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The Growth of a Company, WIDGET, Inc.’s 3 year performance,

Background

Raising capital, whether for startup or expansion, remains the most critical endeavor that a business can undertake. Evaluating WIDGET, Inc.’s 3 year performance, it is evident that it has and qualifies for multiple ways of raising finance for its business operations. Despite the company’s excellent performance in terms of sales, its cash flow needs and strategy to expand makes external financing mandatory. Besides the company’s external financial needs is quite immense, to the tune of $950,000. It is imperative to note that the ultimate choice will have a profound effect on our short and long term success since different sources offer varying advantages and disadvantages. Before reaching a decision, the company considered multiple options including issuing of bonds, common stock, common stock and preferred stock, or to issue a mixture of debt and equity in an IPO. It also considered doing a private offering or obtaining loans from financial institutions which were ready to work with us.

Options

The first option considered by the company is whether to issue bonds which is a means by which companies raise money from investor to finance their business activities. In return for the investors’ money, companies issue bonds promising to pay the investor interest, and also pay back the invested amount at a certain date. The second option was to issue a mixture of debt and equity in an IPO which would involve either issuing equity to public investors or becoming public by issuing debt. Critical considerations indicated that the option would involve a series of reporting requirements, dealing with multiple security holders, observable security prices and an ultimately improved access to existing financial markets (Fabozzi 135).

The other option was to finance its operations by issuing common stock, a viable option since WIDGET is generally in a good financial health. The option would involve liaising with investment banks to help it issue and sell new shares at existing preset prices. The company also considered issuing preferred stock which would place buyers of shares to have special status in case it runs into financial trouble. After evaluating the various pros and cons of common and preferred stock, the company also considered doing a private offering to interested investors. WIDGET, Inc. also considered getting loans to meet the additional financial requirement which would require repayment within specified time periods with interest.

Review

After considering the multiple available options, the company settled on issuing bonds to finance its expansion options. The company does not want to go public, hence bonds are a preferred choice to stock since the former represents a creditor’s claim on a corporation while the latter, an ownership claim. Since the company has an elaborate 7 year expansion plan, bond is preferred since it is a more predictable option since all bonds issued will specify the promised cash flows and the principal. The bonds also have generally lower interest rates comparative to other sources of lending such as loans besides bonds being considered as tax-deductible business expense (Fabozzi 135). Although the sum needed is massive, the company also has the option of targeting both institutional and retail investors thereby expanding its borrowing capacity although some investors may doubt our ability to meet interest obligations due to the shorter period in existence.

Since the company has reviewed its financials and made a decision that corporate bonds is the right choice, it has to select an underwriter, the investment bank which will in conjunction with the organization determine when the bonds will mature, bond prices and interest rates. The company will thereafter consult other underwriters before writing and submitting a registration statement to relevant authorities which will specify all participants including the issuer WIDGET, Inc, the lead manager and other underwriters. Following registration, the final bond prices will be set before a marketing campaign launched and the bonds finally deposited and distributed to be sold.

Work Cited

Fabozzi, J. Frank. Institutional Investment Management: Equity and Bond Portfolio

Strategies and Applications, Epub Edition. John Wiley & Sons Inc, 2009.