Galaxy International operates in a niche market; this is because skiing is only possible in very specific areas, and only a limited number of the population skis regularly anyway. Despite this, the company has performed outstandingly well to be achieving the level of sales with a small staff. This being said, Galaxy International needs to raise capital quickly and in an efficient way to successfully continue expanding to fully capture its full market size. By offering a unique product that is flexible yet tough, Jeremy is likely to continue to increase the volume of his sales and therefore the size of his profit after expansion.
There are several benefits to creating an IPO that Galaxy International should consider. First of all, an IPO will provide Galaxy Skis with a stream of capital it can invest to further its own business interests. In this case, it would be wise for Jeremy to initiate an IPO and purchase/build a facility in Thailand. In addition, it allows and easy exist for Jeremy if the company folds over and he wants to resign as CEO, simply by selling shares (Ltd, 2003). An IPO would also help increase the reputation of Galaxy International; the company would be better known to investors and serious businessmen by virtue of their business transactions. In addition, IPOs help provide future debt financing, as banking institutions are more likely to loan money to publicly traded companies. This is because the laws governing publicly traded companies require that the company reports their financial statements in a clear and transparent manner, especially after the groundbreaking SOX Act was passed. Thus, one of the greatest benefits to launching an IPO is that it will generate increased financial security while raising capital for new projects. This cannot be understated, because every business should consider the ramifications of not having access to capital when it is needed; by going public, Jeremy will be able to receive capital quickly and efficiently, while also opening up more doors for the future if he chooses to pursue capital in other means, such as loans.
There are also a few drawbacks when initiating an IPO and most of them are directly related to the benefits. The increased transparency of the company can also be a drawback, as if it is not performing well it will not receive the level of investment it was looking for. The company will also be subject to SEC rules and regulations; in addition, the company will be subject to periodic audits because of its public status. In addition, the company is under increased pressure to perform well each quarter, which may cause Jeremy significant stress in the long run (Davis, 2011). Thus, there are a few considerable challenges to going public. However, for the purposes of raising capital and ensuring long term profit, I would recommend going public. It will place stress on Jeremy, but it will help achieve the company’s long term goals. In addition, going public will provide his company with the reputation it needs to be a long term player in the ski market.
There are a few other important ways of raising revenue for Jeremy to consider. The first is to simply save the money necessary to build the plant. If the company is making an average of $50 million in annual sales, it would probably only take about five years to be able to provide enough money to build the plant. Jeremy could also just choose to lease the plant, which would effectively eliminate the need to build the plant, which also removes the need to raise capital. The third option is to simply issue debt in the form of bonds to cover the cost, rather than fully go public and issue shares. This option would certainly cost the company a lot of money in the short run, as the interest on the bonds adds up to a lot of money in a short period of time. This means that Galaxy Skis would have to generate a large profit in order to meet its financial obligations. A fourth route would be to seek a business loan from a financial institution. Because of the lack of adequate business assets to provide as collateral for such a large loan, it is highly unlikely that it would be accepted. However, if Jeremy were to save for a few years and then seek a loan, it would likely provide better benefits. This option is the best alternative to going public to raise capital, as it is somewhat conservative and does not put much additional pressure on the company. Jeremy should be looking to save a significant portion of his profits anyway, in order to cushion his company should something go wrong. This will allow him to have time to make the necessary changes before losing the company itself.
Equity is traditionally defined as assets minus liabilities. However, the case for Jeremy and the company is more complex. By using an IPO to raise equity, it would essentially be signing up for permanent debt, as part of the final profits are paid back to the shareholders. However, raising money using equity is a lot faster than using debt, and companies can often raise a much larger amount of capital in total. Another benefit with equity financing is that the profits are invested in the company itself, not in paying off a business loan (Palermo, 2016).
