MERIT ENTERPRISE CORP.

CASE STUDY

Based on Merit Enterprise Corp. case study, Sara Lehn who is a chief financial officer of the
company have two option which are in option one (1), Merit could approach JPMorgan Chase
bank by making sum of loan of $4 billion dollar, or in option two (2) Merit can convert to public
ownership by issuing stock to the public in the primary market.

If Sara choose option one (1) which is approaching JPMorgan Chase bank by making loan, there
are some of advantages by choosing this decision such as Merit company will have the cash on
hand to deal with any cash flow problems compare to option two (2), where the amount of
money must be taking little time to collect the sum of $4 billion. Funding from an equity investor
can give them a substantial injection of cash, but at a high price, the dilution of their own equity
and a reduction in their autonomy. Borrow from a bank or any alternative lender, the
commitment is just to repay the finance on time and in full, allowing them to continue to run
their business, that’s mean if Merit makes a high profit their just need to repay a fixed amount of
loans and interest, there is no need to share the profit among shareholders. Thus, Merit company
also can keep ownership of their company by using option one (1), which means that Merit
company can keep their confidentiality of the company from outsider such as shareholders.

Some of the drawbacks if choosing the first (1) option is the loan must be repay, whether the
company is making a profit or having loss, that’s mean Merit credit rating will be compromised.
Every time the company making a loan, it will be noted on credit history. The more company
borrows, the higher the risk, and the more interest company are likely to be charged. If the
company repay late, the credit rating will plummet, creating significant problems for Merit
company in the future. Merit may have to repay quickly. Working capital loans are intended to
cover a brief hiatus in company cash flow, so the lender will require relatively rapid repayment.
This type of borrowing is not suitable to meet longer-term business goals, for which company
should seek more substantial funding with a longer repayment period.

If Sara Lehn choosing the option two (2) which means Merit convert to public ownership, the
advantages of this option is when the company is open for public means that there will be
shareholders that can issuing stock in the company, it means that the company risk is being less
of a burden for a company than a bank loan as company can satisfy shareholders by paying them
dividends that is roughly equal to 2-3% of the equity of shareholders every year. On the other
hand, loan from a bank has to be repaid along with interest year after year until it is fully repaid.
A share gives a share or some sort of ownership in the company that share capital of the
company is less expensive compare to bank loan. However, bank loan is stricter than share
capital as it needs regular repayment along with interest whereas shareholders can be satisfied
with occasional dividends. Moreover, from issuing stocks to the shareholders can come out and
unlimited funds in the company which is the company can gain more than $4 billion capital to
run their company.

However, there are some major drawback of sharing capital, the company ownership will be
convert to public, and if the company making a huge profit, it must be share with other
shareholders in the company that’s mean the company cannot conquered all the profit
maximization when they had attain the profit goals. Also, the ownership is open to the public
that’s makes other company can have a right to acquisition or taking over the company. On the
other hand, shareholders have a stake in the business as they become part owners in the
company.

As a result, the best solution that Sara Lehn can come out with to the Board of Director of Merit
Enterprise Corp is the second (2) options where Merit can convert to public ownership by issuing
stock to the public in the primary market. By choosing this option, the risk can be share among
shareholders. Before company gaining a profit, they must being through risk first. So it is better
Merit Enterprise Corp company taking care of the risk first instead of just making a high profit,
therefore a high risk will gain into a higher profit. On the confidentiality issue, usually bank is
more care about the internal financing of the company, shareholders just want to be paid
dividend, while the borrowing bank will make sure the company management account is tough
so that they believe the company can make the repayment after the borrowing. Finally as for
ownership issue, usually the ownership of the company that is not matured enough, the portion
will be 70% : 30%, that’s mean the shareholder just buying the stock from 30% out of 100%, the
70% is still under Merit Enterprise Corp ownership, so Merit Enterprise Corp don’t have to be
worried about being taking over by others. Thus, they can convert back into private company if
they already achieve the profit maximization in the future.