Module 5 - Case



Module 5 - Case

There is a relationship between capital structure and dividend policy of the corporation in practice. This relationship is shown in the fact that the structure of capital depends on the return on equity and net profit allocation rules for the payment of dividends and the development of production. With a high return on equity, you can leave more net income for purposes of accumulation of assets and working capital, without prejudice to dividend payments to shareholders. Internal (from net profits) and external (through loans and share issues) financing are closely interlinked. However, this does not mean interchangeability sources of funds. Thus, the external debt financing should not be a substitute for attracting and using own funds (Morgan, 2009).

Only sufficient equity (50%) is able to ensure Development Corporation, to strengthen its financial independence and strengthen the credibility of the shareholders, creditors, suppliers and other partners. In emergent situations, owned funds are able to provide repayment. However, at certain stages of the life cycle of a need external financing (e.g., banks). Debt mitigates the possible conflict between the public company and its owners, lower equity risk (Morgan, 2009).

On the other hand, the debt exacerbates the conflict between owners and creditors. Instability in the stock market may limit the ability of corporations to use equity and debt financing (through issuance of treasury shares and bonds). Therefore, any company (outside of extreme conditions) can not completely run out of their credit capacity. Always keep a reserve for additional borrowing, if necessary, to cover the cash deficit of the bank loan without a serious threat to its financial condition (Eastaugh, 1987).

American superconductor (AMSC) offers a series of ownership technologies and solutions straddling the electric power infrastructure from its production to delivery to the end use of the product. The company is leading in the business of megawatt scale wind turbine designs, alternative energy, and providing proven electrical control systems. The company also provides a variety of products having Smart Grid technologies for operating power grid operators that boosts and enhances the reliability, capacity and efficiency of the grid and impeccably integrates the alternative and renewable energy sources into the power infrastructure (AMSC website).

AMSC management and board of directors have finalized the decision to forgo the secured debt financing and adapt a strategy of equity financing and bring the investments into the operations of the business. They have a belief ...