Granite Apparel- Source of Funding
Subject: Source of funding
From: JMSB consultants;
Date: March 2007
Main Issues * Choosing the appropriate source of financing, between Initial public offering, long term debt or preferred shares, to raise funds for the expansion of Granite Apparel.
Recommendations * Granite Apparel should use an Initial Public Offering as a source for raising funds. Analysis
Initial Public Offering
The cost of issuing common shares for your company was found by adding the following expenses (APPENDIX ONE):
Bridge Financing Rate (Annual) | 10.25% | Amount of Bridge Financing | 50,000,000 | Period | 6 …show more content…
If the company chooses to issue debt, the following ratios would occur in the 2007 financial statements of Granite Apparel.
Ratio | Industry | Granite | Debt/Capital | 15.1 | 61.52 | TIE | 41.2 | 6.47 | ROE | 18.4 | 21.94 |
The risk of the company by issuing more debt would be extremely high and way above the industry averages. By demonstrating both Debt/Capital and TIE, we could see a large increase in the company’s risk which is not in the company's favor. They might be reevaluated as a riskier company and therefore would no longer be able to purchase at low interest. The ROE plays in favor, however, because the total Equity is divided among fewer shareholders. It looks good for investors but not for creditors.
If the company chooses to issue preferred shares, the financial statements would look very similar to issuing an IPO. This occurs because the preferred shares would be booked in the Equity section of the financial statements due to their “ownership” qualities.
Granite Apparel is faced with three financing mediums; initial public offering, long term debt or preferred shares. In the decision process, it is important to weigh the benefits and shortcomings of each financing option.
Initial Public Offering (IPO)
* Increase in Shareholder Capital * Increased wealth without dividing