Question

Jensen & Jensen Incorporated, a telecommunications equipment manufacturer, has a debt to total assets ratio of 55%, while competing companies of similar size operating in the same industry have an average debt to total assets ratio of 62%. Jensen & Jensen is planning to expand its operations by adding two new plants next year. Jensen & Jensen currently is privately owned by the Jensen brothers, and they would like to keep the company closely held but will issue shares if necessary.

a) Discuss three sources for financing the expansion.
b) recommend the most suitable source of financing for Jensen & Jensen based on the information provided.

Answer 1

Jensen & Jensen Incorporated can finance their expansion through debt financing, equity financing, or using retained earnings. Based on their current financial position, it is recommended that they use their retained earnings to fund the expansion.

Step-by-step explanation:

a) Sources for financing the expansion:

1. Debt Financing: Jensen & Jensen can take on additional debt by borrowing funds from financial institutions. This can be in the form of bank loans or issuing corporate bonds.
2. Equity Financing: The company can issue shares to raise capital. They can consider selling shares to private investors or taking the company public through an Initial Public Offering (IPO).
3. Retained Earnings: Jensen & Jensen can use their accumulated profits to fund the expansion without incurring additional debt or diluting ownership.

b) Recommended source of financing for Jensen & Jensen:

Based on the information provided, the most suitable source of financing for Jensen & Jensen would be retained earnings. The company's debt to total assets ratio is lower than the industry average, indicating that they have some financial flexibility. By using retained earnings, Jensen & Jensen can avoid additional debt or diluting ownership while funding the expansion.