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ACCA Strategic Professional · Strategic Business Leader · Financial analysis and decision-making techniques

Kestrel Components plc is a stable manufacturer with a low gearing ratio and a board that wants to fund a new GBP 8 million production line. The directors are reluctant to dilute existing shareholdings and want to keep control with current owners. Profits are predictable and the company has substantial freehold property. Which source of finance best fits these stated priorities?

A secured bank term loan backed by the freehold property fits best. It raises the GBP 8 million without issuing shares, so ownership and control are not diluted, and the company's stable profits and low gearing make interest affordable. The equity and convertible options all create present or potential dilution.

  1. AA rights issue to existing shareholders
  2. BA secured bank term loan backed by the freehold propertyCorrect
  3. CA placing of new shares with institutional investors
  4. DConvertible preference shares offered to the public

Explanation

Debt secured on property avoids dilution of ownership and control, and predictable profits with low gearing mean interest can be serviced. A rights issue and placing both issue equity, and convertible preference shares can convert into ordinary shares later, so all risk diluting control. The rights issue is less dilutive than a placing but still involves new equity.

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