Many firms, especially in their first years of operation and growth, face a variety of challenges obtaining funds to finance their growth. Required: Discuss how a small, young manufacturing firm that has a relatively unpredictable revenue stream might approach financing a new manufacturing line

Answer 1

A manufacturing firm would have significant investments in property, plant, and equipment (PPE). It will require funds to make such investments, with potential sources including short-term liabilities, long-term liabilities, issuing additional shares of stock. When choosing these financing sources, the firm will not want to significantly add to the uncertainty and risk it already faces. Such risks exist in its unpredictable revenue stream. Using short-term liabilities as a potential source may not yield sufficient funds for the new manufacturing line, nor may operating cash flows thus freed be available. Taking on long-term debt may expose the firm to too much risk in its ability to pay the periodic interest and ultimately the balance of the long-term debt. Issuing additional shares of stock may bring in sufficient funds. In addition, a young organization is not expected to declare and pay periodic dividends early in its life. Thus, the need to cover these types of cash flows is lessened.