vi Dilution An increase in equity by issuing shares to new shareholders will

Vi dilution an increase in equity by issuing shares

This preview shows page 13 - 17 out of 22 pages.

(vi) Dilution An increase in equity by issuing shares to new shareholders will reduce the control and possibly, depending upon the issue price and quantity of shares issued, the wealth of existing shareholders. (vii) Use of funds raised Funds should be raised only if their use appears to be productive. Points concerning the suitability of the three finance types include: (b) From Wahome ’s viewpoint (i) Equity Extremely suitable from the liquidity aspects as dividends need not be paid. If the project is not successful then permanent funds will result. However, if the project is extremely successful the greater equity base will provide even further debt capacity to facilitate further expansion. Would dilute the holdings of current shareholders. (ii) Loans Would utilize some unused debt capacity. Interest payments would be required under all circumstance but would be tax deductible. Term of the loan may be difficult to arrange in order to provide the medium term (up to 4 7 years) or long term finance.
Image of page 13
Image of page 14
(iii) Convertible debentures Have the advantage that investment payments are tax deductible but are usually lower than the interest rate on ordinary loans thereby conserving them the debt will be converted into equity and could then provide the equity base for further debt financing expansion. If the project is not successful then conversion will not take place and the debenture can be repaid. Conversion into equity will usually result in fewer new shares being issued with consequent less dilution. From the finance provider’s viewpoint (i) Equity Enables participation in the success of the firm but provides no security in the event of the project not providing successful. (ii) Loans Provide security and regular interest payments but will not permit participation in any success of the firm. (iii) Convertible debentures Provide the security of a loan with the possibility of favourable (but not unfavourable) equity participation. However, in order to obtain this protected position the interest received is usually lower than a normal loan and the conversion terms result in fewer shares than would be obtained by an initial investment in equity. In the circumstances of Wahome, the use of convertible debentures is recommended as they will utilize d ebt capacity and provide medium term or long term finance as required by the outcome of the project. The debentures should be convertible into equity from about year 4 onwards at the holder’s option unless previously repaid by Wahome. Wahome should arrange a repayment option during the period of about years 4 7. The debentures could be secured on the land and buildings to be purchased.
Image of page 15
(c) The risk of the portfolio can be measured by the weighted average beta factor for the shares in the portfolio. The weights should be the market prices of the shares.
Image of page 16
Image of page 17

You've reached the end of your free preview.

Want to read all 22 pages?

  • Winter '18
  • COMPANY LTD, Wahome Company Ltd, Gimwa

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors