Finance Lab · Case study
Funding growth without breaking coverage
The region offers higher growth but slightly lower margins than the home market. The company must choose between debt, new equity, or a mix.
Nova ManufacturingAdvanced14 min
Funding growth without breaking coverage
Nova has an opportunity to enter a new region. The expansion needs ৳3,000,000, and the board is split on how to fund it.
The situation
The region offers higher growth but slightly lower margins than the home market. The company must choose between debt, new equity, or a mix.
Constraints
- Equity issuance dilutes existing shareholders.
- Debt is cheaper but adds a fixed obligation through the cycle.
- The new region is unproven, so forecasts carry real uncertainty.
The numbers
- Current debt / equity
- 0.53×
- Interest coverage
- 2.6×
- Cost of debt
- 9.5%
- Return on equity
- 5.9%
- Before the expansion
- Required outlay
- ৳3,000,000
- Board policy
- Coverage above 2.0×
Your decision
How should the expansion be funded?
What strong reasoning looks like
- Recognise that debt magnifies both returns and losses.
- Test the decision against the board's coverage policy.
- Weigh dilution against financial risk explicitly.
- Consider the value of staging an uncertain investment.
Reflect
- What coverage ratio would you accept as a floor?
- How would a 20% revenue miss in the new region change your answer?