Help me with my Uni Accounting!!!

[costargh]

I just need some thougts/ideas on this question. I have two trains of thought on this question. I wanna see what u guys think.

1. Assets can be funded by debt, and the cost of debt is interest. If interest rate is falling but credit is scarce as in the current climate, what are the implications for shareholders?

[RD]

lol I thought I heard an oral on that topic at uni on Tuesday

[costargh]

LOL yeh its the oral one.

My train of thought is this:

1. A reduced dividend- as the organisation will retain more of its profits as it has trouble to get credit
2. Shareholders may be asked to invest more money in the organisation either through a dividident reinvestment plan or through capital raising request.


.... anyone?

[rhjc.1991]

Well you said anyone, so I will attempt to answer. I may be wrong :


FAVOURABLE ASPECTS:
1. Being able to take out a loan may spark confidence in the shareholders that it is profitable since it can be implied that it has a strong credit rating.
2. Due to lower interests, cost of servicing the loan is less, thus the shareholders are likely to be happy.

UNFAVOURABLE ASPECTS:
1. Shareholders may begin to worry about the future of the business as it has to rely on external funds to expand/fund its assets.
2. Gearing would be higher, making the business seem more volatile to the climate.
3. Due to the supply of debt being less than the demand, the conditions imposed by the lender may be unfavourable to the business, in ways other than interest rates.
4. Extension on the loans seems unlikely. If the borrowed amount is high, the shareholders would be wise to consider the future repercussions on the long-term liquidity.
5. Lower Interest Rate is likely to lead to Lower Inflation Rate, meaning that the value of the loan will remain little affected at its due date. This may offset any financial benefit brought about by lower interest rate. In fact, this may even mean that the business may be experiencing more financial burden than it would under a normal climate and higher interest rate.


I am not a Uni Accounting student, so some of my points could be so wrong. Please don't be too harsh on me.

[costargh]

Thanks You've said some things I hadnt thought about. I see you've interpretted the question slightly differntly to me, which is good.  To be honest, the question kinda sucks, its a bit... like... too broad?