In the following examples, please explain the relationships between a firm and i

Question

In the following examples, please explain the relationships between a firm and it's market stages of growth, the kind of financing it should be seeking, the providers of such external finance at each stage of a market's development, the appropriate mix of debt to equity and how this can vary by industry.

A). The developer of a new mobile app needs $25 million in financing for advertising and software progamming. What would be the proper debt to equity mix and where would it find this financing? What kind of dilution or floatation costs would be likely?

B). Merck wants to develop a promising new New Chemical Entity costing $800 million to $1 billion to bring through clinical trials to market. How would it expect to finance this project? What would the impact be on it's D/E?

C). WalMart has decided to expand its operations in Japan and now has a greater exposure to the Japanese Yen. How should it hedge its short term and long term foreign exchange exposures related to this expansion?

Explanation / Answer

a.

A new mobile app company need $25 million of financing. Since company is new, so company cannot issue equity or bond. Ideal source of fund for new company is mention below:

1. Venture Capital fund

2. Private equity fund

3. Angle investor

Floatation cost in financing by these source of fund is very low.

b.

Merck, a leading pharmaceutical company wants to raise fund of $800 million to $1 billion. Ideal source of fund for company like Merck, an established large company is mention below:

1. by issue bond

Since company is in mature stage, so it is not very difficult to raise fund through issuing bond. Debt equity ratio in this source of financing will increase.

2. by issue new equity

Company can issue new equity in equity market. Debt equity ratio in this source of financing will decrease.

3. by bank loan

One of the easy source of financing is taking bank loan. Debt equity ratio in this source of financing will increase.

4. by issue preferred stock

If company does not want high debt equity ratio, so In that case company can raise fund through issue preferred stock in capital market. Debt equity ratio in this source of financing will unchanged.

c.

Walmart a leading retail company wants to expand its business in Japan. So ideal source of fund for Walmart is mention below:

1. Use own fund

2. Issue bond in international market

3. Take bank loan in USA and Use SWAP agreement with Japanese investors.

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