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List the factors that a company must consider when using creditors finances.

List the factors that a company must consider when using creditors finances.

Answers

Kavungya
1. That cost of finance is less than the Return which implies the rate should not be less than the bank interest + inflation + risk.
2. Economic conditions prevailing – use debt under boom conditions.
3. Present gearing – if high this will lead to:
4. Low credit rating
5. Lowering of the company’s share prices especially to less than Par value – this leads to mass sale of shares – creditors rush to draw their finances and therefore receivership.
6. Long term ventures have to call for independent feasibility studies before funds are committed i.e.
7. Assessment of the return – at least should be greater than minimum return + risk + inflation.
8. Economic life – if uncertain, the return ought to be higher. Such life must allow the company to pay off the loan.
Kavungya answered the question on March 11, 2019 at 12:43

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