Financial Management

Topics: Corporate finance, Finance, Equity securities Pages: 5 (905 words) Published: June 28, 2014

Liberty University Online
Managerial Finance
June 10, 2014

A company that is barely making it must put itself into a position to where they can best take advantage of the opportunities that lie ahead. This case involves a company that is two years away from achieving financial solvency and put it on the path to creating value for its shareholders. The current problem is how to sustain this company over the next two years without them going under and not being able to put their product on the market in two years. Proposal for Obtaining Funds

According to Brealey, Myers and Marcus, corporations have three broad sources of cash, they can internally generate funds in which they reinvest their cash back into the firm or they can raise money from external sources by issuing shares or debt (Brealey, Myers, & Marcus, 2009, p. 400). The company whose capital structure is in a financial deficit doesn’t have the option of reinvesting back into the company as their cash flow is minimal they must seek other alternatives such as issuing common or preferred shares or to borrow money from either banks or seek private equity investment opportunities. Debt Capital

Most companies consider borrowing money through banks or selling their shares to the public in order to keep their business operations going or maybe to fund their future investments. There are several forms of debt such as bank loans or bonds issued to the public Debt comes in several forms, such as through bank loans, notes payable, or bonds issued to the public. Short-term debt is called “Commercial Paper” which is an unsecured promissory note with a fixed maturity of no-more than 270 days and is not usually backed by nay form of collateral. This may work in the short term to help the company develop other alternatives or form of combination.

Equity Capital
Companies have the option of selling their company shares to investors in order to raise the necessary capital needed to maintain their operations. Selling the shares to investors under the premise that there will be significant value to the investor in the future that would make their investment a wise choice. Companies may need to look at private equity investors who seek opportunities to invest in projects that may be high risk but offer high returns. Author Donald Hoffman suggests that “private equity investments have some advantages over these traditional methods and can be used in combination with other sources of funds. Private equity is available on a consistent basis, regardless of the condition of public equity and debt markets, and doesn't come with burdensome and costly disclosure requirements” (Hoffman, May/June 1993). These type of investors usually have patience over the long haul which will be needed in this situation. Preferred Stock

Another option may be to sell preferred stocks which is a higher priority than common stocks in regards to dividends. These stocks are part of the company’s equity and may include some debt shares as well. (Brealey, Myers, & Marcus, 2009, p. 407). Those who buy these types of stocks will get their dividends on time and paid in full. Another advantage is that the tax rate is lower than other common stocks which makes it attractive for the company itself. Financial Planning

There are many options available to a company that is trying to sustain itself over the course of two years but a must and necessity is that the company has a solid financial plan for the short-term and long-term. Typically the company’s short-term financial planning should be tied to the long-term plan. In the short term to raise working capital necessary to sustain operations, company would consider bank loans both unsecured and secured or just forego the banks and offer commercial papers which is selling their short term debt. Long-term finance options may include private equity investors such as angel investors or a...

References: Brealey, R. A., Myers, S. C., & Marcus, A. J. (2004). Fundamentals of corporate finance (7th
ed.). Boston, Mass.: McGraw-Hill Irwin.
Critchley, B. (2009, Sep 24). How to raise cheap capital. National Post (Index-Only) Retrieved
Hodson, P. (2014, Mar 15). Five signs of a good financing. National Post Retrieved from
Hofmann,Donald J.,,Jr. (1993). How to raise capital, privately. Financial Executive, 9(3), 30.
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