Question

ABC Inc has been in business since 2000 and continues to expand operations. The owners need $50 million in additional capital to build a new manufacturing plant. As their investment banker, what method would you recommend to the owners to raise capital?

Answer 1

ABC Inc has been in business since 2000 and the company is to expand operation. The additional capital to build a new manufacturing plant as the insvestment banker I would recommend to the owner to raise fund by considering following factor:

To identify Debt/Equity ratio if it is listed firm and also taking the ratio into consideration what is the extra interest rate to be given by company if it's already high debt. What are solvency, liquidity and profitability of company and industry analysis with its peers.

If company is high debt then as investment banker i would suggest that company should go to raise the fund either from high net investors/mutual fund or raise from IPO or from public.

If company has Debt/Equity ratio is around or less than 2 then company should raise the debt for the build of new manufacturing unit then they should raise the fund untill the ratio shouldn't crosses 3. Also, there is advantage that the cost of Equity is higher than the cost of debt and there is tax exempted on the interest paid amount.

As given in the question that the company is establish for almost a decade and the company is continously expand the operation then they already raised more or higher amount of debt then to set up new factory there should raised the debt from coperate bond instead of bank because bank will furnished teh loan at higher rate than the coperate bond.