Question: You have recently joined a company, Felicia & Fred, as a financial analyst. The company is headquartered in New England and manufactures unique fashion jewelry. It prides itself in the U.S. domestic production of these quality accessories, which are in high demand among its customers. The owners took the company public last year; hence, it is presently financed exclusively by equity. Despite the provision of equity capital, the company's manufacturing capacity still falls short of achieving production adequate to suffice demand.
The company plans to raise additional capital for further expansion of manufacturing facilities by customizing and refurbishing a large former mill building. Identify two considerations which the company should contemplate if new debt were incurred by reflecting on the following questions:
- What likely effect would the incurrence of debt have on the weighted average cost of capital?
- What likely effect would the incurrence of debt have on the acceptance of expansion projects?
Support your considerations with appropriate reasoning and references