Finman Merit

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Toni Rose T. Tahil

MBA 114 B

April 23, 201 6

Ms. Estella Ganas, MBA
Merit Enterprise Corp.

A.) Option 1:
Since JPMorgan Bank have established a good relationship with the company, Merit
Enterprise can negotiate to obtain a lower interest rate. The business will remain
private. However, if Merit Enterprise Corp. takes on a large amount of debt and then
later finds it cannot make its loan payments to lenders (JPMorgan and different banks),
there is a good chance that the business will fail under the weight of loan interest and
have to file for bankruptcy. The major drawback in this case is creating a debt with
multiple debtors.

Pros
 Tax shield (Interest
deduction)
 No need to go public
 Lenders have no claim to
the company’s profits

Cons
 May require collaterals, loan
covenants
 Should be repaid every month,
regardless of how well the
business is doing
 Failure to payback can result to
lawsuit

B.) Option 2:
Going public will result to stock value appreciation if the company performs well.
Since based from the case, the business had been brisk for the past two years, there
will be a greater chance of gaining investors. However, if the company fails to meet their
return expectations, the investors can share their ownership interest and move capital
elsewhere, reducing the value of the company and hampering future efforts to raise
capital. The biggest drawback in this decision is having an extensive disclosure
requirements for investors and with stock trading in the secondary market anyone or
any institutions might wind up holding a large chunk of Merit stock.

Pros

C.)

Cons

 No monthly installments

 Dividend payments to

with interest
 The shareholders or
investors are repaid subject
to the firm’s performance
 Stock or stock options can
be offered to the employees
as a compensation
 Generates publicity and
awareness thus attracts
more customers

shareholders are not tax
deductible
 Investors become partial
owners (they can tell the
company how to run their
business)
 Expensive and timeconsuming (involves lawyers
and accountants)

If I were to decide, the Chief Financial Officer should suggest the second
option. Merit has been profitable for the past years and the ultimate goal of every
business is profit maximization, relying on retained earnings and debt alone
might be risky and outstanding results might be uncertain. Moreover, having an
extensive disclosure will allow transparency and better corporate governance in
their company.
Equity financing does not divert capital from the business in order to pay
debt, and it also shares in the business risk along with the entrepreneur. They
don’t have to pay investors back right away. This gives an advantage for the
company to have more time to grow before they need to start worrying about how
they’re going to pay for it all. If the business ultimately fails, Merit won’t have
anyone to repay. “Investors sink or swim alongside the business owners.”

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