Compare and contrast debt financing options

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Reference no: EM131223378

Question 1 -

Wing Onn Tong Pte Ltd is a private company limited by shares incorporated in Singapore. It is in the business of selling traditional Chinese medicine (TCM). The company's object is "to sell traditional Chinese medicine and to treat illnesses with traditional Chinese medicine". The business was founded by the patriarch Mr Lau Shi Fu and has been doing very well over the years. Unfortunately, Mr Lau has passed on; and he bequeathed his share of the business to his 3 sons. The eldest son Jian Kang has 60% share of the business while the other 2 younger sons Ming Kang and Wei Kang share 20% each. The eldest son Jian Kang has been actively involved in the family business whilst the two younger sons were studying overseas. Jian Kang became the sole director of the company upon the death of Mr Lau Shi Fu. Jian Kang is quite the controlling brother, he tells his younger siblings to "just concentrate on your studies and not to worry about the business".

Jian Kang has not called Annual General Meetings for 3 years. The business has been earning steady profits over the last few years but he has not declared any dividend. Instead, he has compensated himself with huge director's fees with other benefits such as use of company car (a Mercedes Benz) and a house in Bukit Timah. Lately, he wants to open up a fashion retail shop for his daughter, and he wants Wing Onn Tong to fund this venture. When Ming Kang and Wei Kang questioned him about the financial affairs of the company, he brushed them off by saying "you are not a director of the company, you have no business looking into the company's accounts."

Ming Kang and Wei Kang have come to you for advice.

(a) Describe Ming Kang and Wei Kang's rights as shareholders of the company with regards to the general meetings of the company.

(b) Outline how Ming Kang and Wei Kang can seek protection as members of the company, with regards to the proposal for Wing Onn Tong to fund the fashion retail shop; the right to financial information; and huge director's fees in lieu of dividends.

(c) Make one (1) recommendation on what Ming Kang and Wei Kang should do.

  • Support your answer with relevant case law and provisions from the Companies Act (cap 50).

Question 2 -

Mr Lim Low Fatt is the founder of "Made for Home Pte Ltd" (Made for Home), a successful furniture company incorporated in Singapore. Made for Home imports wood from ASEAN countries and fabric from Europe in order to manufacture furniture in its factory in Jurong.

The company has acquired a reputation for affordable and good quality furniture. Hence, the factory has tripled in size with lots of inventory and plant and equipment added over the last few years. Currently, there are 6 retail outlets in Singapore, 3 of the retail units are owned by Made for Home.

Mr Lim is now thinking about further expanding his business by building another factory and opening more outlets locally and in the neighbouring countries.

Being the founder and sole shareholder of the company, Mr Lim is naturally cautious about getting into too much debt. He prefers to use the company's retained profits than to borrow from the banks, as he dislikes paying interests. Hence, the company has very low debt ratio.

He has come to you for advice on possible financing options for his expansion plans. He is wondering if he should increase his leverage or source for new equity investors for his private limited company. He has enjoyed sole control since the company was formed and he worries about losing control of the direction of the company.

(a) Compare and contrast debt financing options and equity financing options available to Made for Home Pte Ltd;

(b) Identify and describe relevant types of company shares in a private company and advise Mr Lim how he might retain control over his company if he were to bring in equity investors;

(c) Analyse and explain the most likely form of financing you would recommend Mr Lim if he wants to expand in a comparatively shorter period of time and support your recommendation with reasons.

Reference no: EM131223378

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