Problem: Setso plc has grown from a company with P1,000,000 turnover to one of P10,000,000 and profits of P800,000 a year. The company has always had cashflow difficulties due to its rapid expansion and problems funding its working capital. It has, however, been able to fund expansion from retained earnings, overdrafts and other internally generated funding. It wishes to continue its expansion but is concerned about the adequacy of its capital resources.
Setso is now considering raising P2,000,000 from:
- An equity investment from a venture capital firm; or
- A variable interest loan from an investment bank repayable in 10 to 15 years.
Required: Discuss the merits and demerits of each of the two sources of finance.