This paper seeks discuss the three key valuation methodologies that Superior Living uses to evaluate its plans for expansion and planned initial public offering (IPO). The company is planning an expansion in its operation by acquisition and development of new product lines which will require a framework on whether the plan should be pursued. The plan for expansion is being planned with IPO as source of its financing. As to how the company will proceed with its options is the main purpose of this paper. 2. Analysis and Discussion
2. 1 Capital investments Case facts provide that company first has the plan to go public in the next six to eight months and then it in addition it plans to pursue new business opportunities via expansion. In the ordinary nature of things going public or making an IPO is actually sourcing of funds to satisfy a need to increase a capital. It can be deduced therefore that the need to increase capital via IPO was the plan for expansion of business activities which will require capital investments into assets.
Since capital investments will require funds there is also another option of sourcing such capital, that is, via debt financing or by long-term borrowing which could be by floating bonds or bank borrowing. The evaluation of equity financing done by IPO is better or not compared with debt financing must be analyzed in the context of the company’s present financial structure. A comparison of IPO as an option is therefore in the following subsection. 2. 2 Plans for the IPO Equity financing by IPO must be compared with the benefits of debt financing first before a decision should be made.
Based on present company’s financial position and capital structure the company has a very low debt to equity ratio which means that the company may result to debt financing without putting the company in a very risky position. The case facts however do not provide how much capital is needed. But by using the present capital structure of the company, the company could actually incur additional debt of about $80 and the debt to equity structure could still be 1. 0 or below and the company may not be still to risky. See Table below.