Question

Here is some additional information on this, I can also provide what I have already, what is in bold is what needs to be taken care of. Gentry Inc. is a mid-sized tech firm (200 employees and $300 million in revenue) and has been privately held since the firm’s inception ten years ago. The organization’s board of directors is keen on expanding the operations globally to take advantage of a growing market. Based on reports from the research and development team, the organization can increase its profitability metrics by 15 to 25% if it expands the operations to China, Japan, and Germany. Becoming a multinational organization will not be easy. To finance this expansion, the board of directors has decided to take the organization public and issue some bonds to raise an additional $50 million. The research team has already determined that the organization meets the financial requirements outlined by the Securities Exchange Commission. The goal is to maximize the Initial Public Offering (IPO), and the leadership must efficiently manage the capital, measure the risk of the investments, and ensure the financial metrics are robust relative to similarly sized organizations.

1) Please help determine what the optimal capital structure should be for Gentry. Please determine how much equity (common stock) the company will offer in the IPO and how much debt the company should assume in their global expansion to meet the goal of $50 million.

If you could make recommendations in word document please! I had someone try to do this in an excel sheet and it was awful.

Also, if you could show how you were able to determine what capital structure will work best with the initial assessment. Describe the structure using the ratios

Please include the dollar amount of equity (common stock) the company should issue in the IPO and how much debt the company should use for this expansion to reach the $50 million goal. Explain your rationale. Note: there is no single answer to the question of the firm’s optimal capital structure. Your assessment is weighted more heavily toward your logical explanation rather than having the correct values for debt and equity.

Answer 1

Optimal capital structure is something that varies from company to company. Every company would carry its own attributes and on that basis they would have their capital structure. However, industry trend is a factor that enjoys a wider acceptance of investors. So, for any company that is planning to go public for the first time, it is advisable to aim for industry trends. Therefore, for Gentry, the optimal capital structure would be that of industry average in USA.

From the data taken from CSI Market, the industry average for technology firms shows a debt-to-equity ratio of 0.58, which means they have 58% of debt in their capital structure. So, Gentry should also strive for employing 58% of debt in its capital structure.

Since the firm targets to raise $50 million in total, the equity and debt portions raised should be as calculated below:

Target Debt = 58%
Capital to be funded using debt = $50 million x 58% = $29 million

Capital to be funded using equity = $50 million - $29 million = $21 million

So, the optimal capital structure for Gentry would be $29 million in debt and $21 million in equity.