Assuming you worked for a corporation that wanted to increase plant capacity with an estimated cost...

Assuming you worked for a corporation that wanted to increase plant capacity with an estimated cost of $26m, what are some of the options you might suggest to the management to pay for such an expansion? what are the limitations of my question?

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Expert Solution

Some of the options that I will suggest to the management to pay for expansion with an estimated cost of $26 m are:

· Internally generated funds – This is also known as retained earnings. This is one of the safest methods of funding. There is, however, a cost associated with using retained earnings and that will be the earnings foregone by the shareholders. It will be in the form of an opportunity cost.

· Bank loans – The firm can raise the required amount of $26m in the form of bank loans. It can be in the form of line of credit loans, installment loans, balloon loans and interim loans. The advantage is that loans can be obtained easily if the financials of the company is proper. On the downside it will increase the company’s use of leverage and its interest expenses will go up significantly.

· Equity – The company has the option of raising fresh equity. This is an easy method for raising funds as new equity can be issued to current shareholders in the form of right issues. The company can also consider issuing new equity in the market. The downside will be that it will reduce the earnings of the existing shareholders.

The limitations of your question are that you have not provided the existing financials of the corporation. If the current financial position of the company was provided I would have been in a better situation to advice with regards to the optimal option that the management can use for raising $26m.

jeff jeffy answered 1 year ago

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