Page 92 - DMGT409Basic Financial Management
P. 92

Unit 5: Capital Structure Decisions




             firm has record of retiring debt prior to maturity. Retains bulk of earnings and pays low   Notes

             dividends. Management not interested in surrendering voting control to outsiders. Money
             to be used to finance machinery for plumbing supplies.

             Sharma  Brothers., Inc.

             Needs $20 million to expand cabinet and woodworking business. Started as family business
             but now has 1200 employees, $50 million in sales, and is traded over the counter. Seeks
             additional shareholder  but not willing to stock at discount. Cannot raise more than $12
             million with straight debt. Fair management. Good growth prospects. Very good earnings.
             Should spark investor’s interest. Banks could be willing to lend money for long-term
             needs.
             Sacheetee Energy Systems

             The firm is well respected by liberal investing community near Boston area. Sound growth
             company. Stock selling for $16 per share. Management would like to sell common stock at
             $21 or more willing to use debt to raise $ 28 million, but this is second choice. Financing

             gimmicks and chance to turn quick profit on investment would appeal to those likely to
             invest in this company.
             Ranbaxy Industry

             Needs $25 million. Manufactures boat canvas covers and needs funds to expand operations.
             Needs long-term money. Closely held ownership reluctant surrender control. Cannot
             issue debt without permission of bondholders and First National Bank of Philadelphia.

             Relatively low debt-equity ratio. Relatively high profits. Good prospects for growth. Strong
             management with minor weaknesses in sales and promotion areas.
             As George was looking over the folders, Meenda’s secretary entered the offi ce. George
             said, “Did Meenda leave any other material here on Monday except for these notes?”.
             She responded, “No, that’s it, but I think those notes should be useful. Meenda called early

             this morning and said that he verified the facts in the folders. He also said that he learned
             nothing new on the trip and he sort of indicated that, he had wasted his week, except of
             course, that he was invited to go skiing at the company lodge up there”.
             George pondered over the situation. He could always wait until next week, when he
             could be sure that he had the right recommendations and some of the considerations
             that outlined each client’s needs and situation. If he could determine which fi rm matched
             each recommendation, he could still call the  firms by 6:00 P.M. and meet the original



             deadline. George decided to return to his office and match each firm with the appropriate
             fi nancing.
             Questions
             1.  Which type of financing is appropriate to each fi rm?


             2.   What types of securities must be issued by a firm which is on the growing stage in
                order to meet the fi nancial requirements?
          5.5 Summary


          z    Organisation requires funds to run and maintain the business. The required funds may be
               raised from short-term sources or long-term sources or a combination of both the sources

               of funds, so as to equip itself with an appropriate combination of fixed assets and current
               assets. Generally, capital is raised from two prime sources (a) equity and (b) debt. What
               should be the proportion of equity and debt in the capital structure of a company?





                                           LOVELY PROFESSIONAL UNIVERSITY                                    85
   87   88   89   90   91   92   93   94   95   96   97