Risk Assessment and Mitigation (Step 6)
Although risks of long-term debt financing are bankruptcy and bondholders take control the company. However, LEI can mitigate by limiting amount of debt to reasonable limit. In addition, LEI needs to involve contractual obligations set out in indentures. There are many kinds of debt, but the essential feature is that debt involves a stated amount that must be repaid.
Similarily, offering preferred stock risks that the company may not make money. To avoid this, the company can offer lower dividend if at all possible. In addition, LEI also can have some of the features of debt and some of the features of common equity. Holders of preferred stock have preference in liquidation and in dividend payments compared to holders of common equity. LEI needs financing for capital expenditures, working capital, and other long-term uses. Most of the financing is provided from internally generated cash flow.
Finally, convertible debt offering are timming and the risk structure of the interest rate. LEI can mitigate this by converting preferred shares or bonds to exchange usually common stock at a pre-stated price. This is a way to offer investors who want higher yield from that common stock. The purpose is to sweeten and attract the marketability of the stock.
Optimal Solution (Step 7)
In searching for the ultimately chosen as the best solution or combination of solutions out of the set of five alternative solutions listed in the Step 4 Alternative Solutions and Benchmarking Validation, the findings of the Step 5 Analysis of Alternative Solutions have suggested that the alternatives numbers 1, 2, and 3 are the ultimate choices that have potential and best fit to satisfy the End-State-Goals of LEI. The decisions were weighted on the pros and cons of each solution to maximize shareholder wealth of the following measusements
• Money Earned
• Earnings Per Share
• % Return