PCB is a public limited company. It makes a well-known brand of mobile (cell) phones. Pricing is important as it sells in a competitive market. PCB wants to increase its product range. It plans to make luxury headphones as the demand for these is growing fast. The Operations Director has to decide whether PCB should develop its own brand of headphones or take over an existing producer. For both options, the source of finance would be a share issue.
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09 Identify and explain one advantage and one disadvantage to PCB of issuing new shares as a source of finance. [6]
Possible KN Points:
Advantages:
• Access to greater amounts of capital
• No interest OR finance costs to pay
• Permanent source of capital
• Avoid increasing debt
Disadvantages:
• Possible loss of control OR risk of takeover
• Shareholders might expect dividends
• Cost OR time to arrange
• Dividend paid after tax whereas interest paid before tax deducted