When playing the Business Strategy Game (BSG), none of the companies have a lot of money in year 11. Companies have to raise funds using debt or equity. By financing your business with debt, you accept the risk of bankruptcy. Bankruptcy occurs in the event of a loan default for 3 consecutive years. Failure to obtain a loan also causes a decline in the credit rating and share price. Equity is the alternative to debt in raising capital through the sale of common stock. The loss of shares reduces the return on equity (ROE) and earnings per share (EPS). The advantage of selling stocks is that there is no risk of bankruptcy.
I learned an intriguing strategy from 2 successful industry champions. The strategy is to build a financially strong company and sell shares when the share price is high. Then, after intentionally running a bad fiscal year, buy back the stock when the stock price has dropped. This allows your company to earn huge amounts of capital by using a “build and sink” strategy for your business on a manipulated stock price. This is terribly risky and rather immoral, but also innovative and catches most companies off guard. It is worth noting the concept of people buying stocks low and selling stocks high when raising funds through stocks.
Raising capital through debt is the traditional way of raising money that completely exposes your company to bankruptcy. However, debt financing can be cheaper than equity financing with an extremely profitable company because the money can be repaid at a fixed annual rate while stock repurchases can become expensive with a rise in the share price. The big downside to debt is that it can weaken profit margins each year through interest expense, a feature that equity does not have.
Both debt and equity have their advantages and disadvantages when raising capital. Finding the right debt-to-equity ratio will help your business finance its growth and profitability to win the business strategy game.UFABET 888