2020 BPGH S4O/5N P2 Q4 Miracle Limited
Miracle Limited is a company that trades in face masks and other pharmaceutical products The company would like to raise funds for further expansion of its existing business. Miracle is considering taking out a 4% bank loan, $120,000, on 1 July 2019. The loan is repayable in 5 equal instalments, payable on every 30 June. Interest is payable each year calculated on the amount of the loan outstanding over the year on 30 June.
b. The company accountant suggests that Miracle Limited could issue new shares of $120000 instead of taking out the loan to raise the necessary funds. Assuming that Miracle Limited decides to issue the new shares on 1 July 2019, state the double entry to record the issue of new shares. Narrations are not required
c. Compare and comment on the above two options of raising funds. Advise Miracle Limited on which option it should take.
Make a Decision
Make a choice and state your decision clearly.
I advise Miracle to borrow from the bank
I advise Miracle Ltd to issue shares to raise funds
Supporting Evidence & Explanation
Any Two Points
Any Two Points
When supporting your decision, you will have to:
– When Miracle borrows, he agrees to pay the bank interest in exchange for using their money. The bank don’t own a piece of his business and they don’t participate in his decision-making.
– Hence, there is no dilution of control.
– Borrowings also offer the advantage of allowing Miracle to borrow money only for the time he will need it.
– Issuing share capital gives you the advantage of not owing any money to the bank, because you are not borrowing. He don’t have to make any payments for the money he raise this way.
– Miracle must pay interest on loan to the bank, which differs from dividends that he has to to pay when he declares one. The interest must also be paid according to a strict timetable, which can create problems if the business is not performing well.