The text indicates that small cap growth stocks have performed better over time in terms of total return. However this higher return is related to higher risk because during a market’s high growth phase many firms get shaken out of the market. Once the market matures the situation changes. Please explain the following relationships between a firm and its market stages of growth, the kind of financing it should be seeking, the providers of such external finance at each stage of a market’s development, the appropriate mix of debt to equity and how this can vary by industry.
Merck wants to develop a promising new NCE [New Chemical Entity] costing $800 million to $1 billion to bring through clinical trials to market. How would it expect to finance this project? What would the impact be on its D/E?