Page 29 - CIMA MCS Workbook February 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

EXERCISE 2 – SOURCES OF FINANCE AND CALCULATION OF WACC

Crowncare may need to raise finance in order to:
 acquire one or more subsidiaries,
 invest in upgraded PPE, and/or
 implement any plans to rationalise the business.

At 31 December 2018, Crowncare held a small balance of V$0.876m in cash and cash equivalents,
which represents just under 1% of total assets. The company may therefore experience some
difficulty in undertaking capital projects or making acquisitions due to the lack of immediate cash
resources. However, Crowncare currently has no debt finance and would probably find that it
could raise debt finance if required.

As an unlisted entity, Crowncare could not offer its shares to the public, without first making an
initial offering of shares to the market. This could be expensive in terms of compliance with
corporate governance and other regulatory requirements. The current owners of Crowncare
would also need to think carefully about the extent to which they would be happy to dilute their
controlling interest in order to raise finance.

Debt finance
Crowncare could borrow funds from its bank or other organisations that specialise in lending to
entities operating in the healthcare sector.

If Crowncare becomes a listed entity, it would be able to issue bonds on the stock market. This
would have the benefit of being able to raise finance from many different investors and so could
probably raise a significant amount.

Crowncare holds significant tangible non‐current assets, which will include property (practice
premises), vehicles and some equipment. The premises, in particular, could be used as security for
debt finance. If Crowncare did raise debt finance, it may need to comply with loan covenants,
perhaps based upon specified profitability and/or liquidity measures. This could hamper freedom
of the board of directors to determine and implement future strategy.

Equity finance
As Crowncare is not a listed entity, it could seek a listing of shares for the first time. If this was the
case, there are likely to be additional compliance and corporate governance factors that need to
be considered.

Alternatively Crowncare could consider a rights issue to its existing shareholders. A rights issue
would have the advantage of maintaining the current ownership and would avoid any dilution of
ownership. It would also be cheaper compared to a full market issue. A rights issue may have a
greater chance of success as it involves existing shareholders rather than trying to persuade new
investors to provide the required finance. However, as a rights issue is typically priced at a

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