Plz do the case at page 5 of the ppt

Financial Instrument Decision

Apples Ltd should consider the following factors in deciding between the two methods of financing its business. First, the company should consider the Repayment terms of each method. It should keenly look into how each of the financing arrangement is structured and the duration for repayment (AASB, 2004). AASB 132, paragraph 28 requires any company issuing a non-derivative financial instrument to evaluate the term of the instrument to find out whether it results in both liability and equity. Credit arrangements like convertible notes with long payment periods and results in both liability and equity are preferable (Donald, Weygand &Warfield (p.123).

Secondly, the company should closely consider all the costs associated with of the method, weigh them and make an informed decision. Cumulative preference shares do not add up to the company’s equity capital, but they are associated with higher interest rate than convertible notes. Methods associated with few costs of capital are preferable

A convertible note is a hybrid form of credit which is partly equity and partly debt. However, the debt can be converted into to equity at a given future date predefined in the terms of the agreement (AASB, 2004). AASB 132 tends to allow for the separation of convertible notes into debt components and equity. It is typically secured from the venture which finances the equity deals. Convertible notes are majorly used at the initial stages of a company’s life (Martynova, Natalya & Enrico, (p.34). Since Apples Ltd is an operational company faced with the problem of high gearing ratio, it can consider using cumulative preference shares to meet its current liquidity demands but since they only result into a liability, the consideration can be discarded.

However, considering the urgency factor of the condition in the company, convertible notes would suffice. Raising capital through convertible notes is much quicker and relatively cheaper than issuing of the cumulative preference shares (Donald, Weygand &Warfield (p.55). Additionally, convertible notes provide a flexible valuation of stock to allow the company to meet the needs of the subsequent investors. Martynova, Natalya and Enrico suggests (p.34) that convertible notes’ interest payment terms are much favorable compared to the dividend advanced to the cumulative shareholders. Hence, Apples Company should consider the use of convertible notes in raising the capital since this will enable it to lower it leverage ratio faster.

Work cited

AASB, A. S. (2004). Financial Instruments: Disclosure and Presentation.Disclosure51, 52.

Kieso, Donald E., Jerry J. Weygandt, and Terry D. Warfield. Intermediate accounting: IFRS edition. Vol. 2. John Wiley & Sons, 2010.

Martynova, Natalya, and Enrico C. Perotti. «Convertible bonds and bank risk-taking.» (2015).