Assignment 1: Discussion—Finance Organization and Long-Term Planning 

Considering Genesis’s aggressive growth plan, Sensible Essentials suggested that its client should broaden the scope of financing beyond short-term loans and consider long-term financing options. These options would greatly enhance the ability of the operations management team to fund the capital investments and growth in operating expenses.  

One option is selling more equity in the company. A public stock offering might be a possibility; however, a company as young and small as Genesis might be hard to value. Sensible Essentials believes that another private investor might require preferred stock dividends in order to mitigate some of the financial risk. Another option is a long-term bank loan. 

Acting as the finance expert for Sensible Essentials, respond to the following: 

Determine the cost of debt and equity for Genesis and its weighted average cost of capital. Go to www.yahoofinance.com and look under SEC filings. Use a US publicly traded company, such as Apple, Google, DuPont, etc.

Identify the sources of long-term financing for Genesis.

Analyze the potential costs and benefits of each option.

Explain how relative risk (from the investor’s perspective) impacts the cost of capital for Genesis.

Determine the cost of debt and equity for Genesis and its weighted average cost of capital.

Calculate the required rate of return for Genesis using the capital asset pricing model (CAPM). What is the required return for Genesis shareholders?

Write your initial response in 5–7 paragraphs. Apply APA standards to citation of sources. 

Then, review and comment on at least two peers’ responses. In your response, do the following:

Respond with substantial comments to enrich discussion and the learning experience.

Contribute new, relevant information or quotes from course readings, Web sites, or other sources. Build on the remarks or questions of others, or share practical examples of key concepts from your experience, professional or personal.

Assignment 1 Grading Criteria

Maximum Points

Initial response:

Was insightful, original, accurate, and timely.

Was substantive and demonstrated advanced understanding of concepts.

Compiled/synthesized theories and concepts drawn from a variety of sources to support statements and conclusions. 

16

Discussion response and participation:

Responded to a minimum of two peers in a timely manner.

Offered points of view supported by research.

Asked challenging questions that promoted the discussion.

Drew relationships between one or more points in the discussion. 

16

Writing:

Wrote in a clear, concise, formal, and organized manner.

Responses were error free.

Information from sources, where applicable, was paraphrased appropriately and accurately cited. 

8

Total:

40

SOLUTION

With the implementation of Basel III, the ability of banks to provide balance sheet funding is being reduced and becoming more expensive. As a result, capital light products in areas like debt capital markets and securitisation are becoming increasingly important.

Infrastructure development and improvement projects are a priority across Africa. In infrastructure project finance transactions, after initial bridge financing or retained cash flow, long-term funding solutions need to be in place. Capital markets are expected to drive most of those projects, with debt capital market or securitisation funding generally best placed to serve this need.

With an extensive presence across Africa and experience in the sectors most relevant to its growth and development, Standard Bank provides versatile solutions to our clients. The debt primary markets team focuses on solutions across:

  • Debt capital markets – through issuing bonds or derivatives, investments in the bond market tend to diversify risk and enhance fixed income returns. Debt markets provide more direct access to capital with better long-term efficiency.
  • Securitisation – by converting illiquid assets with fairly predictable cash flows into tradable securities, securitisation offers an attractive option for investors seeking diversification and securities with a high credit quality. For clients needing to optimise their funding and/or capital structures, it is an alternative source of finance at a lower rate than traditional term funding.
 
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