Page 20 - SCS May 2018 - Day 2 Tasks

CIMA MAY 2018 – STRATEGIC CASE STUDY

Reference Materials – extract from Board minutes.

Marie: OK, that seems to be it; unless anyone has anything else?

Jen: Yes, can I raise a small point? Last year we raised additional funding by both issuing
new equity shares and increasing our debt finance. I appreciate that this is the
prerogative of the finance department but I’m concerned at the issue costs involved
in using both sources of finance effectively at the same time? What’s the reasoning,
Martine?

Martine: It was done on the advice of our Merchant Bankers who recommended we raise
more equity before issuing more debt.

Jen: Do we know why?

Martine: It’s a question of keeping our gearing at an appropriate level.

Jo: Now this is something I don’t understand at all. Part of my MBA looked briefly at
financing and I seem to remember that debt is cheaper than equity; is that right?

Martine: Yes, the debt carries less risk so the investors accept a lower rate of return.

Jen: So why didn’t we just raise more debt?

Martine: More debt increases the shareholder’s risk.

Jo: Now I’m really confused! First you say debt is less risky, and then you say it increases
risk!

Martine: It’s a bit complicated.

Marie: Right, we clearly have some confusion here. Martine; could you get one of your
team to produce a briefing paper to clarify things for us all, bearing in mind the rest
of us are not financial experts?

Martine: Certainly. I’ll get someone onto it straight away.

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