Week 5 Finance Discussion Responses

Finance Responses:

Minimum of 100 words each

Discussion: Michelle’s Post

• It appears we may need to raise more capital. Is expanding debt a good idea? Why or why not and should our given assets impact this decision?

Expanding debt can be a great alternative to straight capital purchases. Firms can simply not have enough cash to fund expansion projects. (Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019) There are several pros to using debt to finance capital. Interest rates are tax deductible, the financial obligation is defined, and most terms are fixed, in some economies, debt can be paid back with cheaper dollars and using debt will lower the cost of capital to the firm. Cons to debt are the financial obligations due no matter the state of the firm. If utilized beyond a given point, debt may depress common stock values. (Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019)

• In our economic environment, should we issue bonds, common stock, or preferred stock? What would be some pros and cons?

Common stock includes all income that is not paid out to creditors or preferred stock. There is also a higher earning potential which will create greater dividends. Common stockholders also have voting rights. You can also common est in companies with limited liability. A con to common stock is the risk. Preferred stock does not have the most desirable characteristics that debt or a common stock possess. Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019) Preferred stockholders have limited voting rights, but the stock is stock I till appealing to investors because of the similarities to common stock and bonds.

• Or should we forego this immediate opportunity and buy back some of our outstanding common stock? What market conditions would make this a good move; what might be some pros and cons?

Buying back the shares can reduce the cost of capital, inflate financials, consolidate ownership and free up all profits to pay out bonus payments. (Boyte-White, C. (2021) Midsized or growing companies should not buy back shares. This practice is usually reserved for larger companies. If a company does buy back, they need to be sure that they buy at the lower price than what the sold it for.

• Should we issue a dividend, or should we retain cash in the company for future opportunities? How might this impact future growth? Are we obligated to pay our shareholders a dividend?

Dividends should be issued as an obligation to the stakeholders. A company should also retain a portion of the cash in reserve and some to grow the business.

Discussion: Jonathan’s Post Hello classmates,

Capital Discussion

With regards to raising capital, expanding debt can potentially be a good idea under the proper circumstances and largely depending on the cost of capital at the time of need. One factor to consider would be whether interest rates are expected to rise or fall, which could impact the decision to refund existing debt or not, with a potential to increase the leverage position of the firm at a more affordable cost (Block, et al., 2022). Additionally, expanding debt allows the firm to extend leverage on its current position and consider a fixed obligation that creates value in the operational areas that are needed. Lastly, the payments on interest are tax deductible and therefore allow for less than a dollar for dollar interest payment on the debt expanded to need to be paid initially. It is important to consider the amount of the assets we have as well – expanding debt will only be a good idea if we have the revenue to cover the obligations and if the cost of capital is outweighed by the return that can be achieved with it. Additionally, if the firm is leveraged too much, our debt-to-assets ratio will indicate we are over- leveraged and give concern to our shareholders that we are operating in a risky manner (Block, et al., 2022).

Bonds, Common Stock, or Preferred Stock?

In the current economic environment, issuing bonds would be a fairly priced form of achieving cash flow and allowing to make some investment decisions without needing to give up a portion of the company through the issuance of common or preferred stock, especially with the market at one of its lower points (Li, et al., 2022). The cons are that as inflation and interest rates fluctuate, bonds could end up needing to be sold at a loss instead of a premium down the line. Issuing stocks would be a guaranteed method of raising capital in the short term with no debt obligation, but an additional portion of revenue and equity would be lost from the company unless eventually a plan was put in place to buyback the shares issued once in a more comfortable position financially.

Buying Back Stock

Buying back stock would be a method of shoring up the balance sheet and bringing more equity back into the organization when, simply put, the value of the shares is fair to the overall value of the company and not inflated in any way, whether by internal company risk or market perception. This would give us more flexibility in the near future if the market is showing that the cost of capital will be reduced in the future due to interest rates or even based on what our future plans are.

Issuing Dividends

We are not obligated to issue a dividend to our shareholders, but the presence of one reflects positively on the company’s health and expected future performance. Issuing dividends gives shareholders a reason to stick around and invest more in the company, hoping for more returns for a longer period of time. However, if there are short-term opportunities we need cash for, we should forego dividends and release a plan to achieve them in the longer run as opposed to issuing them now, and ensure that our return plan includes space to issue dividends after new investments begin to pay back (Block, et al., 2022).

Thank you all for the discussion,