Assignment:
Finance Organization and Long-Term Planning
Considering Genesis Energy's aggressive growth plan, Sensible Essentials suggested that its client should broaden the scope of financing beyond short-term loans and consider long-term financing options. These options would greatly enhance the ability of the operations management team to fund the capital investments and growth in operating expenses.
One option is selling more equity in the company. A public stock offering might be a possibility; however, a company as young and small as Genesis Energy might be hard to value. Sensible Essentials believes that another private investor might require preferred stock dividends in order to mitigate some of the financial risk. Another option is a long-term bank loan.
Acting as the finance expert for Sensible Essentials, answer the following:
- Determine the cost of debt and equity for Genesis Energy and its weighted average cost of capital. Go to www.yahoofinance.com and look under SEC filings. Use a US publicly traded company, such as Apple, Google, DuPont, etc.
- Identify the sources of long-term financing for Genesis Energy.
- Analyze the potential costs and benefits of each option.
- Explain how relative risk (from the investor's perspective) impacts the cost of capital for Genesis Energy.
- Determine the cost of debt and equity for Genesis Energy and its weighted average cost of capital.
- Calculate the required rate of return for Genesis Energy using the capital asset pricing model (CAPM). What is the required return for Genesis Energy shareholders?
Managing Finance
The Genesis Energy operations management team was excited to understand the various options for securing financing to fund the rapid growth plans. The team was surprised by the cost associated with using funds supplied by others after accounting for risk of investments in its small but profitable company. Sensible Essentials explained how the cost of external financing can be calculated.
Using the readings for the module, University online library resources, the Internet, and the sources you identified, do the following:
- Explain with examples how the cost of capital is determined.
- Calculate the differences in cost and risk. Explain why the costs and risks of external financing are important for the organization to understand.
- Explain why rapid growth plans are important to a small company. Would there be a more efficient way to fund a growing company? Why or why not? Justify your answer.