diss 5

Student 1

For this project we are looking at three options for financing the in-house purchase of the company Fanuq Robodrill. These options are to sell stock, sell bonds, or to get a loan. The first option to sell stock has advantages and disadvantages. The most obvious is that it will generate cash and help to alleviate the debt of the purchase without taking on any additional debt, however, the disadvantage to this method is that it will take shares away from the business and if low enough could remove the majority from the business. This would cause issues with the running of the business and the new shareholders expect a return on their investment in the company. If you get a bond then you get an interest only loan that is expected to be paid at the end. This comes as an advantage of raising the money initially for a low amount of money that will need to be fronted and paid over the course of the years. However, at the end of the loan period the principal is due in its entirety. This disadvantage would be dramatic when it comes due and will need to be accounted for. Finally, the last option is to get a loan from a financial institution. To pay the debt of purchasing the company this will come with a major disadvantage of the payment of interest and principal will cause a large payment and large amount of debt due to another company. If the loan defaults, then the debt will be placed against the business and could cost a large amount in bankruptcy or the loss of the business itself. (Ross, 2019) 

It is my recommendation to seek a bond to pay for this financial endeavor. This is because the disadvantages are the least and will result in achieving the money with the least amount of yearly and monthly payments. The end principal payment can be debited as a prepaid amount for the business and can be budgeted for after you see the prosperity of the new machines and how it affects the business. This method will cost the business the least in stocks or debt and will still give the money for the acquisition. (Ross, 2019). 

Respectfully, 

Aaron 

References:

Ross, Stephen. Financial Management. McGraw Hill Education, 2019, Excelsior College, https://prod.reader-ui.prod.mheducation.com/epub/sn_4275/data-uuid-70e0adb87d0a473a95b1457ac5eefbd7, Accessed 2022.

Student 2

Straightline Medical Director of Operations and other Directors,

Thank you for your time reviewing this, as your Finance Director purchasing the Robodrill and hiring a Robodrill operator is a large investment within Straightline Medical. This purchase requires immediate resources and increased liabilities to meet the eventual end state of producing these inhouse. The inhouse production will not only meet our patients needs quicker; providing them a better service, but we will also be more competitive within the market, reduce outsourcing costs, and we will eventually raise our profit margins. I say eventually raise our profit margins because in order to take on this technology we will require outside resources to afford this, each resource will take a part of our profits until this resource is paid off and we are complete with repaying the external financing.

This technology purchase will require debt and will increase our liabilities. When looking at debt we have a few options, short-term debt which is usually paid off in a year or less or long-term debt, with maturities are over a year (Ross et al., 2019). Looking at the requirements for this type of purchase we will be primarily looking at long-term; however, we could use a combination of long-term and short-term to meet Straightline’s needs. Debt is generally regarded and less expensive than equity, especially when interest rates are lower. Equity for financing would usually be considered as the sale of common stock and a portion of our company to an investor. Due to this fact plus the tax benefits on interest payments I am recommending if Straightline decides to take on this project we utilize debt and not equity. The sale of part of our company through common stock would have an effect on other areas within the operations of Straightline, including a possible major shift from patient care to shareholder focused initiatives. We have discussed that this project will not be considered if it does not yield a positive net present value; however, there are repayment obligations that must be meet and the cost of financing is not guaranteed, it may exceed our original estimate and there are long term costs including salaries, upkeep, and maintenance.

Looking at inflation when considering bonds it is important to keep in mind that investors will require compensation when investing with us. This adjustment will impact our ability meet the level required for the increased profit margin. A believed higher interest rate in the future will affect the nominal interest rate requiring an inflation premium; if investors believe inflation will drop this would require a down-sloping term structure. Concerning both debt and equity the cost of doing business requires external funding, that total cost is not guaranteed so the more aware we are all with the decisions we make the better financial position Straightline Medical will be.

References:

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.