Question
The Federal Reserve of the U.S. has just raised rates for the third time in the year. Most economists are convinced that inflation will accelerate
The Federal Reserve of the U.S. has just raised rates for the third time in the year. Most economists are convinced that inflation will accelerate over the next year to two years. You are on the Board of Directors of Old Town Industries, which has three operating divisions. Division X has been in existence the longest, has the most stable sales wherein it sells pens that it manufacturers around the world, but its biggest customer is England. Division Y has been in existence for five years and is slightly less risky than the overall firm, but that division sells pens to the US government who loves their pens, but can only give 1 year contracts due to Federal contract regulations. Division Z is the research and development side of the business. This division has just filed patents for a new type of pen that can write on every smart screen phone with a simple app that can be downloaded from the Apple Store or Google Play. The Board is considering raising $ 10,000,000 as debt or equity.The firms WACC is very sensitive to inflation in the US and goes up when inflation increases. Given all of the above, what would be your suggestion regarding the mix of debt and equity ? Whether the company should raise the funds at all and how to divide the funds amongst the three divisions ? Please explain your answer.
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