In: Accounting
Question 2
The Government of Ghana in an attempt to stimulate the Ghanaian
economy after the COVID 19
pandemic has set aside GH¢600 million as a stimulus package for
businesses. These stimulus
packages are to be in the form of soft loans for businesses.
However, some believe that these
loans must be extended to firms in industries that are worst hit by
the pandemic. As the Finance
Director of your company, you have been tasked to present a
proposal to the Board of Directors
of your company for consideration. Your proposal must address the
following;
i. The negative impact of the COVID 19 pandemic on the operations
of your firm, justifying
why your firm needs such a stimulus package? Your arguments should
be situated within
the industry within which you operate.
ii. With your understanding of lessons on capital structure, which
other four (4) factors
should your firm consider before choosing this source of debt
finance?
iii. Discuss four (4) risks that your company is likely to be
exposed to if it goes ahead with
this source of debt finance.
iv. Explain how this decision will affect the return to the equity
holders or shareholders of
your company following the arguments of M&M proposition
2.
(Note: Your essay should not be more than 1500 words. Marks will be
awarded for
professional presentation)
According to data:
i) Covid pandemic is financially effected to our firm badly.
Production got stopped, Selling got stopped,
financial transaction also get effected, collection got impacted,
people interaction got distanced. But
we stand to face this situation and caring our employees. We not
only provided social distance by
providiing facilities to do partly work as work from home even
salaries got paid during this pandemic.
Now when government of Ghana provides soft loan to the enterprises,
we must take this opportunity
to come back to the business track .
ii) Four factor should be considered before choosing debt
financing:
> Whether Soft debt provided by Government having some specific
benefits
i.e. lower rate of interest, moratorium period convinience, market
rate, etc.
> Mortgage need to be keep.
> Whether Equity option having better opportunity to save
cost.
> Procedure & eligibility chriterion. When our firm will
satisfy the condition needed before application
for loan.
iii) Four Risk for debt financing:
> Leverage issue on future cash flow
> Limit your future borrowing potential
> Mortgage effect
> Reinvestment in your firm getiing difficult with high
debt.
iv) Higher debt means less profit available to shareholder. That
will effect lower return to equityholder's.
Which will influence them for M&M proposition.
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please vote positively...........