Question

Case Study:

The Exceptional Service Grading Company requires a capital infusion of $500,000. It is currently a closely held corporation with less than 25 shareholders. Although the shareholders are not all related to each other, they all know each other, and they view the business as a family business. The financial statements should be familiar to you because you performed a basic financial analysis of the company in Unit 1 of this course.

Several alternatives are available to the company, consisting of the following:

• Obtain private debt financing
• Seek out a private investor(s) who would be willing to share ownership (private transfer of partial ownership)
• Seek out offers for a private buy-out (private transfer of entire ownership)
• Issue public debt (corporate bonds)
• Issue public common stock (public equity offering)

Briefly discuss each alternative and include implications to the company’s capital structure and cost of capital, if any. Considering the size of the investment ($500,000 infusion),

Answer 1

Several alternative are available to the companies which are as follows-

A. Obtaining of private debt financing would be lowering the cost of capital of the company, but it will increase the solvency risk of the company.interest payment towards debrlt are tax deductible in nature so it will lower the overall cost of capital.

B. Seeking out a private investor would be dissolution of overall control of the firm and that will mean that equity of the company would be shared with another person in exchange of the capital which would be risky for the company in case it wants to have higher control.

C. Sitting out offers for private buyouts means that selling of entire stake to the another person in exchange of cash which would be discontinuance on the business on the part of the previous owner, so only if the business wants to get transferred to the another person completely, this option has to be adopted.

D. Issuing public debt means reducing the overall cost of capital of the company because interest payments towards debt capital are tax deductible in nature and it will help the company to lower its overall cost of capital and it would be more inclined to obtain more of the debt capital as it is providing with lowering of cost of capital.

E. Issuing common stock means listing the company on to the stock exchanges and dilution of its control and ownership by raising funds through public funding. It will mean that there would be more equity einto the overall capital structure of the company.