You are the CFO of Kramer Manufacturing, a publically traded manufacturer of par

Question

You are the CFO of Kramer Manufacturing, a publically traded manufacturer of parts for small gas engines. The CEO has set a goal of developing a device that, when installed in a gas engine, would monitor the engine and predict needed maintenance, repair, and replacement of engine components, reducing down-time of equipment for customers of Kramer. The research and development costs will be significant and external financing will be necessary to pursue this goal. Create a bulleted list of all factors you would consider in recommending either debt or equity financing, i.e. a bond issue or a stock issue, for the project. Be sure to EXPLAIN your analysis of each factor to include such points as pros and cons, consequences of alternatives, or other specifics for your analysis.

Explanation / Answer

Pros for Debt Financing

a) Maintaining ownership of your own business

If you raise equity by diluting stake , you are giving away your equity ownership , which you obviosly would not like to give

b) Tax deductions

Cof the debt is given by the coupon on bond and then considering tax deduction on the same

Cons of Debt financing can be

1)Effect on credit rating

Credit rating would be effected if you borrow more

2) Cash flow timely payment

This is where equity financing scores well all payments have to made timely , even if the cashflows or buisness is not doing well

Pros and cons of Equity financing :-

Pros

No regular payments : Self explanatory

Cons giving up ownership

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