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Case Analysis - Merit Enterprise Corp
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Question: Merit Enterprise Corp. Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation 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 CEO was pushing for a dramatic expansion of Merit�s production capacity. Executing the CEO�s
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Merit Enterprise Corp
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Integrative Case 1 - Merit Enterprises
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INTEGRATIVE CASE 1 Merit Enterprise Corp. INTRODUCTION Sara Lehn, chief financial officer of Merit Enterprise Corp., was
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INTEGRATIVE CASE 1 Merit Enterprise Corp. INTRODUCTION Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation 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 CEO was pushing for a dramatic expansion of Merit’s production capacity. Executing the CEO’s plans would require $4 billion in capital in addition to $2 billion in excess cash that the firm had built up. Sara’s immediate task was to brief the board on options for raising the needed $4 billion. Unlike most companies its size, Merit had maintained its status as a private company, financing its growth by reinvesting profits and, when necessary, borrowing from banks. Whether Merit could follow that same strategy to raise the $4 billion necessary to expand at the pace envisioned by the firm’s CEO was uncertain, though it seemed unlikely to Sara. She had identified two options for the board to consider: ALTERNATIVE COURSES OF ACTION Option 1: Merit could approach JPMorgan Chase, a bank that had served Merit well for many years with seasonal credit lines as well as medium-term loans. Lehn believed 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 could monitor Merit’s financial condition as it expanded its operations. Option 2: Merit could convert to public ownership, issuing stock to the public in 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 many investors would want to participate in any stock offering that Merit conducted. Becoming a public company would also allow Merit, for the first time, to offer employees compensation in the form of stock or stock options, thereby creating stronger incentives for employees to help the firm succeed. On the other hand, Sara knew that public companies faced extensive disclosure requirements and other regulations that Merit had never had to confront as a private firm. Furthermore, with stock trading in the secondary market, who knew what kind of individuals or institutions might wind up holding a large chunk of Merit stock? DISCUSSION (PROS AND CONS) Option 1 If Merit would opt to acquire debt from JPMorgan and other banks, their ownership would remain entirely their own. They need not to worry about the extensive disclosure requirements and other regulations that public companies are facing. They could set the term of the debt as short as possible to minimize the need to pay interest (although interest expense is taxdeductible). However, the company will have to make timely payments of their interest or principal payment. This could hurt their cash flows in the future whenever they wish to acquire new assets since JPMorgan will limit their borrowings and they will have to pay their interest on time. The bank will also require the company to disclose their financial position periodically to monitor their financial condition as they expand. The conditions of their debts may change depending on their financial standing and if the company fails to pay them, it could result in bankruptcy. Option 2 If Merit would opt to issue stock in the public market, they could offer their employees compensation in the form of stock or stock options thereby creating stronger incentives to help the firm succeed. Due to the company’s excellent financial performance, their stock price could be offered at a high price in the market and investors would most likely participate in the stock offering. However, public companies faced extensive disclosure requirements and other regulations that Merit had never had to confront as a private firm. The company also worries about the investors that will end up holding a large portion of their stocks. DECISION Merit should choose option 2. Given that their company currently has excellent financial performance, it would be the right timing to go public. They could offer their stock at a higher price and still attract investors. Once they opt to sell bonds and fail to pay their interest or principal on time, it would reflect on their credit rating and bankruptcy is possible. Their reputation of having excellent financial performance will be tainted and it will be hard for them to offer a high stock price and attract more investors once they go public. When it comes to facing extensive financial disclosure and other regulations, they could hire additional staff/employees to help them comply with the added requirements since they already have enough funds for it. And with their concern of having new investors owning a large portion of their stock, it cannot really be controlled. But every share has voting rights on which they could use to elect members of the board to act on behalf of the shareholders. Having a Board of Directors, any act of one member must be validated and approved by the other, hence, no individual can control the corporation alone. CONTINGENCY ACTION If Merit opted to go public and turned out that only few investors are willing to invest in the company, they could still go for option 1, acquire debt from JPMorgan and other banks. Their financial condition is still excellent and the banks could probably offer them the same amount at the same interest rate. Their company is rapidly growing for the last two years and it is possible that the trend will continue in the next few years therefore, they could pay-off their debt on time.
Sara Lehn, Chief Financial Officer of Merit Enterprise Corp., was reviewing her presentation last time before her upcoming meeting with the board of directors.
Managerial Finance Case 1 Merit Enterprise Corp ... immediate task was to brief the board on options for raising the needed $4 billion. Unlike most companies its
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CASE ANALYSISMERIT ENTERPRISE CORPORATIONSara Lehn, Chief Financial Officer of Merit Enterprise Corp., was reviewing her presentation last timebefore her
Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of
Merit s business had been brisk for the last two years, and the company s CEO was pushing for a dramatic expansion of Merit s production capacity. Executing the
Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last time before her upcoming meeting with the board of
Merit's business had been brisk for the last 2 years, and the company's CEO was pushing for a dramatic expansion of Merit's production capacity. Executing the
Mabati Rolling Mills Case Study. Q3. Does the company have any other sources that it could use to raise the funds it requires? Explain. (In your answer consider
INTEGRATIVE CASE 1 Merit Enterprise Corp. INTRODUCTION Sara Lehn, chief financial officer of Merit Enterprise Corp., was reviewing her presentation one last