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    Debt vs. Cash Financing

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    After you finish your discussion with the managers and finance personnel, the head of strategic planning stops by your office to discuss the IPO. He says that recently the investment bankers started to encourage the firm to begin to use more financial leverage as a sign to Wall Street that the company would be more aggressive when it goes public. The investment bankers believe this will help with the IPO and likely generate millions of dollars in additional net proceeds. You two sit at the large conference table in your office discussing what the impact would be if the company purchased the production plant rather than leased it and if the company used debt rather than cash flow to finance the project (the company would also use debt to buy the facility).

    With this in mind, discuss with the head of strategic planning how using more debt can impact a firm's capital structure. Discuss the trade-offs between incremental IPO proceeds and debt financing. How would the company's balance sheet be impacted by debt financing rather than using cash? How would the company's return on equity be impacted by utilizing more debt?

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    Solution Preview

    The financing decision is considered to be an important factor for the firm's profitability. The decision involves the various sources available and using them as a source for the capital structure of the firm. Before starting a paper like this, it is crucial to focus upon the sources individually and their favorability towards the firm. This decision holds importance as it is directly related with the firm's prosperity.

    The paper discusses the concept of IPO and the use of debt financing before starting a project. The decision made in this area requires precision as it is related to the project's success. The point to be discussed is what type of source the firm adopts to initiate the project. That means whether it should be debt financing, or the capital invested by the investors or the public financing. The decision varies from person to person and it is required on the part of the decision maker to put his efforts in making it worthy.

    In addition to this, some of the companies believe to allocate more funds from the investors instead of going for public financing. On the other hand, some believe in raising more funds from the public instead of getting it invested from the investors. That is why, both of them are considered to be fruitful; though they involve certain disadvantages too. The most important point is that the matter is to allocate the funds properly ...

    Solution Summary

    The response looks at the pros and cons of this financial decision in 942 words with references.