Osama Co. is a listed company operating in the textile industry. Osama Co’s board of directors met recently to discuss a new strategy for the business. The proposal put forward was to sell all the old plant and machinery and use this fund as well as borrow from market to purchase new plant and equipment. The new plant and machinery are more productive and meet the current standard quality required by the international buyers. It is also argued that new plant is more energy efficient and environment friendly that gives more advantage when facing international competitors. The proposal stated that the funds raised from the sale of the old plant and machinery would be used to buy the new plant and machinery. New borrowing for the balance amount will be made from local bank which offered lowest rate. Since inflation is on higher side compared to last few years so cost of borrowing is on higher side which will increase firm cost of capital. The board of directors are of the opinion that increasing the level of debt in OSAMA Co. will increase the company’s risk and therefore it can increase its cost of equity capital. It is assumed that due to change in plant and equipment current local sales of the product will not be affected
Osama Co. is a listed company operating in the textile industry. Osama Co’s board of directors met recently to discuss a new strategy for the business. The proposal put forward was to sell all the old plant and machinery and use this fund as well as borrow from market to purchase new plant and equipment. The new plant and machinery are more productive and meet the current standard quality required by the international buyers. It is also argued that new plant is more energy efficient and environment friendly that gives more advantage when facing international competitors.
The proposal stated that the funds raised from the sale of the old plant and machinery would be used to buy the new plant and machinery.
New borrowing for the balance amount will be made from local bank which offered lowest rate. Since inflation is on higher side compared to last few years so cost of borrowing is on higher side which will increase firm cost of capital.
The board of directors are of the opinion that increasing the level of debt in OSAMA Co. will increase the company’s risk and therefore it can increase its
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