Funding the investment by an issue of ordinary shares, Financial Accounting

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Funding the investment by an issue of ordinary shares could tender several advantages to Springbank plc. Gearing would drop to 47% (3·5/7·4) fewer than half of the sector average of 100% rather than increasing to significantly more than the sector average. Interest cover would rise to 5·8 (2·33/0·4) from 3·75 compared to a sector average of 4. The financial risk encounter by the company would thus be reduced making it a more attractive investment prospect on the stock market. This could have a optimistic effect on the company's share price.

Ordinary shares don't carry a commitment to make regular payments such as interest on debt giving Springbank plc a degree of flexibility in rewarding shareholders in financial terms. This should be balanced against the common desire of shareholders for a regular and increasing dividend.

Ordinary shares are permanent capital ever since they don't need to be repaid. Springbank plc would therefore avoid the need to find funds for redemption that would arise if it issued debentures. For the reason that the fixed assets of the company would increase but its burden of long-term debt would be unchanged Springbank would find it easier to raise additional debt in the future.


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