Homework SourseQuestion 5 20 marks ven though the Hong Kong debt market has
Solution
Funds can be raised through debt in the form of debentures or loan from financial institutions,banks,private money lenders,public deposits etc.The cost of debt capital is the rate of interest payable on debentures and bonds.In the given case since the hong kong debt market is supported by the hong kong government ,this simply means that the way of doing the business by people of hong kong market is not feasible at all i.e why they are not finding good and cheap debt (long term funds) funds because they are not having good business techniques and lenders do not trust in that things i.e why government is helping them to run their businesses and its development is still lags behind that of other international markets because of their strong leverage system.
They do not have enough money in their own pockets to run the business i.e why they want raising of funds from the market.Three major factors that support development of debt market in hong kong are:-
1.INVESTMENT DECISION 2.FINANCING DECISION 3.DIVIDEND DECISION
INVESTMENT DECISION- The investment of long term funds is made after a careful assessment of various projects through capital budgeting techniques.Only that investment proposal is accepted which is expected to yield atleast so much return is adequate to meet its cost of financing.
FINANCING DECISION-A firm may raise funds from different sources of finance .The optimum debt and equity financing mix will increase return to equity shareholders and thus maximise their wealth These decisions relate to acquiring the proper and optimum finance to meet financial objectives and seeing that fixed and working capital are effectively managed.
DIVIDEND DECISION-These decisions relate to determination of paying dividend out of profits to equity holders and after retained earnings to run the business.The owner of any profit making organisations looks forward for his investment in two ways 1- Growth of capital invested 2- Cash paid out as dividends.
Two factors that constrain develpoment of debt market in hong long are as follows-
RISK AND COST
RISK-It should be noted that raising of long term funds increases risk of principal repayment as per agreement if any and timely payment of interest irrespective of performance or profits.
COST-The raising of any kind of long term funds consists of their cost i.e interest cost but it also saves tax on interest payments and it usually is cheaper than that of equity and preference dividends.
