The CEO of Merit Corporation reviewed the company;s business records. Business h

Question

The CEO of Merit Corporation reviewed the company;s business records. Business had been brisk for the last two years, and the board of directors wants to dramatically expand the company's production capacity. They have asked the CEO to present them with some options for expansion. The plan would require $4 billion in caoital in excess cash that the firm has built up. Merit Corp has maintained it's status as a private company, reinvesting profits and borrowing from banks when necessary. It seemes unlikely to the CEO that following their usual strategy would work to expand at the company's desired pace.There are two options for the company to consider.

OPTION ONE. Merit could approach JPMorgan Chase, a bank they've used before with seasonal credit lines and medium-term loans.The CEO doesn't believe Chase would likely to extend a oan that large, but could gather a group of banks together to make the large loan like this. However, the banks would undoubtably demand that merit limit further borrowing and provide Chase with periodic financial disclosures so they can monitor Merit's financial condition as they expand their operation.

OPTION TWO. Merit could convert to public ownership, issuing stock to the public in the primary market. The CERO thinks that the company's excellent financial performance in recent years, and that stock could command a high market price and many investorswould want to participate in any stock offering by Merit. Becoming a private company would also allow them foir the first time, to offer their employees compensation in the form of stock or stock options, creating a stronger incentive to help the company succeed. On the other hand, the CEO knew public companies face extensive disclosure requirements and other regulations that that they haven't has as a private firm. Also, with stock trading in the secondary market, they don't know who might und up with a large chunk of their stock.

a. What are the pros and cons of Option 1? What are the most positive aspects of this options and what are the biggest drawbacks?

b. Do the same for option two.

c. What option should the CEO persent to the board and why?

Explanation / Answer

Answer:a. Merit Enterprises Corp. Option 1 In option one we can observe some valid point on part of their CFO Mrs. Sara Lehn on utilizing JP Morgan and a group of banks all together to obtain the 4 billion loan much needed by the CEO to create the dramatic expansion of Merit's production capacity. Cons: With the Loan comes having pressure of owing someone ( Financial Institutions) principal and interest. Another problem with borrowing money from JP Morgan and other bank partners to grow Merit's production capacity is that it hampers their monthly cash flow.

Answer:b Option 2: After converting the Private to public company company can easily generate funds through public issue with free of cost .Cons is company is facing heavy legal requirements regarding disclosure and other aspects.

Answer:c Option 2 because it helps in generating the funds with no cost.

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