Page 92 - DMGT409Basic Financial Management

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?

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