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American Superconductor Decision for Debt Financing vs Equity Financing

Read the article below, available in Proquest:

American Superconductor switch; Westboro company plans to raise money through a stock offering
Andi Esposito. Telegram & Gazette. Worcester, Mass.: Aug 26, 2003. pg. E.1

Abstract (Article Summary)

'AMSC's management and board of directors believe the decision to forgo a secured debt financing and to adopt an equity financing strategy under current market conditions is in the best interests of our shareholders," said Gregory J. Yurek, chief executive officer of AMSC. The 265-employee company has operations in Westboro and Devens and in Wisconsin.

Finally, the Northeast blackout "shined a lot of light on the problems we have been talking about as a company for three to four years," Mr. Yurek said. AMSC products, such as a system installed this year in the aging Connecticut grid and high temperature superconductor power cables and other devices bought by China for its grid, are designed to improve the cost, efficiency and reliability of systems that generate, deliver and use electric power. "We are a company with products out there solving problems today," he said.'

Then answer the following questions:

What are the advantages and disadvantages for AMSC to forgo their debt financing and take on equity financing? Do you agree with their decision?

Explain both of your answers thoroughly. Be sure to support your opinions with references to the background materials or other articles.

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Solution Preview

This is an issue of capital structure. The term capital structure is used to represent the proportionate relationship between debt and shares. The various means of financing represent the financial structure of an enterprise. Thus the composition of debt and shares represents the capital structure of the firm. Let us discuss about both the sources of funds.

Equity represents ownership in the organization. There are various ways of raising money through equity shares:

1) IPO
IPO is initial public offer where the money is raised from the general public first time.
2) Follow on offers
Here the money is raised through the public in general by subsequent issues. These issues can be raised from the existing shareholder or from general public.
3) Strategic placements
The money can be raised from selling the partial ownership to the institutions.
4) Venture capitalists
Venture capitalists help in raising the money at the infancy stage. These also help in giving other inputs such as technical and managerial inputs for nurturing the ...

Solution Summary

This solution discusses capital structure, evaluates IPOs and raising money through debt and equity finance, discusses risk appetite of management and provides recommendation based on an optimal balance between operating leverage and financial leverage. 685 words with 2 references.