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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
One advantage of obtaining finance through the Australian Stock Exchange (ASX) is access to a larger pool of capital. By listing on the ASX, businesses can attract investment from a diverse range of investors, including institutional and retail investors, which can significantly enhance their funding capacity.
On the other hand, a key disadvantage is the regulatory compliance and reporting requirements that come with being a publicly listed company. Companies on the ASX must adhere to strict regulations, which can be resource-intensive and may divert attention from core business operations.
Step 2
Evaluate the use of debt financing to fund a major expansion into new products.
Answer
Using debt financing to fund a major expansion into new products can be both beneficial and risky. On one hand, debt financing allows a business to maintain ownership and control, as it does not require giving up equity. It can also be a relatively quick way to secure funds, enabling the company to capitalize on growth opportunities without diluting the shareholders’ equity.
However, there are significant drawbacks to consider. Debt financing leads to mandatory repayments, which can strain cash flow, especially if the new products do not generate the expected revenue. Additionally, high levels of debt can increase the financial risk of the company, potentially leading to bankruptcy if it fails to meet its obligations. It is crucial for businesses to weigh these factors carefully before deciding on debt as a financing option for expansion.