Essays on The Star Bay Company - Analysis of Decisions Taken by Thomas McGill Case Study

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The paper 'The Star Bay Company - Analysis of Decisions Taken by Thomas McGill" is a great example of a finance and accounting case study.   Star Bay Company (SBC) was established in 1983 and Thomas McGill’ s major decision was taken from 1990 onwards. This is because the company needed major external funding as the sales of the company had gone down in the last three years by about 5% each year from 1986 to 1989, even though earnings had been constant. Three reasons were largely accounted for this downtrend. One, since the company was into a research and development phase, the costs thus incurred were high; two, the research and development programs recommended for the development of certain new plant facilities for new product manufacture; and three, the current revenues could not offset the start-up costs of these new facilities. Another reason for massive external funding was the stock price in 1990 and the earnings per share thereof, which stood at $10 and %1 respectively, while for the other firms price-earnings ratio stood at 18 and was showing better growth and earnings per share. 1990 McGill being the executive Vice President Finance had the onus of taking sensitive financial decisions under these circumstances, even though SBC had a relatively lower debt ratio against the overall industry ratio.

But the total increase in net assets was forecast to be around 30% to raise it to $104 million from$80 million. Since retained earnings were expected to raise $4 million of these funds during this year, $20 million more had to be raised. McGill’ s recommendation to take a combined action on the alternative suggested in the board meeting was appropriate as it divided $20 million raise between two options of selling 50% through the common stock and obtaining 50% through long term bonds.

That separated the $20 million expectation between $10 million each. McGill’ s decision came after the management presented the board with three options, which were issuance of a commercial paper at 4.25% interest rate, long-term non-convertible bonds at 5%, sell common stock at a per-share value of $9. McGill’ s has taken these decisions in the right earnest and spirit and has been justified to do so.

Debt and equity are the two major ways of seeking external funding. When a company opts for the former, it enters a debt funding option by issuing debentures which it later has to pay back as till then the company is in debt to those who hold its bonds (BusinessFiance. com). McGill opted for the latter where he raised 50% of the desired $20 million by selling stock. It cannot be said that what McGill did was wrong as both sources of raising external finance have their respective pros and cons. Though arguably equity funding is generally considered to be more advantageous than debt funding as it is committed to a business and investors are attracted to a business only if the business is doing well, the businesses do away with the liability of servicing a debt loan, investors have as much interest in the business as do owners as the stakes are embedded, and both sides expect the business to deliver value (BusinessLink. gov. uk).

References

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BusinessLink.gov.uk. (nd). Equity finance: Advantages and disadvantages of equity finance Available http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1073789573&type=Resources. Accessed February 02, 2012

Broemmel, M. Demand Media. The Advantages of Short-Term Debt. Available http://smallbusiness.chron.com/advantages-short-term-debt-2038.html. Accessed February 02, 2012

Debt vs. Equity Financing. Available http://www.enotes.com/debt-vs-equity-financing-reference/debt-vs-equity-financing. Accessed January 02, 2012

Fedorov, S. (nd). Why Do Companies Choose Convertible Debt? Available http://www.ehow.com/info_7746689_do-companies-choose-convertible-debt.html. Accessed February 02, 2012

Jefferson, Steve. "When Raising Funds, Start-Ups Face the Debt vs. Equity Question." Pacific Business News, 3 August 2001.

Pandey, N. & Joshi, D. (2011). Return and risk in non-convertible debentures. Business Standard. February 2012. Available at http://www.business-standard.com/india/news/returnrisk-in-non-convertible-debentures/445605/. Accessed February 02, 2012

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