Macy’s Limited: Financing of Long-Term and Long-Term Investment Projects, Research Paper Example

Macy’s organization is a chain of departmental stores in America, dealing diverse merchandise depending on location. It has flagship stores in New York City’s Herald Square and as of September year 2008, it had a total of 810 stores in the United States.

The board has made a resolution to expand the existing Macy’s Central division on the following departments, clothing, cosmetics and the cellar (a long-term investment project). This is a long term investment and requires large sums of money. On observing the Company’s structure, the recommendable source is to make rights issue to the existing members. The source will increase the company’s capital, and the company will be able to raise the required funds for expansion (Seidman, 2004). An opportunity is given to all members to increase their share holding and the company is certain about the execution. The duty of issue is given to the bank to coordinate and garner interest on the rights issued. Commission charged on this issue is lower than that of placing, road show expenses are less since the target is the existing members’ and not new investors being issued ordinary shares. The rights issue takes shorter time and avoids hindering the laid down financial plans, in case of large placing the company lacks authority to make an increase in its authorized capital, therefore the shareholders approval creates a delay to financing plans (Seidman, 2004). This source helps to improve the company’s leverage since it increases the capital base, the company will be in a position to access more debt. There is increased liquidity, thus the company can be able to execute the planned expansion.

The company also intends acquire treasury bills at 16% interest with six months maturity (a current investment project). This intended to generate cash which will improve the liquidity position of the firm. The amount needed to acquire the treasury bills is $50,000,000.

I feel that a commercial loan will be the most appropriate source of funding to fund the acquisition of treasury bills as compared to other alternative sources. This will have several benefits both to the ownership of the company and to the company itself. Firstly, the commercial loan will give the company a chance to preserve its cash and working capital. This is because the loan can be used for almost every purpose including repaying current debt so as to avoid higher interest rates plus short repayment term (Gotthilf, 1997). The lender of the commercial town will only be entitled to an interest above the loan amount, rather than to a unit of ownership or a share of company profits. The loan will permit for flexibility to devise a repayment schedule that will suit the company needs plus access to capital with insignificant up-front repayments. This will bring about improved cash flow for the company since it reduces the chances of draining out its capital. By acquiring the treasury bills using the loan, the company will be entitled to its ownership. Finally, the interest payable on loan will be an allowable deduction and thus an advantage to the company in terms of tax payable (Harvey, 2002).

References

Gotthilf, D. L. (1997). Long-term borrowing techniques. Treasurer’s and Controller’s Desk Book: American Management Association.

Harvey, C. (2002). How do CFOs make capital structure and budgeting decisions. Journal of Applied Corporate Finance, 15(1), 8-23.

Seidman, K.F. (2004). Economic development finance. UK: The SAGE Group Plc.