CanWest Corporation is a newly established IT company that focuses on high-end software development for the...

CanWest Corporation is a newly established IT company that focuses on high-end software development for the worldwide market. Assume that you were the CFO. Suggest the capital structure that can suit this corporation best. Discuss and explain.

ASAP

Expert Solution

CanWest Corporation is a newly established company. Therefore, it will not be in a position to borrow money from banks/financial institutions as they provide loans on the basis of previous financial performance and credit rating of the company. In such a case, the company is left with the option of contribution from promoters/business owners or funding from venture capitalists. In other words, the company will have to rely on equity as a major source of financing its business operations. The other possible option would to borrow money from friends/relatives.

The amount of money that may be contributed by the promoters/business owners or obtained from friends/relatives may be limited. Therefore, the company will have to approach venture capitalists to obtain additional funds. While, this form of funding is not guaranteed, the company can raise substantial amount of money if its business plan/proposal is found to be attractive by the investors. However, these investors may demand a huge stake in the company's equity and participation in decision making. The CFO should consider the benefits and costs associated with this form of financing before taking a final decision.

In the current situation, it can be concluded that the company's capital structure will comprise equity. With the passage of time, the company may be able to include debt in its capital structure if it shows growth and profit potential.

jeff jeffy answered 2 years ago

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