RST Ltd. is an independent printing company in a medium-sized town in Saskatchewan. It was established 15 years ago by Ron, Sandra, and Tara, who each own one-third of the shares in the company. Last year, RST revenues were $4 million, mainly from local contracts for such items as customized office stationery, business cards, advertising posters, calendars, and entertainment programs. Because the business is prospering, the owners are planning to expand their printing and sales space. They know that significant financing is required for the expanded facilities and the increased business. The current financial structure of RST is 60 percent owners’ equity and 40 percent debt. Rather than sell shares to other investors, the owners are prepared to put more equity into the business by purchasing additional shares in order to maintain their debt/equity ratio. The expansion project will cost $1 million, so they need to borrow $400 000. Do you agree with the owners’ financing decisions?
What are the risks?
How can the owners plan for uncertainty in their industry and the economy in general?