Module 03 Content
Based on the information that you learned about capital structure and budgeting, determine what the optimal capital structure should be for Gentry. You will need to determine how much equity (common stock) the company will offer in the IPO and how much debt the company should assume in their global expansion to meet the goal of $50 million.
Determine what capital structure will work best with your initial assessment. Describe the structure using the ratios.
Include the dollar amount of equity (common stock) the company should issue in the IPO and how much debt the company should use for this expansion to reach the $50 million goal. Explain your rationale.
Note: there is no single answer to the question of the firm’s optimal capital structure. Your assessment is weighted more heavily toward your logical explanation rather than having the correct values for debt and equity.
Module 01 – Client Engagement Outline
Sadie Nonweiler
Rasmussen College
ECO3250CBE Section 01CBE Managerial Economics
Edward Strafaci
May 12, 2024
Client Engagement Outline
Table of Contents
I.
Objective
II.
History of Gentry
a. Background
b. Location
III.
Growth and Expanding Strategies
a. Internal
b. External
IV.
Capital Structure
a. Weighted average cost of Capital (WACC)
b. Equity Financing
c. Recapitalization
V.
Risk Identification
a. Economic Risk
b. Business Risk
c. Systematic/Unsystematic Risk
VI.
Conclusion
VII.
References
1. Objective
a. I have been hired as an outside consultant for Gentry Inc. to assist the
company with an IPO on the primary market, so Gentry is able to expand
internationally.
2. Company History
a. Gentry is located in the United States
b. Gentry is a mid-sized tech firm with 200 employees and $300M in
revenue.
c. Privately held since the firm’s inception ten years ago in Silicon Valley
d. Expanding operations to China, Japan and Germany by increasing
profitability metrics by 15 to 25%.
3. Growth and Expanding Strategies
a. Internal growth strategies
i. Market Penetration – Selling more of the same products to the
same market with risks being lower (Assess Your, n.d.).
ii. Product Development – Providing a new product to an existing
market. Effectively selling something new to the same customer
base (Assess Your, n.d.).
4. External Growth Strategy
i. Strategic Alliances – Companies combining their assets and
resources for a period of time to achieve goals while remaining
independent companies. Equity and Non-Equity alliances. Equity
alliances when independent companies become partners and non-
equity is created through contracts such as franchising and
licensing agreements (Team, n.d.).
5. Capital Structure
i. Capital structure is a combination of debt and equity that the
company uses to finance the overall operations and growth.
1. Weighted average cost of capital
Weighted average cost of capital (WACC) is used to
represent the company’s average tax cost of capital from all
sources, which include common stock, preferred stock and bonds
and other forms of debt. This information is useful for investors
and stock analysis.
2. Equity Financing
Equity financing is a process used to raise capital though
the sale of shares. Selling shares the company could have a return
for cash. Private placement of stock with investors and public
stock offerings (Banton, 2024).
3. Recapitalization
Recapitalization is the process of restructuring a company’s
debt and equity mixture which helps stabilize the
company’s capital structure. Exchanging one form of
finance for another for example removing preferred shares
and replacing with bonds. This can help improve financial
stability for the financial structure (Kenton, 2020).
6. Risk Identification
i. Economic Risk – Conditions that can have a negative impact on
the business and economies. Different factors are recessions,
inflation and regulatory changes and natural disasters. These risks
can affect investors, individuals and businesses roles in financial
planning and decision making for the future of the company
(Banerjee, 2024).
ii. Business Risk – Any exposure that an organization has that could
potentially lower profits and cause the company to go bankrupt.
Different risks could include consumer taste and demand for
products or services, state of overall economy and government
rules and regulations (Kenton, 2023).
iii. Systematic and Unsystematic Risk – Systematic risks can affect
the entire market and not just a particular stock or industry. This
can reflect the impact of economic, geopolitical and financial
factors. It can be very unpredictable and hard to avoid. Portfolios
should include a variety of assets such as cash, real estate and cash.
Unlike systematic but unsystematic can be mitigated through
diversification and refers to the probability of loss within specific
industries (Chen, 2023).
7. Conclusion
In conclusion for Gentry to be successful they need to determine each risk
factor and use different strategies to be prepared. Gentry Inc is looking to
increase profitability metrics by 15 to 25% expanding to China, Japan and
Germany.
References
Assess your options for business growth: Business growth strategies. (n.d.).
NIBUSINESSINFO.CO.UK. https://www.nibusinessinfo.co.uk/content/business-growthstrategies
Banerjee, P. (Ed.). (2024, April 30). Economic Risk. WallstreetMojo.
https://www.wallstreetmojo.com/economic-risk/
Banton, C. (Ed.). (2024, February 25). Equity Financing: What It Is, How It Works, Pros and
Cons. Investopedia. Retrieved February 25, 2024, from
https://www.investopedia.com/terms/e/equityfinancing.asp#:~:text=Equity%20financing
%20is%20the%20process,term%20project%20that%20promotes%20growth.
Chen, J. (Ed.). (2023, May 3). Systematic Risk: Definition and Examples. Investopedia.
https://www.investopedia.com/terms/s/systematicrisk.asp#:~:text=Unsystematic%20risk
%20can%20be%20mitigated,a%20specific%20industry%20or%20security.
Hagrave, M. (n.d.). Weighted Average Cost of Capital (WACC): Definition and Formula.
Investopedia.
Kenton, W. (Ed.). (2020, October 24). Recapitalization: Meaning, Purposes, and Types.
