Two businesses in very different circumstances are pondering how to raise $2 million.
HighTech.com has fallen on hard times. Net income has been low for the last three years, even falling by 10% from last year's level of profits, and cash flow also took a nose dive. Top management has experienced some turnover and has stabilized only recently. To become competitive again, High Tech needs $2 million to invest in new technology.
Decorator Services is in the midst of its most successful period since it began operations in 2012. Net income has increased by 25%. The outlook for the future is bright with new markets opening up and competitors unable to compete with Decorator. As a result, Decorator is planning a large-scale expansion.
Requirement
Propose a plan for each company to raise the needed cash. Which company should borrow? Which company should issue shares? Consider the advantages and disadvantages of raising money by borrowing and by issuing shares, and discuss them in your answer.