Corporate Debt in Financial Management: An Analysis of RR Ltd Case

This case study examines RR Ltd, a fashionable clothing company founded 10 years ago, and analyzes the benefits and risks associated with incorporating corporate debt into its financial strategy. Corporate debt, a security issued by public or private organizations, is used to borrow money for business growth, purchasing assets, and other investments. While debt financing offers advantages such as lower funding outlays, potential profits, financial leverage effects, and tax savings, it also poses risks including over-leveraging, future financing liabilities, collateral concerns, and potential economic downturns. The analysis concludes that RR Ltd can benefit from debt financing to maintain its competitive position and pursue growth opportunities, but it must carefully balance these benefits against the inherent risks. The company could either borrow from institutions or issue shares publicly, with the conclusion that borrowing at low interest rates may be preferable to equity due to the higher perceived risk associated with equity.

Corporate financial
management (Part A)

Content
 Introduction
 Overview of case study
 Risk associated with corporate debts
 Benefits of corporate debts
 Conclusion
 References

Corporate Financing can be defined by how the
organisations manages its funds through capital
restructuring, investments and accounting. Its main
concern is to maximise the value of shareholders
through short and long – term planning and by
implementing various strategies. In this the tax,
interest and debt payments of an organisation is
considered.
Introduction

Overview of the Case study
RR Ltd, a company which is into the business of fashionable clothing. It was founded 10
years ago with a short term partnership with Rebecca and Roy Race. The growth rate of
the business was rapid and it has even launched its clothing under the two brand labels
called RR and Racey. These two labels are divided into two sections of women's, one for
the middle income women's and other the younger women.

Benefits and Risk of incorporating corporate debt
Corporate Debt is a type of security which is issued by the public or private
organisations (Detthamrong, Chancharat and Vithessonthi, 2017). It is issued by the
companies to borrow money through various sources such a by growing or
expanding the business, purchasing building, machinery or any equipment etc. These
can be taken by the source of issuing bonds.
Restructuring corporate debt is the alteration of a hard-pressed administration
outstanding liabilities to mend its liquidity and hold it in business.

Risk
• Over – leveraging
• Future Financing liabilities
• Collateral and Slump
• Lack of investment

Benefits
• Lower Funding Outlay
• Profits
• Effect of Financial Leverage
• Tax Savings

Conclusion
On the basis of the PPT, it can be concluded that debt financing can benefit the company
but it is also very riskier. So it needs to be balanced which have been explained above.
The RR Ltd. can either borrow from any institution or can issue its shares publicly in the
market. But it has been concluded that equity has more risk compared to the borrowing.
Because the debt can be made available at the low interest rate and the business have to
pay it off. It has also taken consideration as per the case demands, that company wants to
maintain its competitive position in the market and also wants it to get more growth
opportunity which ca increase its market value.

References
Chang, Y., Chen, T.H. and Shu, M.C., 2018. Corporate social responsibility, corporate performance, and pay-
performance sensitivity—Evidence from Shanghai Stock Exchange Social Responsibility Index. Emerging
Markets Finance and Trade. 54(5). pp.1183-1203.
Detthamrong, U., Chancharat, N. and Vithessonthi, C., 2017. Corporate governance, capital structure and firm
performance: Evidence from Thailand. Research in International Business and Finance. 42. pp.689-709.
Feng, Y. and et. al., 2021. Effects of anti‐takeover provisions on the corporate cost of debt: evidence from
China. Accounting & Finance. 61(3). pp.4119-4145.

Thank You