Investopedia.
https://www.investopedia.com/terms/r/recapitalization.asp#:~:text=Recapitalization%20i
s%20the%20process%20of,and%20replacing%20them%20with%20bonds.
Kenton, W. (Ed.). (2023, November 30). What Is Business Risk? Definition, Factors, and
Examples. Investopedia.
https://www.investopedia.com/terms/b/businessrisk.asp#:~:text=Business%20risk%20us
ually%20occurs%20in,operational%20risk%2C%20and%20reputational%20risk.
Team, C. (Ed.). (n.d.). CFI. External Growth.
https://corporatefinanceinstitute.com/resources/valuation/externalgrowth/#:~:text=External%20growth%20(also%20known%20as,to%20internal%20(orga
nic)%20growth.
1
Module 02 Course Project – Growth and Expansion Strategy
Sadie Nonweiler
Rasmussen College
GEB3020-02 Advanced Principles of Financial Management
Edward Strafaci
May 16, 2024
Module 4
2
Gentry Expansion to International Markets
Expanding at a go or in phases depends on many factors. Gentry’s decision to expand to
China, Japan, and Germany requires intense considerations such as the capital required, human
labor, market conditions, and the consumer perspective. Researching the market conditions and
consumer preferences in a particular country before investing in it is capital-intensive. Therefore,
an organization needs to first gather enough capital to enable it to expand its operations to other
markets at the same time. Therefore, Gentry will be required to collect a huge amount of cash to
enable it to expand to China, Japan, and Germany. Compared to the phased expansion approach,
a comprehensive one-time expansion is inappropriate for Gentry. Considering factors such as the
company’s financial position, competitive landscape, cultural differences, market conditions, and
regulatory environment for each country, it appears that a phased approach to the company’s
global expansion plans. The phased approach will enable the company to expand into one
country at a time, thus focusing its resources on one nation. The company will be able to adapt to
the local regulations, culture, and customer preferences, thus building solid relationships with
suppliers and customers. This approach will mitigate risks associated with international
operations.
Advantages and disadvantages of expanding with debt and equity
Expanding with debt has its advantages and disadvantages. For instance, one of the
advantages of expanding with debt is that it has tax benefits and there is no loss of ownership or
control of the company. Additionally, expanding with debt lowers costs if the interest rate is low.
According to Freedman, financial debt brings about independence, easy forecasting, and no
profit sharing (Freedman, 2024). In terms of independence, it implies that debt financing
Module 4
3
providers have no say in how an organization runs its operations. The company is in full control
of its operations and profit. With a fixed loan rate, the loan repayment does not change. It
becomes easy for an organization to budget-forecast (Freedman, 2024). Despite its benefits, debt
financing has its disadvantages. For instance, high levels of debt could lead to increased pressure
on an organization to generate cash flow. There is also the risk of higher fixed charges, potential
insolvency if the business cannot meet its obligations to pay back the debt, or reduced flexibility
in managing finances. It is important to note that too much debt in an organization limits its
future expansion and financing options.
On the other hand, raising the equity of a company through issuing new shares can offer
it several benefits and, at the same time, disadvantages. In terms of benefits, raising funds
through equity helps an organization avoid debt burdens, access larger sums of capital, and gain
strategic partners who would enable it to expand its operations, network, or increase its expertise
and resources. It is important to note that equity financing has no interests or repayments,
implying that an organization has no debt burden to pay back from its profits. However, equity
financing has its demerits (Freedman, 2024). For instance, diluting the existing shareholdings to
create room for others reduces the founders’ influence over the decision-making process,
potentially creating conflicts between old and new shareholders. Additionally, seeking external
funding sources can be a tedious and lengthy process. It involves legal processes and high
transaction costs.
Module 4
4
Steps necessary to expand globally
When considering expanding globally, companies have to establish and follow several
steps to ensure they achieve maximum success. According to some essential steps when
expanding globally include conducting market research on the intended region, developing a
comprehensive market entry strategy, establishing partnerships and collaborations with local
firms, and complying with local regulatory requirements (Watson et al., 2018). It is also
recommended that an organization understand foreign laws to avoid penalties. The company will
also be required to build effective supply chain networks, adapt its products and services to local
preferences, and foster cross-cultural communication. Conducting market research in the region
of interest will enable the company to understand the market conditions and consumer
preferences so as to adapt its products and services to the local preferences.
Recommendations
Taking into account the pros and cons of both equity and debt financing and the
complexity involved in the global expansion process, I recommend that Gentry adopt a hybrid
approach to financing its international expansion plan. The company needs to first rely on a mix
of internal accruals and moderate levels of debt financing to fund its early stages of expansion.
During the late stages of expansion, the company should consider using equity financing to raise
the capital needed. Using both strategies would enable the company to maintain a reasonable
debt burden while retaining sufficient flexibility to respond to market changes (Watson et al.,
2018). It should avoid expanding all at once in the three marketplaces: China, Japan, and
Germany. Given the unique challenges experienced in different regions, such as language
Module 4
barriers, cultural nuances, and varying regulatory approaches, using the phased approach will
make it easier for the company to expand successfully.
5
Module 4
6
References
Freedman, M. (2024). The Pros and Cons of Debt and Equity Financing. B.
https://www.business.com/articles/debt-vs-equity-financing/
Watson, G. F., Weaven, S., Perkins, H., Sardana, D., & Palmatier, R. W. (2018). International
Market Entry Strategies: Relational, Digital, and Hybrid Approaches. Journal of Marketing,
26(1), 30–60. https://doi.org/10.1509/JIM.17.0034
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
