Problems in Raising New Funds: of Briarwood Medical Equipment - Case Study Example

The paper "Problems in Raising New Funds: Case of Briarwood Medical Equipment" is a perfect example of a case study on finance and accounting. Briarwood Medical Equipment (BME) needs to raise capital for a $250 thousand expansion to meet customer demand. BME is a small business entity. The company can face many problems in raising new funds because it is not listed in the stock market. Below are listed some ideas of what might be most suitable.

SELLING EQUITY STOCKS: the company has the option of selling its equity shares through IPO. The company can easily raise new finance through this method. On the other hand, this method will result in the liquidation of control. BME is a family business and management wants to retain the control of the business in the family. But this is only the method that carries low risk. BME has recently launched the IPO of common stock in the market. This means that potential investors will carry voting rights and control with their investment.

BANK LOANS: BME can also raise new finance to meet customer demand through bank loans. The company can request a bank loan of $250 thousand.  BME can also secure this loan on any of its business assets. On the other side of the coin, debt finance carries many risks with them. The bank can also impose some limitations on the company against the loan. As the BME is operating in the small business sector, then there is the possibility that the bank can demand a higher level of interest rates.        

BUSINESS ANGELS AND VENTURE CAPITALISTS: BME can also consider the way of business angels and ventures capitalist to raise the finance of $25,000.

CAPITAL ASSET PRICING MODEL:

Capital asset pricing model shows how the minimum required return on a security depends on its risk (ACCA, 2010) The CAPM of the BME Company has been calculated below

CAPM = Rf + b (Rm-Rf)

Where

Rf = Risk-free return

(Rm-Rf) = equity risk premium (sometimes referred to as average market risk premium)

b = systematic risk of the investment compared to the market and therefore the amount of premium needed.

Data for BME Company

Rf = 10% ;                              (Rm-Rf) = 5%;                                    b = 1.25

CAPM = 10 + 1.25 (5)

CAPM = 16.25% 

DISCOUNTED CASH FLOW:

Discounted cash flow is a valuation method that is used to estimate the attractiveness of investment for potential investors. (Investopedia)

DCF = Cf / ( 1 +r )1 +  Cf / ( 1 +r )2

Where

Cf = cash flow;                       r = Rate of return

Data of BME

Cash flow 2012 = $260,000

Cash flow 2013 = $270,000

Rate of return = 16.25% (assumed from CAPM calculation)

DCF = (260,000 / 1.1625) + (270,000 / 1.351)

DCF = 423506

RECOMMENDATIONS

BME Company is seeking opportunities for raising new finance for $ 250,000 to meet with the customer demand. The management of the company is planning to raise new finance by issuing common stock. Common stock is another way of capital growth and capital returns (Investopedia). On the basis of CAPM calculation, BME has a return of 16.25% which is higher than the market rate. This means that the common new common stock will give a higher level of returns. The value of discounted cash flow seems good in relation to new investment. The revenue projections are also showing a constant increase in the revenue in the result of new investment in common stock.

RECOMMENDATIONS TO BME:

The idea of raising new finance by issuing new common stock is good, but the management needs to consider the division of control of current shareholders. Current shareholders will lose their control and voting rights because the common stockholders have more voting and control rights due to the nature of their investment. (ACCA, Financial Management, 2008).          

RECOMMENDATION FOR POTENTIAL INVESTORS:

The investment in the BME Company can give good value to the money of potential investors. The company is performing well and it is expected that the new investment will generate a higher level of returns in future years. In addition, BME is paying a constant level of dividends to its shareholders. As the company is expected to grow its performance in future years so it is the possibility that the company will increase the level of dividends in the near future. Capital growth and wealth maximization is another main thing that a shareholder wants (ACCA, Financial Management, 2008). According to CAPM calculation and future projections, it is expected that the shareholder’s wealth will increase in the near future. In short, on the basis of given data potential investors can give good value to their money by investing in the BME company.