This paper aims to analyze the advantages and disadvantages for AMSC to forgo their debt financing and take on equity financing.
AMSC can use its cash from equity financing to invest in the project or business without carrying the burden of debt on its back. In a period of financial turmoil, where businesses are faced with a credit crisis, equity financing helps in providing the necessary cash and reduces the risk of bankruptcy. By forgoing debt financing, AMSC is gaining a major advantage by using the cash to grow its business rather than paying a bank loan. Equity financing also brings new resources with itself such as valuable human capital which can provide necessary skills, contacts and experience to run the business. In addition to that, as the business grows over the period of time the investors are often willing to provide additional funding in case if it is needed so AMSC can have access to future sources of funding with the current owners. The owners of the equity can control the business without any interference from the creditors since the company will have no debt obligations. The biggest advantage lies in the fact that the business will be free from any interest costs thus it can boost its profits. Furthermore, during a recessionary period where there is a lack of credit in the economy, AMSC can have a chance to obtain funding through debt financing since it will have a lower Debt-to-Equity ratio. Financial institutions often extend credits to those corporations who have a lower Debt-to-Equity ratio in their balance sheets thus AMSC’s ability to borrow will be improved. Too much debt financing can tarnish the reputation of AMSC if they have already huge liabilities on their books. Finally, Corporations also collateralize their important assets due to debt financing and creditors impose certain stringent rules and regulations on the use of those collateralized assets which limits the ability of the organizations to use those assets