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Characteristics of the Various External Financing Alternatives

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Having previously identified the location of its greenfield investment, Acme, a multi-billion dollar public MNE that is incorporated in the U.S., must next obtain external financing for its proposed overseas production facility. It has been estimated that the acquisition will cost $500M and all funds will be secured in the U.S.

Your job is to explain to this committee some of the financial aspects of this acquisition.

At the next steering committee meeting, you will provide a detailed presentation of the characteristics of the various external financing alternatives, including the advantages and disadvantages of each.

Which alternative (or combination of alternatives) should be used to finance the overseas investment?

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There are various financing routes available for Acme to invest in its expansion plans in India. For our analysis, since funds will be secured in the US only, we are ignoring alternative financing schemes available in the foreign country such as special grants provided by development banks to set up operations in these countries.

Let us discuss these options, their merits and demerits one by one:

1) Fund Raising via IPO/ Public issue: One of the most common routes to raise funds for these expansion plans is to offer shares of the company to public via Initial Public Offer, if the company is not publicly held right now or via issue of additional shares or rights issue, if the company is already publicly traded. The major advantage of going to the stock markets to raise funds is that substantial amount of funds can be raised via this route by diluting the equity of the company in proportionate amount. Further, the cost of raising funds via this route is cheaper as well due to no obligation to pay interest on capital as investors become shareholders of the company and not lenders. IPO's are especially attractive for new projects when there is optimism in the economy and ...

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Characteristics of the various external financing alternatives-Acme