Part (d) Critically evaluate, with reference to section 3, the sources of finance being considered. Your evaluation should include – ● a comparison of the costs of finance and the impact of each source of finance on the target debt ratio for all budgeted periods (round all final answers to two decimals); and ● any other qualitative factors not dealt with.
Answer
Choice 1: Get a new bank loan.
Good: It's a straightforward way to get the money.
Bad: Interest rates are going up, so it might be more expensive. Also, the bank will want the company to promise some of its assets as security, which could make it harder for Breeze to get other loans later on.
Choice 2: Sell "Green Bonds."
Good: This is a cheap way to borrow money. It also looks good because it shows the company cares about the environment, which might attract certain investors.
Bad: This loan doesn't need to be paid back for a long time (7 years). This makes Breeze look more "in debt" on its books for longer. Plus, it's due at the same time as another big loan, which could be a problem later.
Choice 3: Sell more shares to investors (a "rights issue").
Good: This is the best choice for Breeze's finances. The company is already considered to be too "in debt," and this is the only option that will fix that problem and keep the company from breaking its promises to other lenders.
Bad: This could make the existing owners' share of the company smaller. It also might make people think the company is in trouble, which could make them less willing to buy the new shares.
The Main Problem: The most important thing is that Breeze is already carrying too much debt. Taking on another loan (Choice 1 or 2) would make things worse and break the rules they have with their current lenders.
The Conclusion: The best option is to sell more shares (Choice 3) because it solves the biggest problem. However, the expert solution says that if you could make a really strong argument for the other two options, that would also be acceptable. It's not just about the final answer, but about how you explain your reasoning.
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