Debt financing is a little bit different. Debt financing occurs either through the issuance of a loan from a financial institution or the more common method of issuing bonds. Bonds have a set interest rate and the company must pay back both the principle plus the interest rate. In the case of loans, businesses must devote a portion of the profit back to financer in order to meet its financial obligation, which can be troublesome. In the case of bonds, a significant portion of the bonds available on the market are not long term, meaning the money would become due soon, and Galaxy Skis would have to generate a significant profit to make it worthwhile and payable. Without issuing shares, I would highly suggest small business loans as a method of debt financing, as they are often government backed and are much more secure.
Bonds are only taxed once, and it is a tax on the interest that the lender receives. Thus, the government inadvertently increases the interest rates because investors wish to receive more money, so they increase interest rates so that they achieve the income they want, while the business must pay more because of the tax. Equity is actually taxed twice, at the corporate level and on the lender level. The former is the result of the corporate tax, and the second is the result of the capital gains tax and dividends taxes. The coupon rate for $50 million in bonds is 8%. This would yield a total of $54 million being returned to the lender. The maximum bond tax rate on US corporate bonds is 15%, which would yield $600,000 being taxed by the government. For equity, the capital tax rate is up to 15% as well. In addition, dividend taxes depend upon several factors, mainly the size of the dividends being issued by the company. Thus, bonds are the way to go if you do not want to have a significant portion of the income earned from investments taxed a second time.
One of the biggest issues that internationally minded companies must deal with is currency fluctuations. Currency fluctuations occur for a myriad of reasons, including a changing political environment and unexpected economic reasons, depending on the product. In the case of oil, increased production from OPEC and other oil producing companies would drive the price down, while a reduction in production would do the opposite. The Thai Baht has experienced some fluctuation over the past three decades, namely due to the Asian Financial Crisis in the ‘90’s and the military coups that destabilized the political realm of the country. Regardless, fluctuations are something that a businessman considering investing in Thailand should consider if he/she wishes to become successful. The most effective way to prevent currency fluctuations is to hedge a currency trade; this means that Jeremy would lock in a price for a good or service a long time before it actually was trade. If Jeremy chose to receive the good in a few months’ time, he would receive it then for the price when the deal was first made. Currency hedging can benefit either party due to the nature of fluctuating markets, but both are benefitted because the companies can foresee business expenses as a result of preplanning (Sponsored, 2014). Hedging has no negative side effects, other than the fact that you might have to pay a third party to broke the deal and that the company might save more by not hedging, which is the most likely to happen with the Baht’s currency inflation rate. This is because the dollar is appreciating.
Hedging currency can be done a number of ways. The best way is to find a hedging broker and let them handle the process. Hedging is not the same as FOREX trading; rather, hedging is simply a way to protect the profits of a business. Jeremy should identify a broker he trusts and allow him/her to protect his profits. Some of the biggest financial institutions offer hedging services such as Deutsche Bank and JP Morgan (Hougan, 2015). These companies are the biggest names in the business, and can effectively protect Jeremy’s companies from the changing fluctuations of the Thai Baht. The Baht has faced substantial fluctuations during the past decade due to numerous geopolitical factors. The current inflation rate of 6% is an indicator of such, and the high inflation rate will actually help Jeremy in the long run because the American dollar will be worth more, and therefore can afford more labor. In addition, the cost of leasing the property will be lower in the long run, with the projected inflation rate remaining the same for a decent period of time. However, this can change in the blink of the eye, and it is probably better for Jeremy to continue to hedge.
The current economic state in Thailand is interesting, to say the least. The military seized power over a year ago, and that has been affecting investor activities ever since. The region has a much lower cost of living as a whole, and wages are significantly lower than in more modernized parts of the world. This is slowly changing as time goes on. Thailand has a freedom scale of 63.9, and the country has made great strides towards economic freedom during recent years (Foundation, 2016). The financial system is sound, and the tariffs remain relatively low in comparison to other parts of the world. This, in addition to the low corporate tax rates, serve to make Thailand a suitable place to place part of Galaxy Skis. The entire region is relatively stable economically, other than the current issues in Cambodia. The region is gaining in economic importance, and Jeremy could accomplish a lot by establishing a root in the area and take advantage of the region’s lower cost of living and of labor. I would recommend that Jeremy buy the plant and use it, as he will have acquired an asset that will have significant value for resale later, even if Jeremy begins to lose money based on the plan.. In addition, the political situation in Thailand may be tumultuous, but every dictator and democratically elected government has kept the status quo in regards to the economy and taxation rates. This is likely to remain the same, as the governments understand that maintaining a stable business environment is necessary to the country’s continued competition in the international marketplace. The most recent democratic vote in the country heralded in increased economic stability by increased social planning on the part of the government in an effort to seriously reduce the poverty rate in the country over a period of time., which demonstrates the power the current government holds and the possibility of that power becoming popular (Watts & Chaichalearmmongkol, 2016). Either way, it means increased stability in terms of trade.
