The chapter discusses some of the approaches relating to financing of growth in corporates. Since growth is an essential part of a firm, managers have to arrange funds to source this growth. However, whenever a company faces rapid growth, it poses a special problem for the finance managers as they have to arrange large amount of cash to fund this growth. The ultimate goal of a finance policy of a firm, whether young or old is to maximize the value of its shareholders and also since the set of finance policy and instruments available to a finance manager is constant, author finds his interest in examining the financial tools available for a firm to boost its market value before it consider any financial strategy for growing firms. Author in his further discussion explains the two basic approaches for using finance to increase the value of the firm under the assumption that the total operating cash flow will be distributed to all the investors. The two approaches which author discussed in this chapter is:
- Slicing the Pie Approach
- Using finance to increase the Cash Flow Pie
For slicing the pie approach, this approach assumes that the cash flow pie is independent of financial policy, so that the principal role of finance is to divide the pie of earnings before interests and taxes into different slices by issuing varying types of security. The main objective of this approach is to understand the desires of investors and match them with the securities characteristic so as to maximize the total proceeds from the sale of securities.
The second approach which the author cited was relating to increasing the size of value pie through investment and operating decisions. The reason for this approach is because the company is a complex web of contracts organizing disparate corporate shareholders through contracts. Thus, the fimr’s future operating cash flow will depend upon perceptions and incentives of the firm’s non-investor stakeholders. Thus, as per this approach, financial policy can be used to increase the size of cash flow pie by strengthening stakeholder relationships in the form of management incentives or by increasing the confidence of suppliers and customers.
After explaining these two approaches, author now turns towards defining growth companies and related growth features, financial management techniques related to them etc. The most obvious sign of a rapidly growing company is its large hunger and need for cash and a negative cash flow primarily to finance growth in its sales. The second feature of growing companies is related to devising a financial plan i.e for a company to grow both in values and size it must have access to investment opportunities with positive net present value(NPV) and thus companies citing growth must frame out plans for positive NPV projects. Final feature of growth companies is that these companies face tough times in establishing their value in the market unlike other companies whose value depends on the value of growth options, for which there are no comparables and instead there valuation depends on future profits. Thus, this difficulty in valuation of growth options leads to creditibility problem and increases the potential for conflicts among managers, investors and non-investor stakeholders.
In his concluding discussion, he commented on some of the medium of financing growth companies and their likely effect on the growth company. The mediums of financing growth companies are:
- Bank
- Venture Capital
- Private Placement
- Convertible Securities
Works Cited
Shapiro, B. C. Financing Corporate Growth. In Risk Management (pp. 260-274). Los Angeles: University of California and University of Southern California.
