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Source Ltd is currently considering a major capital investment project for which additional finance will be required. It is not currently feasible to raise additional equity finance, consequently debt finance is being considered. The decision has not yet been finalised whether this debt finance will be short or long term and if it is to be at fixed or variable rates. One of the directors has suggested that debt finance be raised by a debenture issue. The managing director is not sure exactly what a debenture issue means. You as their financial controller has been assigned the responsibility in the preparation of a report for a forthcoming meeting of the board of directors.
Required
Prepare a draft report to the board of directors which identifies and briefly explains:
(a) FOUR main factors to be considered when deciding on the appropriate mix of short, medium or long-term debt finance for Source Ltd.
(b) What is meant by a debenture.
(c) THREE practical considerations which could be factors in restricting the amount of debt which Source Ltd would raise.
(d) What is the relationship between financial decision making and risk and return? Would all financial managers view risk-return trade-off similarly?
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