As a portfolio manager, I would invest in Galaxy International. This is because the company is solid. The capital asset pricing model is mean to compare an investment to a risk-free investment with a risk premium. It calculates the amount of compensation an investor would need to undertake additional risk. The expected return of Galaxy International stock is 23.6%, which clearly demonstrates the strength of the company. I would want to jump in on the investment opportunity early, as this high of a CAPM demonstrates the strength of the company and indicates strong long term performance. The CAPM even exceeds the WACC; this is because the current return on the company’s assets are very high, especially in comparison to other companies. Ignoring the CAPM, Galaxy International is an attractive business opportunity for other reasons. It is a niche market so expansion is limited to the market size; however, the intended acquisition enabled by an IPO is relatively small and easy to pay off with the company’s current rate of return. The company is reaching a very high level of sales, and has a small number of employees and primary assets. The only downside to investing in the company is the possibility of international influences damaging the company, as currency changes could result in loss. As previously mentioned, Jeremy can hedge the currency to avoid this and the Baht is not currently in a position to drop. Thus, Galaxy International is a very viable business opportunity.
Thus, it is wise for Jeremy to continue with his equity/debt plan and issue the stock and bonds. This way, he will be able to build the facility in Thailand, decrease his long term fixed costs, and alleviate some of the variable costs that occur when using a more expensive labor source. Jeremy will continue to capture the market after this expansion and the scope of business for Galaxy International will likely increase due to the brilliance of the product and future decreased price that will occur as a result of this switch. By building the plant, he will decrease the overall fixed cost as he will not have to lease, and he will gain an asset that does not often lose value over time. In addition, the current sales of the company and the company’s capital asset pricing model reveals the company to be strong in regards to its risk level. Thus, Jeremy should continue with his plan and invest in his company’s future, but carefully monitor his company’s ability to pay its bills.
Works cited:
Ltd, T. C. G. (2003). IPO benefits - TCG. Retrieved August 11, 2016, from Trust Capital, http://www.trust-capital.com/page.php?id=73&&PHPSESSID=798a964978326d6fb0a20625b21ecca6
Davis, M. (2011). The ups and downs of initial public offerings. In Investopedia. Retrieved from http://www.investopedia.com/articles/financial-theory/11/upside-downside-of-ipos.asp
Palermo, E. (2016). Debt vs. Equity financing: What’s the best choice for your business? Retrieved August 11, 2016, from Business News Daily, http://www.businessnewsdaily.com/6363-debt-vs-equity-financing.html
Sponsored, T. (2014, September 14). Can I protect my export business from rate fluctuations? The Telegraph. Retrieved from http://www.telegraph.co.uk/business/sme-library/smes-questions-answered/protect-export-business-from-rate-fluctuations/
Hougan, M. (2015, January 8). 2015: The year of currency hedging. Retrieved August 11, 2016, from ETF, http://www.etf.com/sections/blog/2015-year-currency-hedging
Foundation, T. H. (2016). Thailand economy: Population, GDP, inflation, business, trade, FDI, corruption. Retrieved August 11, 2016, from Heritage Foundation, http://www.heritage.org/index/country/thailand
Watts, J. M., & Chaichalearmmongkol, N. (2016, August 9). Thai vote result Heralds economic stability, if not democracy. Wall Street Journal. Retrieved from http://www.wsj.com/articles/thai-vote-result-heralds-economic-stability-if-not-democracy-1470735485
