Initial Public Offering for the Superior Living - Essay Example

The paper “Initial Public Offering for the Superior Living" is a forceful example of an essay on finance & accounting. This paper will specifically discuss how the debt financing strategy would impact Superior Living’s capital structure, balance sheet, and return on equity. It will also analyze the trade-offs between incremental IPO proceeds and debt financing.

The level of debts can have a great influence on an organization’s capital structure. In addition, there is a range of elements including the degree of business uncertainty, tax exposure, management, financial background, market status, and growth rate that could impact a firm’s capital structure. A firm’s level of business certainty can be linked to its market activities. When a company has a higher degree of business uncertainty, it may choose to maintain a capital structure with a lower debt ratio. A conservative management approach cannot support the idea of huge debt financing. Therefore, the organization should practice an aggressive management approach to use more debts and thereby quickly increase its earnings per share.

Referring to Solocha and Bundt, when the company uses more debts to improve its profits, this practice would lead to a rise in the interest expenses.  Hence the company may be forced to raise more revenues to cover these additional expenses. From the case scenario, it is evident that Superior Living has a good market status and therefore the organization can easily raise funds to cover the additional interest expenses. In addition, the company has a greater level of financial flexibility and hence it would not face any difficulty in raising finance for repaying the debt.

The tradeoffs between IPO and debt financing will last as long as the IPO does not exceed the initial cost of the debt. The company needs to depend more on debt financing at the time of initial public offering because the public money collected at this stage may not be adequate to meet day to day business needs.  However, the incremental IPO would progressively exceed the initial cost of debt. The amount raised from incremental public offering can be used to repay the debts once the amount from public offerings exceeded the initial costs of the debt. The management may also choose to retain its debt levels even though it acquired a good public stock level.  

Similarly, the debt financing strategy will notably impact Superior Living’s balance sheet. To illustrate, when the company uses debt to finance its expansion operations, the number of debts will be directly added to the company’s liability side of the balance sheet. In the words of Galindo, Panizza, and Schiantarelli, a high level of debt in the balance sheet would give a negative motivation to the company’s stakeholders. In addition, a high level of balance sheet debt may prevent the company from obtaining credit facilities from external lenders.        

Duff states that the utilization of more debts may increase or decrease the company’s return on equity. If Superior Living can improve its profitability using more debts, this condition would assist the firm to pay more dividends and hence the return on equity will be increased. In contrast, if the company fails to utilize its debts efficiently, it would probably suffer losses and this situation, in turn, may lead to a decline in return on equity.