S ara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the…

Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing herpresentation one last time before her upcoming meeting with the board of directors. Merit’s business had been brisk for the last two years, and the company’s CEOwas pushing for a dramatic expansion of Merit’s production capacity. Executing theCEO’s plans would require $4 billion in capital in addition to $2 billion in excesscash that the firm had built up. Sara’s immediate task was to brief the board onoptions for raising the needed $4 billion.Unlike most companies its size, Merit had maintained its status as a privatecompany, financing its growth by reinvesting profits and, when necessary, borrowingfrom banks. Whether Merit could follow that same strategy to raise the $4 billionnecessary to expand at the pace envisioned by the firm’s CEO was uncertain, thoughit seemed unlikely to Sara. She had identified two options for the board to consider:Option 1: Merit could approach JPMorgan Chase, a bank that had served Meritwell for many years with seasonal credit lines as well as medium-term loans. Lehnbelieved that JPMorgan was unlikely to make a $4 billion loan to Merit on its own,but it could probably gather a group of banks together to make a loan of this magnitude. However, the banks would undoubtedly demand that Merit limit further borrowing and provide JPMorgan with periodic financial disclosures so that they couldmonitor Merit’s financial condition as it expanded its operations.Option 2: Merit could convert to public ownership, issuing stock to the publicin the primary market. With Merit’s excellent financial performance in recent years,Sara thought that its stock could command a high price in the market and that manyinvestors would want to participate in any stock offering that Merit conducted.Becoming a public company would also allow Merit, for the first time, to offeremployees compensation in the form of stock or stock options, thereby creatingstronger incentives for employees to help the firm succeed. On the other hand, Saraknew that public companies faced extensive disclosure requirements and other regulations that Merit had never had to confront as a private firm. Furthermore, withstock trading in the secondary market, who knew what kind of individuals or institutions might wind up holding a large chunk of Merit stock?TO DOa. Discuss the pros and cons of option 1, and prioritize your thoughts. What are themost positive aspects of this option, and what are the biggest drawbacks?b. Do the same for option 2.c. Which option do you think Sara should recommend to the board and why?

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