Choosing Between Debt And Equity Finance Essay

Choosing Between Debt And candour Finance EssayIn financial endings, the choice between debt and lawfulness pay is one of the some difficult ones. Both types of financing have its advantages and disadvantages. Debt financing is base on borrowing finance, and incurs debts that should be repaid in a certain time. The obligations of the high society include repaying the loan and paying engage on the loan until its repaid. Debt financing does not impact the ownership of the business, but might cause high debt servicing costs.On the separate hand, equity financing represents the exchange of finance to a part of business ownership this is commonly make by issuing stocks. Equity financing allows to receive investments without additional payments and does not cause financial carry on of investors, like debt financing does. However, since the ownership is shared, the owners have to dilute their decisive power (Grossman Livingstone, 2009), and might even drop control of the famil iarity.For the companies, the choice of debt or equity financing is based on many factors, such as size of the company, state and dynamics of the industry, perspectives of the company, debt-to-equity ratio, debt servicing costs etc. The purpose of this essay is to consider the last of the Statesn Superconductor muckle to shift to equity financing from debt financing, made in 2003.AMSC caseAmerican Superconductor Corporation is a company providing wind turbine design, electrical control systems, power systems and superconductive wires (Madura, 2008). It operates mostly in Europe, North America and Pacific Asia. Before 2003, the companys investment policy was based on debt financing however, in 2003, the decision to lead a secured debt financing and to adopt an equity financing strategy under current market conditions (Esposito, 2003) was made. The company experienced recession in 2003 in October 2002, its stock prices have fallen to the record level of $2.25, and in 2003, they con stituted about $3.36, which was very low compared even to 2002 level of $12.26 (AMSC Stock, 2010). The company needed financing, and their choice was to skip a public equity offering instead of debt financing.This decision was explained as strategic solution based on the consequences of 2003 blackouts, and CEO of American Superconductor, Greg Yurek, forecasted an increased need for their power grids and public attention to better electromotive force support with dynamic reactive power compensation (Esposito, 2003). The results of source six months of fiscal 2004 year seemed to express the efficient of the decision to pursue equity financing, since no long-term debt was reported, and $17.4 million revenue in the first two quarters of the year. The company also focused on wind turbines, which were gaining popularity. Wind power in 2007, for example, became the first $30B clean energy industry (Madura, 2008).Current financial position of AMSC shows that its total revenue and uncou th profit values have significantly increased during the last years (2008-2010 financial information available) the companys hoggish margin is 39.14% compared to 32.19% in the diversified electronics industry in general (AMSC Stock, 2010). The operating margin is also high 14.70% compared to 5.71% industrys operating margin, the EPS is also higher (0.64) than 0.08 average (AMSC Stock, 2010). Although the financial position of AMSC is weaker than that of main competitor, ABB. Ltd., the company managed to override some other major competitor, SatCon Technology Corporation. The industry provides a significant development potential, and the stocks of the company were not priced less than $10 since 2007 (AMSC Stock, 2010).Analysis of financial decisionThe combination of debt and equity financing impacts the companys cost of capital. Debt financing is safer for investors, while equity financing is to a greater extent risky for investors, but at the same time safer for the company (Gros sman Livingstone, 2009). Since debt financing creates contractual obligations, the companies should carefully consider their ability to repay the debts. Debt servicing incurs higher costs than equity financing, and if the company experiences luxuriant growth, it might suffer from high debt servicing expenses. It has also been shown that companies with consistent profit operating in low-risk and late growing industries more often opt for debt financing, while companies operating in risky and rapidly changing industries as well as in volatile ones, should choose equity financing since these companies have more opportunities for investments, and would not suffer from underinvestment (Grossman Livingstone, 2009).By 2003, AMSC experienced financial problems and its stocks have dropped in price, but the conditions of the environment indicated the profligate growth of interest to AMSC production. It could be forecasted that in some time the company would need significant investments and 2003-2004 was the sound time to expand. If AMSC continued debt financing, its growth would be hindered by debt servicing costs and worse stock dynamics. Thus, the decision of AMSC to replace debt financing with equity financing was very appropriate in this situation.ConclusionIn gild to perform the choice of business financing (debt versus equity), it is necessary to consider the perspectives of the company as well as the nature and dynamics of the industry. In 2003, AMSC was experiencing financial difficulties and its stocks have significantly fallen. However, there were many opportunities for development, and the 2003 blackouts increased the interest to AMSC production. Therefore, the company had strong potential for growth, and needed strong financing source without excess cost increase. Thus, American Superconductor Corporation performed a right decision to stop debt financing, and to issue a public equity offering. The rightness of the decision can be also traced looking at further financial development of the company AMSC is stably growing, creates new products and shows good progress compared to its competitors.