4. Assume US corporation XYZ needs to arrange to have £10,000 in 90 days. Discuss the...

4. Assume US corporation XYZ needs to arrange to have £10,000 in 90 days. Discuss the alternatives available to the corporation in meeting this obligation. What factors are important in determining which strat- egy is best?

Expert Solution

Before we get to the alternatives, it is necessary to distinguish if this obligation is an operating or capital obligation. Operating obligation is expensed to the P&L whereas Capital expenses are carried to the balance sheet.
These obligations can be met using any of the below alternatives –

Using Operating Cash Flow (OCF): Company can use the cash generated from day to day operation to meet its obligation. Healthy companies usually fund operating obligations using Operating cash flows (OCF).
Raising funds by parting ownership: Company XYZ can give up some ownership of the company to meet the cash obligations. Funding thru venture capitalist can be an alternative. Since the funds required is only 10,000 pounds, raising funds thru Initial Public offering (IPO) may not be a suitable alternative.
Raising funds by issuing debt: Alternatively, the company can borrow funds through debt. There are various forms of debt – Secured/ unsecured, redeemable/ Non-redeemable, Convertible/ non-convertible. Based on the company’s requirement, it can choose which form of debt is more suitable.

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