Assignment Part 1: Finance Organization And Long Term

Assignment Part 1 Discussionfinance Organization And Long Term Plann

Considering Genesis Energy’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 Energy 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 Energy and its weighted average cost of capital. Go to 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 Energy. •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 Energy. •Determine the cost of debt and equity for Genesis Energy and its weighted average cost of capital. •Calculate the required rate of return for Genesis Energy using the capital asset pricing model (CAPM).

What is the required return for Genesis Energy shareholders? Write your initial response in 300–500 words. Citation (APA Style) and use at least 1 source

Paper For Above instruction

Genesis Energy's aggressive growth strategy necessitates a comprehensive approach to financing that extends beyond traditional short-term loans. As a financial analyst consulting for Sensible Essentials, it is crucial to evaluate various long-term funding options, their associated costs, and their implications from a risk perspective.

Determining the cost of debt and equity is foundational to understanding an enterprise's capital structure. The cost of debt typically involves the interest rate paid on borrowed funds, adjusted for tax benefits, since interest expenses are tax-deductible. Conversely, the cost of equity reflects the return required by shareholders, which includes considerations of expected dividends and capital appreciation. To estimate these, one could analyze SEC filings of comparable publicly traded companies such as Apple or Google. For instance, Apple's current long-term debt yields approximately 3.0%, reflecting low-interest rates and a strong credit rating, while its cost of equity, derived via the Capital Asset Pricing Model (CAPM), hovers around 8-10%, considering the beta coefficient and market risk premium (Apple, 2023; Damodaran, 2022).

The weighted average cost of capital (WACC) provides a blended rate accounting for the proportions and costs of debt and equity financing. For Genesis Energy, assuming a balance of 50% debt and 50% equity, and taking estimated figures of 4% for debt (after tax) and 9% for equity, the WACC would approximate 6.5%. This encompasses the risk premiums investors demand for bearing specific risks associated with Genesis Energy's age and industry sector.

Sources of long-term financing for Genesis Energy include bank loans, bond issuance, private equity, and equity financing through private placements or IPOs. Each presents unique advantages and drawbacks. Bank loans typically offer lower costs but may impose covenants that restrict operational flexibility. Bonds can raise substantial capital but are susceptible to interest rate fluctuations. Equity financing dilutes ownership but does not require repayment, thus being less burdensome during rapid expansion phases.

From the investor's perspective, relative risk significantly influences the cost of capital. Higher perceived risks—such as market volatility, industry competition, or operational uncertainties—increase the required return. This is evident in the CAPM, where the beta coefficient measures the sensitivity of the stock's returns to market movements. A higher beta leads to a higher cost of equity, reflecting greater risk (Brealey, Myers, & Allen, 2020).

Applying the CAPM formula: Required Rate of Return = Risk-Free Rate + Beta * Market Risk Premium. Assuming a risk-free rate of 2%, a beta of 1.2, and a market risk premium of 6%, Genesis Energy’s required return would be approximately 9.2%. This rate guides investors and management in evaluating the attractiveness of proposed investments and the necessary returns to sustain shareholder value.

In conclusion, for Genesis Energy to support its growth ambitions sustainably, understanding and effectively managing its cost of capital is essential. It influences decision-making about the optimal mix of debt and equity, risk management strategies, and valuation models, ultimately facilitating strategic financing that aligns with its long-term objectives.

References

• Apple. (2023). Apple Inc. SEC filings. https://investor.apple.com
• Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
• Damodaran, A. (2022). Damodaran Online: Equity Risk Premium & Cost of Equity. https://pages.stern.nyu.edu/~adamodar
• Investopedia. (2022). Weighted Average Cost of Capital (WACC). https://www.investopedia.com
• SEC. (2023). U.S. Securities and Exchange Commission EDGAR database. https://sec.gov
• Ross, S. A., Westerfield, R., Jaffe, J., & Jordan, B. (2021). Corporate Finance (12th ed.). McGraw-Hill Education.