Financial Management: Corporate Debt Risks, Benefits & RR Ltd Analysis

This report provides an overview of corporate debt, including its risks and benefits, within the context of corporate financial management. It begins by defining corporate financing and its goal of maximizing shareholder value. The report then presents a case study of RR Ltd, a fashion clothing company, and analyzes the advantages and disadvantages of incorporating corporate debt. Key risks discussed include over-leveraging, future financing liabilities, and potential collateral slumps, while benefits include lower funding outlays, profit generation, and tax savings. The report concludes that while debt financing offers potential advantages, it also carries significant risks that must be carefully balanced. RR Ltd can choose between borrowing from institutions or issuing shares, with the report suggesting that equity carries more risk compared to borrowing, especially considering the company's goals of maintaining its competitive position and increasing market value. The report references academic sources to support its analysis of corporate social responsibility, capital structure, and the cost of debt.

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.

Debt
Debt is when one party borrows something from another, usually money. Many
businesses and individuals utilise debt to finance significant purchases that
they would not be able to make under normal circumstances.
Types of Debt:
• Secured Debt
• Unsecured Debt
• Revolving Debt:
• Mortgages
• Corporate Debt

How the debt is being raised
Debt financing is when a company sells debt instruments to
individuals and/or institutional investors to raise money for working
capital or capital expenditures. Individuals or institutions become
creditors in exchange for lending money and obtain a guarantee that
the principle and interest on the loan will be repaid. Another approach
to raise money in the debt markets is to sell stock in a public offering,
which is known as equity financing.

Cost of raising debt
The cost of borrowing is the effective interest rate a company
pays on its debts, such as bonds and loans. Borrowing costs
can relate to borrowing costs before taxes, i. H. the
company's borrowing costs before taxes or the cost of
borrowing after taxes. The main difference between
borrowing costs before and after taxes is that interest
expenses are tax-deductible.

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.

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