A struggling company has a positive cash flow, the cash flow is minimal. If some

Question

A struggling company has a positive cash flow, the cash flow is minimal. If something does not change soon, the company will go under. The product development team has just created a new product that will not only save the company from financial demise, but the product will revolutionize how the industry does business. The problem is that the product is still two years away before it can be sold to the public, and you will run out of cash within the next six months. How would you propose obtaining the funds needed to keep the company alive and thriving for the next two years until you are able to see a return on the product development, and keep the stakeholders happy? Also, Weighted Average Cost of Capital relative to raising capital in bonds, bank notes, preferred equity and common equity must be addressed. Agency costs should be addressed relative to the leveragng of the firm. Optimal capital structure relative to WACC and valuation must be addressed as well. Thanks.

Explanation / Answer

Yes, we obviously need some external financing to keep the firm alive. There are various sources of funds that we can use, some of them are Common Stocks, bonds, preferred stocks bank loans. Before using any sort of fund, we have to see its impact on weighted average cost of capital. Bonds are less risky but they can increase the business and financial risk which in turn will made the equity holders to require more returns. This will substantially increase the WACC. Using Equity might also be risky. If the fund has low leverage of leverage they can use bonds or bank loans. If it is financed through the issue of common stock, it will impact agency cost as well. As the number of shareholders increases, managers

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.