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Describe ONE advantage and ONE disadvantage for a business obtaining finance through the Australian Stock Exchange - HSC - SSCE Business Studies - Question 24 - 2009 - Paper 1
Question 24
Describe ONE advantage and ONE disadvantage for a business obtaining finance through the Australian Stock Exchange. Evaluate the use of debt financing to fund a maj... show full transcript
Worked Solution & Example Answer:Describe ONE advantage and ONE disadvantage for a business obtaining finance through the Australian Stock Exchange - HSC - SSCE Business Studies - Question 24 - 2009 - Paper 1
Step 1
Describe ONE advantage and ONE disadvantage for a business obtaining finance through the Australian Stock Exchange.
Answer
Advantage:
One significant advantage of obtaining finance through the Australian Stock Exchange (ASX) is access to a large pool of capital. By listing shares on the ASX, a business can attract numerous investors, which increases its ability to raise substantial funds for expansion, research and development, or other strategic initiatives. This broad access to capital can provide the necessary resources for growth and innovation, enabling the company to thrive in a competitive market.
Disadvantage:
Conversely, a notable disadvantage is the regulatory scrutiny and costs associated with becoming a publicly listed company. Companies listed on the ASX must comply with rigorous reporting standards and regulations imposed by the Australian Securities and Investments Commission (ASIC) and the ASX itself. This compliance can be resource-intensive, requiring significant financial and administrative investments, which could detract from the company’s core business activities.
Step 2
Evaluate the use of debt financing to fund a major expansion into new products.
Answer
Debt financing can serve as a viable option for businesses looking to fund major expansions into new products, and there are several factors to consider regarding its advantages and disadvantages.
Advantages:
- Retaining Ownership: Unlike equity financing, debt financing allows a business to retain full ownership and control over the company, as lenders do not gain ownership stakes in exchange for the funds.
- Tax Benefits: Interest payments on debt are tax-deductible, which can lead to substantial tax savings for the organization.
Disadvantages:
- Repayment Obligations: The primary risk associated with debt financing is the obligation to repay the loan, regardless of the company’s financial situation. This can impose significant financial strain on a business, especially if the expansion does not yield the projected returns.
- Impact on Credit Rating: Taking on additional debt can negatively impact a company’s credit rating if it leads to higher debt-to-equity ratios, which may make future borrowing more costly or challenging.
Conclusion:
In conclusion, while debt financing can provide businesses with the necessary funds for expansion while allowing them to maintain control, it is crucial for companies to weigh these benefits against the potential risks and financial obligations involved.