Granite Apparel Essay
The advantage of a long-term debt financing option, in this case, is the attractive rate of interest Metropolitan Life is willing to offer. However, their offer comes with some conditions:
An upfront free of 200,000 common shares is required.
In terms of operations, the capital budget would not be able to exceed the forecasted budget.
No acquisitions could be made without the approval of Metropolitan Life.
No change could be made to the current compensation packages of the firm’s executives until 50% of the debt was repaid.
Their debt-equity ratio would be constrained to 1.20.
They would not be able to raise any more debt without the insurance company’s approval.
While the interest rate …show more content…
The downside to such a financing option would be the unexpected future cash inflow from the company’s sales, which might impair Granite’s ability to pay dividends. In the case where Granite misses two consecutive dividend payments, the preferred shareholders would have the authority to take control of the company and exercise voting rights.
Some conditions to this financing option apply as well. Granite would not be able to perform a major change in the company should it deem it beneficial, until they redeem all preferred shares, which they could only do five years down the line. As in the case of financing with long-term debt, Granite would lose some control over the company should it decide to deviate from their current strategy. Should an investment opportunity arise, without the consent of the preferred shareholders may hold back the company and dampen their ability to become more profitable.
Initial Public Offering
Granite also has the option of offering an initial public offering, which would imply that the company transfers to being a publicly held company. After the bubble crash of 2001-2003, the market seemed to have recovered well in the past few years. In terms of the apparel and footwear stock, the sector had outperformed the S&P 500 by 28% since the crash, which is considered to be a positive