Introductory Finance

Introductory Finance

John Perez and Jane Daly have an opportunity to buy the Hale Electric Co. (HEC), which is a small manufacturer of electrical equipment. They plan to organize a corporation, Per Dal, Inc. to buy the HEC. They both have meaningful savings, however, their savings are far less than a likely fair price for HEC. So they have to seek financing to obtain the purchase price. Here are my suggestions to Perez and Daly in order to finance a purchase of all the assets and liabilities of HEC by Per Dal, Inc.

Per Dal, Inc. can raise Debt Financing from institutional lenders such as insurers, pension funds, banks, commercial credit companies, venture capital funds, wealthy individuals, small investment companies and government agencies. Debt Financing has a considerable cost advantage. When using debt financing for an acquisition, the net cost will be reduced by the deductibility of interest for federal and state tax purpose. Moreover, when use debt financing, if the interest cost is high, the borrower can negotiate to refinance upon payment of a prepayment premium or after an agreed time period.

According to the situation of Pal Dal, Inc., I will suggest Per Dal, Inc. borrow money from intermediate-term lenders such as banks and commercial credit companies. Banks and commercial credit companies provide similar three-part package of loans for the borrowers. Pal Dal, Inc. can enter into one of the bank’s or commercial credit companies’ proposal of acquisitions. However, banks usually provide lower interest and seldom fees than the commercial credit companies for the borrowers.

Pal Dal, Inc. can also raise Debt Financing from Venture Capital Funds. It provides a wider range of loans to the borrowers. The source of Venture Capital Funds provides a large of capital raised by selling stock to wealthy or prosperous individuals. “Mezzanine” financing of Venture Capital Funds is a valuable and useful way to raise capital, especially for buyers with a small equity capital base, like Pal Dal, Inc. it can supplements the equity capital to support senior debt.

Perez and Daly are willing to retain Harold Hale to manager the business, but Hale have decided to retirement, and a capable young sales manager hired a year ago has not yet established close relations with some senior customers. Since HEC’s business has grown slowly, but steadily over the years and has been steadily profitable, therefore, I suggest Pal Dal, Inc. raises Debt Financing from Wealthy individuals, which is similar to Venture Capital Funds. Wealthy individuals will most likely to provide their pool of capital, when their business experience is valuable and their participation in management is welcome. Wealthy individual’s join can raise equity capital quickly and also contribute to the management of the HEC.

Per Dal, Inc. can also use Equity Financing for an acquisition to support Debt Financing.