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Hi Sir,
In part c where we discuss the factors which help determine source(s) of finance, under the ‘cost’ factor it says “As Selorne Co’s share price is stable, its current external shareholders appear content with the dividends paid, so there does not appear to be pressure to increase them. In any case, the board is not required to pay dividends every year.”
Can you please explain to me how this statement affects the ‘cost’ factor when determining how to finance a cash bid? Is this suggesting equity finance over debt finance or debt over equity? Is this saying that a rights issue might actually be cheaper? I’m not quite understanding.
Thank you 🙂
The question does not require you to advise as to which is better but just to state the factors that they will need to consider.
However they raise the finance needed to pay for the acquisition, it could potentially affect future dividends and if this was the case then it is effectively a cost. The answer states that it probably won’t be a problem, but it is still a factor that they need to consider.
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