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Development of financial strategy

Example 1

The directors of McCombs Co, an unlisted company, have identified an
attractive (positive NPV) project which is expected to generate positive cash
flows for the company over a five year period. Finance is needed to fund the
purchase of a new machine to use in the project.

Which of the following financing decisions would be most appropriate in
these circumstances?

A Extend the overdraft to fund the investment

B Issue new shares to existing shareholders

C Issue some new bonds on the market

D Arrange a term loan with the bank

Solution

The answer is (D).

An unlisted company cannot issue bonds (C). An overdraft (A) is too short
term and equity (B) is too long term for the funding of a five year project.

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