Kaitlyn Fredrickson

We had a top to talk about:
“The founding family and majority shareholders of the company do not believe in using debt to finance future growth. The founding family learned from hard experience during Prohibition and the Great Depression that debt can cause loss of flexibility and eventual loss of corporate control. The company will not place itself at such risk. As such, all future growth will be financed either by stock sales to the public or by internally generated resources.”

Here was the students response:  Do you Agree or Disagree with the student?
As a public shareholder of this company, I would be pleased with the new policy as their decision allows for quick funds to be retreived. I also understand why Elkhead made that choice. Using debt to finance growth can help a business have the extra cash they need to grow where they would like to however, it can also hinder the timeline of their growth. I do understand Elkhead’s fear of losing control. By accepting loans from others, this could also spark other parameters that the company would need to follow and eventually the company may lose valuable aspects such as flexibility.  After accepting the extra funds they are not only responsible for making payments but also they must factor in interest which is an additional expense. A companys solvency can tell a lot to creditors about the business and the capability they have to pay back debts over a period of time. If a company has a low debt ratio they will more than likely get future loans if needed.

The approach that Elkhead would like to take by selling stock to the public or finding resources internally also has its own pros and cons. By selling stock, shareholders are selling equity. Although they are not obligated to pay back a debt, they lose that piece that they did own to then gain funds they would like to expand their business. Businesses are constantly growing and attempting to keep up with the next best thing. The decision to pull back on debt and debt owed can definitely help Elkhead in the future.