Evaluate the long term financing of Stemlife Company
Stemlife Company’s capital structure is made up of 100% equity. It has two types of equities; ordinary stocks and retaining earning. Stemlife issues two types of stocks; stocks capital and stocks premium.
There are several advantages of offering common stocks. First, by issuing common stocks the company can raise a large sum of money (Anonymous, etd). Secondly, the board of directors can decide on the amount of dividend paid to the stockholders (Anonymous, etd). Thirdly, the company needs not pay the stockholders if it is not doing well (Anonymous, 2006). The company also does not have a maturity date to repay the fund (Anonymous, 2006). There is also less restriction to follow in issuing stocks.
On top of that, stockholders also pump in part of their dividend (unappropriated profit) into the company for investment and business expansion. This increases Stemlife’s financial resources. There are several advantages of reinvesting profit by stockholder into the company (Anonymous, etd.). First, the company can avoid payment of cash and issuance of cost (Anonymous, etd.). Secondly, the existing management can maintain its control over the company (Anonymous, etd.). The amount of retained earning put in by Stemlife increases from year 2006 to year 2007.
A company needs to have good fundamentals in order to attract investors to invest in its stock. A strong balance sheet plays an important role as it speaks on behalf of the company about its financial status. A financially fit company will have more equity than debt (Loth, 2010). Capitals are a company’s permanent funding to support its expansion and assets.
The capitalization ratio compares the total debt with the total equity (Loth, 2010). Stemlife has a capitalization ratio of 9.75% in year 2006. This low percentage of capitalization ratio indicates that the