Exploring Debt and Equity Financing

DISCUSSION BOARD 4

Discussion Board 7

If you owned a successful company, would you keep it private or have it become a publicly-traded company?

I would prefer to make the company publicly-traded because this offers more chances for growth. To begin with, going public increases access to more capital than may be offered by private investors, venture capital firms, and institutional investors (Berk, DeMarzo and Hartford, 2021). Further, going public increases the opportunity to secure more funds from private investors (Berk, DeMarzo and Hartford, 2021). Going public is associated with stringent regulatory and reporting requirements such as the declaration/filing the company’s finances with the Securities and Exchange Commission (SEC). These regulations enhance transparency and make it easy to value the company, which, in turn, increases the number of private investors willing to invest in the company.

Berk, DeMarzo and Hartford (2021) point out that by going public, a company opens itself up to a high level of reporting regulations and requirements that may be costly. However, in my view, such transparency may be beneficial for the company as it would enhance the level of compliance and minimize the risk of mismanagement that could cause reputational damage.

a) If you go public and as your company grows, would you prefer raising capital by issuing stock, bonds, or a combination of the two?

Both stocks and bonds have their share of advantages and disadvantages. For this reason, I would go for a combination of the two. Issuing bonds is a form of debt financing. By issuing bonds, the company enjoys tax advantages because interest payable to lenders is a taxable expense that reduces the company’s pre-tax profit and tax liability (Taillard, 2012). Shares do not reduce the company’s tax return as they are not expenses. Thus, by partly issuing bonds, the company bears a lower tax liability than if it issued stocks only (Taillard, 2012).

Further, bonds are advantageous as they help the business retain more cash in-house (Taillard, 2012). This is because their maturity date can be years into the future with interest payable at a fixed rate, thus cushioning the company against unexpected interest rate changes. Finally, bonds can be issued at any time and do not have the effect of increasing ownership and diluting shareholder value (Berk, DeMarzo and Hartford, 2021). This is their primary advantage over stocks, which dilute the company’s ownership structure and interfere with voting powers. However, stocks are also less costly to the business as they do not add to debt levels (Berk, DeMarzo and Hartford, 2021). On the contrary, stock holders become owners in the company, taking part in decision-making and profit-sharing. In the event of insolvency, the owners are settled last after the company has paid all of its liabilities, including bond holders (Taillard, 2012). Therefore, despite diluting the company’s ownership structure, stocks offer more security than bonds in the event of insolvency. As such, I would propose a financing scheme that offers stocks at a higher percentage than bonds, say 70 percent equity financing and 30 percent bond financing.

b) If you decide not to go public, explain why not. Also, how do you plan to finance the growth of your company?

One of the disadvantages of going public is increased transparency and compliance with federal regulations, which comes with greater government control (Berk, DeMarzo and Hartford, 2021). The regulations impose stringent conditions on among other things, the composition and roles of the board of directors, accountability, and financial disclosure. Further, going public leads to a loss of control as investors have less power to control how the board of directors manage or run the company. Thirdly, going public would slow down the decision-making process as some key decisions that would otherwise be made by the board of directors have to await shareholder approval. This could be costly and time-consuming for the company