American Superconductor

American Superconductor

Introduction

American superconductor is firm that creates technological solutions for the electric power. The company previously used debt as source of finance but recently it has taken the decision of changing its capital structure by increasing equity ratio as compared to the debt ratio. The decision to change the capital structure was critically viewed and according to many financial analysts this was not a good decision. Equity financing is a source of raising capital through selling shares in the market. Meanwhile debt financing is raising funds through lending money from relatives, friends or any other financial institution. Thus the report will provide an analysis of the advantages and disadvantages of equity financing over debt financing. It will also provide an analysis of the tax benefits under the debt financing. The report will help in analyzing that whether American superconductor decision was a wise one or not.

Discussion

According to research conducted by Mande, Park and Son (2011) it was tried to find out that how much corporate governance plays a role in deciding the capital structure of the firm that is either equity or debt. They founded in their research that as the corporate governance increases there is an increase in the equity financing due to a strong relation between the investors and the management. Similarly the decision of increasing equity financing was taken at the upper level of the management. It was analyzed that what are the advantages and disadvantages of the decision taken by the firm for adopting equity financing. Equity financing is obtaining the investment from the investors against the share in ownership of the firm. In case of a private company funds can be taken from friends, family or relatives and in case of a public company funds can be taken by issuing shares to the general public.

According to Chiste (1996) the management should need to have knowledge of advantages and disadvantages of obtaining capital from equity financing. The biggest advantage of equity financing is that there is no responsibility on the firm to regularly pay interest or dividends especially in the establishment phase of the firm when usually funds are needed to be invested back in the company instead of paying expenses that is interest rates. In case of raising funds through selling equities there are two benefits of it first the investor coming in the firm is bringing funds and second then he or she also brings their expertise with them which can facilitate the decision makers in making wise decisions for the company. The equity financing is essential to obtain debt financing, so the more the business has equity financing the more it will be to get debt finance from the financial institutions. The firm having more debt financing means that the amount of risk is more in that firm thus increase in equity capital reduces the risk by diversifying the investment. The diversification strategy plays a vital role in the success of the firm increases the interest of more investors from all ...