18 Jul SOME OF THE DISADVANTAGES THAT AMSC WILL ENCOUNTER WITH THIS IMPLEMENTATION INCLUDE THEM MISSING ON THE OFFERED LOAN INTEREST TAX DEDUCTIONS.
Introduction
The act of seeking financial funding that can support a business as a form of capital is what can be termed as business financing. To most public companies there are many business financing options available, however equity financing and debt are currently the most commonly applied financing methods. These methods may be used in combination or singly, but they both have their own disadvantages and advantages. Debt financing firstly involves acquiring finances mainly in the form of the invested loans that have been put in the business pay offs and operations agreed upon in the terms inscribed in the loan with some form of interest percentage.
Debt funding may be short or long term, the payment of the short term debt is done in less than a year, while the long term debt financing is done in a longer period that can extend for years.In some cases like in debt financing their only obligations that are awarded to the business is on their timely repayment of their loans. While on the other hand equity financing involves selling out shares to investors who in turn have to offer as capital their money for the business investment in return forshares valued at the monetary contribution to the business’s capital value(Houston & Brigham, 2008).
This is simply an exchange of the business’s shares or portions for the monetary exchange in terms of units in valued shares. Having foregone debt financing AMSC may indeed have some advantages that are related to that financing option. In that with the 50 dollar billion debt may impair their credit rating and may be too heavy, and they cannot acquire any form of credit that they can utilize to promptly finance their emergency loan requirements. Such a large debt secondly may require highercompany’s profits and higher interest payments which, may be swallowed up in the loan repayment and therefore make the company never realize the fruits of its labor fully.
The company would need to go through a lot in trying to show that they have enough cash flow for the debt financing since it required them to pledge a part of their assets and support loan repaymentthat would finally be seized if they failed to repay their loans and this can eventually lead to bankruptcy (Cox, 2011).
Advantages
The raising of equity sales through the decision of raising required capital can be considered prudent, since, they when the business fails they would have to find alternative ways of repaying their investors, and in addition; if the business loss or profits are actually to operate at zero they do not have to repay their investors payments or interests.
Another advantage is on the fact that incase the company runs into losses or doesn’t record any profits there will be no fear of any form of loss, since there was no need for collateral in their pledges. The company with its rising value will also have good returns mainly from the initial 12.20 dollars, which is an increase of 60 cents. The shares 305% percent rise is also likely to attract investors that through the equity can be able to fund the business, and this makes the loan searching unnecessary (Esposito, 2003).
The company is on the right path towards achieving its target due to the momentum of business’ revenue gains which have gradually picked, therefore it is able to attract the confidence of the investors and therefore make it unnecessary for the loan search. In the future the company is also likely to have more cashfor any projects because profits can easily be plowed back, unlike where a bigger part of the profit is consumed by the interests like in debt financing.
Disadvantages
Some of the disadvantages that AMSC will encounter with this implementation include them missing on the offered loan interest tax deductions. These deductions on taxes are given to businesses that acquire loans for their business financing and they are highly beneficial since they help the company retain its initial profits. Another disadvantage is on the company loosing part of its control, and due to this it might have to act to benefit the highly influential stakeholders, especially if a larger part of the equity that funds the business is held by them (Houston & Brigham, 2008). Another disadvantage would be that within any corporation payments to investors would not be deductible, and this would cause conflicting ideas to arise between the investors and company.
Conclusion
The best option for the company was indeed equity funding since it removes the initial risk that is related to the payment of loans, this should be the case whether the company is recording a profit or not. The (TSR) total shareholder return should be taken into considerationin order to determine a company’s cost of equity. The anticipated earnings when the shares are purchased from the company are shown by the TSR.
It is clear that both methods have evident disadvantages and advantages and with this the best way for financing a business should depend on the environment, type of business and ability to use any other alternatives. In the case of AMSC it can be said that its management can implement both methods; but for a company that is just starting it would be a little hard to raise capital just based on its equity since it is unknown. Therefore depending on a business age, stage and profitability however, while making their decisions a company would have to incorporate so many factors.
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