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Equity and debt capital structure essay

Personal debt Financing, Financial debt, Capital Budgeting, Financing

Research from Essay:

AMSC had announced a letter of intent for secured personal debt financing in July of 2003 (AMSC 2003 Twelve-monthly Report) if the stock was trading inside the range of $8 per talk about. The blackout gave the firm’s share considerable momentum, and this finished the month of August up over 50% at $12. 19 every share (MSN Moneycentral, 2010). Equity concerns normally lead to dilution with the stock cost, since the concern must be offered at a discount to the current price in order to attract shareholders. With the stock price surge, however , such a discount would still be over a July cost, or certainly any value the company’s inventory had seen in the previous 18 months. Thus, the impacts with the dilution would be minimal for the existing shareholders.

The decision may also have been built on the basis of capital structure. At that time, AMSC would not have any kind of long-term debts. The Come july 1st financing may have been the only long-term debts for the organization. The company had quite strong liquidity percentages. Thus, the decision to concern equity also relates to management’s aversion to debt. Personal debt aversion is usually one reason behind choosing equity despite their higher cost. Businesses sometimes choose to match their particular financing terms with their earnings terms. A business focused on long term growth or growth of indeterminate length may prefer to employ equity loans specifically as a result of flexibility it offers management. For AMSC, there were no reason given the firm’s size and budget to have financial debt aversion, yet such antipatia may have become a great ingrained portion of the managerial traditions.

The other major economic consideration may be the firm’s current cash flow scenario. While AMSC had a solid balance sheet during the time, it was taking a loss. The loss in fiscal 2003 was $4. 21 per share, and had been quickly increasing within the last few years. Although AMSC was an established business, one of its primary lines of business, contracts, had dry out. Contract revenues declined from $3. one particular billion in 2001 to $715 million in 2003. Contracts symbolize steady cash flow flows that can easily be used on debt. Without any certainty out of this particular profits stream, financial debt financing may possibly have show up unattractive to management as it worked to grow distinct businesses, perhaps with less certain funds flows.

The decision by AMSC management to select equity loans therefore appears to be the result of 3 different factors. The organization had a cultural aversion to debt. The corporation also is at a transition phase of its business, with regular contract profits streams going dry. Lastly, AMSC’s share value had spiked, reducing the negative effects to the investors of an value issue. These types of three factors combined persuaded management to forgo the debt issue and issue more stock instead.

Works Cited:

Hillstrom, L. (2010). Financial debt vs . collateral financing. eNotes. Retrieved March 4, 2010 from http://www.enotes.com/management-encyclopedia/debt-vs.-equity-financing

Esposito, A. (2003). Westboro company strategies to raise cash through a share offering. Telegram Gazette. August 23, 2003, pg. E1.

AMSC inventory price information from MSN Moneycentral. Retrieved February 5, 2010 coming from http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=U.S.%3aAMSCCP=0PT=10

AMSC 2003 Annual Report gathered February 4, 2010 by http://media.corporate-ir.net/media_files/irol/86/86422/FileUpload/2003.pdf

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Category: Business,

Topic: Capital structure, Cash flow,

Words: 589

Published: 01.17.20

Views: 165

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