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.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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
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