Tui Fin 301 Mod 5 Case

639 Words3 Pages
In 2003, American Superconductor Corporation (AMSC) decided to forgo a $50 million debt financing plan and instead went with equity financing. In this paper I will discuss some of the advantages and disadvantages with such a plan, and my opinion of their decision. First, I will discuss advantages to AMSCs plan of opting for equity financing First and foremost, by not electing to take financing there is no commitment to make fixed payments in the future. Their choice to finance through equity eliminated the debt incurred by the original plan. A side benefit to that is there is no loan payment to budget for. A second advantage to equity financing is the company does not have to offer up collateral as they would have in the original plan to finance the $50 million. Therefore, the company is not at risk of losing collateral, or possibly the entire business to the financier. Additionally, any possible losses incurred will be shared with the equity holders. The final advantage enjoyed by AMSC is that they can keep the financial flexibility described in Aswath Damodaran’s presentation: The Debt-Equity Trade Off: The Capital Structure Decision. According to the presentation, when a firm borrows up to its capacity, it loses the flexibility of financing future projects with debt. AMSC retained that flexibility by opting for equity financing. With those advantages also come various disadvantages. First, payments on debt interest are tax deductible but payments on equity are not. Second, equity allows shareholders to share the company profits. With that, equity holders now also hold stake in AMSC and share control. Comparatively, debt financiers have little or no impact on control of the company; assuming payments are being made. Profits are also used to pay the debt, however, so how this weighs out as a disadvantage would clearly depends on how well or not

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