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WA Unit 6.pdf - 1 Case study: Dottie’s Grocery Investment...

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1Case study: Dotties Grocery Investment Options[Name Removed for Peer Review]Department of Business Administration, University of the PeopleBus 5111: Financial ManagementDr. Marc ScavuzzoMay 20, 2021
2Case study: Dotties Grocery Investment OptionsPrivate companies that need to expand operations or cover debt must look at the different optionsfor raising capital. Some owners may wish to keep the company private in order not to dilute ownership,to keep control over decision making or to keep their financial reporting private. Other private ownersmay be willing to restructure the company and publicly open the books in return for financing. The twoways of raising capital through investors, discussed in this assignment, are through issuing debt orcommon stock. Proper consideration of both the companys financials and objectives must be consideredbefore making the decision on the ideal way for the company to raise funds.Case StudyDotties grocery incorporated, a family business that has grown in the last 45 years, needs furtherfinancing to maintain current business operations and possibly expand the business. It has been concludedthat the company needs to raise $23 million. The company has seven shareholders who are all familymembers. The current shareholders do not have the funds to finance the needed capital and the amount istoo large to take out a bank loan. The company needs to decide on other financial alternatives. They areexploring issuing debt or issuing common stock to the public. I will conduct an analysis of the currentsituation and give a summary of my recommendations.Issuing Debt/Corporate BondsA corporate bond is a loan made to the company. The typical bond is at a value of $1,000 perbond. The company pays the purchaser of the bond periodic coupon payments, interest payments, and thepar value of the bond if and when the bond reaches the maturity date. The advantages to the company ofissuing bonds are that the company does not dilute ownership of the entity and maintains control. Bondsare very versatile, allowing the company to decide when to issue the bonds, duration, value, and paymentterms. Debt is less expensive. In addition, the company can make the bondscallable, forcing theinvestor to sell the bonds back to the company before it reaches maturity. Bonds are debt and thereforecan be used as a tax savings. Finally, debt decreases the overall weighted cost of capital (WACC). Thedisadvantage of bonds is that the interest payments must be paid at the intervals agreed. If the companydoes not pay the fees, and breaches contract, the company may need to pay a fine, increase interest ratesor the bond holder can force the company into bankruptcy. The more debt the higher the leverage of thecompany which causes greater risk that the company will not be able to repay the debt. When issuingbonds future financial statements will need to be made available publicly. Lastly, if interest rates are highwhen issuing bonds, they stay high, which creates higher debt cost to the company (The LegalEnvironment and Foundations for Business Law, 2012,pp. 945-946).

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Term
Fall
Professor
Dr. Schmidt
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