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5.3 Creditors’ Concern
In terms of getting funds, it can be either equity financing or debt financing. For equity financing, firms have to concern about the risk of uncertain future expansion in enhance the growth of business. Meanwhile, by using debt financing, the firm would have to bear the risk of bankruptcy if any inability to meet their obligation.
Agency conflict may arise between manager and creditor in the event of the firm borrows money which they expect to get a higher return over the interest paid on the loan. Before loans getting approval, the creditor will judge the risk of the venture and identify their rate of return accordingly. As we all know, shareholders have the right to take profit but the creditors would have to take excess losses. Therefore, the creditor would concern about the firm’s capability to manage in expanding their business and preventing from bankruptcy. Creditor would also able to determine the amount of repayment without reduce the value of the firm and the wealth of shareholder. In addition, bond financing is also one of the solutions of debt financing for firm to get fund rather than borrowing from banking institutions. Since GPC can only get a maximum loan up to $3 million, the $1 million left will be using bond financing for full expansion which this plan required $4 million in debt financing.
In this case study, creditor may only concern about what types of expansion may use by GPC because the interest rate repayment for both expansion plans are same which is fixed at 8.75% per annum. Moreover, creditor wills also less concern if Annette pledge the assets or equipment as collateral to the creditor (bank) in order to get the loan for fundraising.
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