Merit Enterprise Corp, a private limited company, has been performing overwhelmingly in the past few years. The company has a resilient balance sheet with a cash fallback of USD 2 billion. However, it intends to expand its production but it does not currently have the financial ability required to meet the expansion. The chief financial officer (CFO), Sara Lehn, knows very well that the company requires supplementary capital amounting to $4 billion to undertake the project. These issues confronting the company must be resolved before the board members.
The option of raising the required capital through syndicated bank borrowing might work well for the company but might not be the best option. JPMorgan Chase is a bank that has had good working relationship with Merit Enterprise but might not provide such high loans solitarily. It will have to team up with other banks and provide the required capital (Media, 2011). This therefore calls for the company to disclose its financial records to the other banks so that they can assess its financial strength. Since it has been performing well, the banks are likely to offer the loan but this will increase the liabilities of the company. From a financial standpoint, raising the entire amount through debt will upsurge financial risks and the debt proportion unnecessarily.
Additionally, interest will be charged on the loan, and the company will have to provide records of its progress to the banks. This will compromise the privacy of the company hence negatively impacting on the company’s reputation. Having such associations with the banks might create agency problems. This is because a conflict of interest between the lenders and the stakeholders might arise.
However, seeking the loan will enable the company to finance its activities while remaining as a private company with the right of non-disclosure. Merit Enterprise will also not be required to explain to shareholders why their stock is underperforming in case such a scenario occurs. Additionally, the company will be able to utilize the tax advantage of debt to improve its earnings thus resulting to a higher financial leverage (Media, 2011).
The CFO also has an option of recommending that the company goes public. This seems to be the best option for Merit Enterprise. Since it has been performing excellently, its stock is likely to fetch a higher price in the stock market since many people will be willing to invest in the company and the 4billion will easily be raised (Media, 2011). Additionally, Merit will be in a position to offer stock to its employees and this will add onto the employees’ incentives a factor that will motivate them to spur the overall success of the company.
Despite being the best option, going public will negatively impact on the company. The company will need to regularly submit records of its performance and activities for scrutiny. Additionally, being a public company, the management will be closely monitored by the shareholders as well as other members of the public.
The best way to resolve the issue is to report to the registrar of companies that the company wants to go public (Media, 2011). If the request is approved and all the required documents submitted, the company will then advertise its stock to members of the public so that they can apply and purchase. Through selling of stock, the required 4billion or even more will be raised and the expansion project will comfortably be undertaken.
References
Media, B. P. (2011). FIA - Foundations in Financial Mangement - FFM 2012: Study Text. London: BPP Learning Media.
