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Having previously idnetified the location of its greenfield investment, Acme, a multi-billion dollar public MNE incorporated in the US must obtain financing for its proposed overseas production faciltiy. It has been estimated that th acquisition will cost $500M and all funds will be secured in the US.
I need to explain to a steering committee some of the financial aspects of this acquisition. I need to provide a detailed presentation of the characteristics of the various financing alternatives, including the advantages and disadvantages of each.
I also need to conclude with a recommendation of which alternative, or combination of alternatives to use to finance the overseas investment.
Could you please help with this regarding the long-term financing alternatives, the characteristics of each, advantages and disadvantages of each and a recommendation of which to use.
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LONG TERM financing alternatives for a Greenfield investment Acme, for financing its production facilities abroad.
Large corporations could not have grown to their present size without being able to find innovative ways to raise capital to finance expansion. Corporations have five primary methods for obtaining that money.
Issuing Bonds. A bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. In the interim, bondholders receive interest payments at fixed rates on specified dates. Holders can sell bonds to someone else before they are due.
Corporations benefit by issuing bonds because the interest rates they must pay investors are generally lower than rates for most other types of borrowing and because interest paid on bonds is considered to be a tax-deductible business expense.
However, corporations must make interest payments even when they are not showing profits. If investors doubt a company's ability to meet its interest obligations, they either will refuse to buy its bonds or will demand a higher rate of interest to compensate them for their increased risk. For this reason, smaller corporations can seldom raise much capital by issuing bonds.
Issuing Preferred Stock. A company may choose to issue new "preferred" stock to raise capital. Buyers of these shares have special status in the event the underlying company encounters financial trouble. If profits are limited, preferred-stock owners will be paid their dividends after bondholders receive their guaranteed interest payments but before any common stock dividends are paid. The selling of preferred stock in case of Greenfield MNE will lead to the paying of dividends from the original activities of the company. Usually this will not be acceptable
Selling Common Stock. If a company is in good financial health, it can raise capital by issuing common stock. Typically, investment banks help companies issue stock, agreeing to buy any new shares issued at a set price if the public refuses to buy the stock at a certain minimum price. Although common shareholders have the exclusive right to elect a corporation's board of directors, they rank behind holders of bonds ...
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