Straightline Medical’s plan to purchase a Robodrill is functional as the device can have a high potential for the company. However, the decision to purchase the drill is a tough one. The upside is that it could bring great cost-efficiency for the company if its capability were realized. The company has a few ways it can use to purchase the drill, either through the use of equity instruments, or using debt to make the purchase. The choice of which option to use comes down to which mode is beneficial to the financial security of the company.
The broad categories for financing available to businesses include debt and equity. Figuring which one to use depends on the financial situation of the organization. Whereas debt financing can be lucrative for purchasing the Robodrill, a loan will require the company to pay back the principal amount with interest. Loans have collateral, which may include important company assets. With equity financing, the company can sell some stake or shares to investors who will be partial owners hence the capital retrieved from the investors does not have steep interest rates and the investors will only be entitled to small profits the company makes.
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Equity vs. Debt
For Straightline Medical to minimize the impact of purchasing the technology on financial decisions of other areas of operations, it would be better off using equity instruments for financing the purchase. Equity financing is favored in the technology sector. When firms raise amounts in external financing, the anticipation of losses is limited through the use of equity as compared to debt (Goh et al., 2017). Dealing with new technology has its merits and demerits. Supposing the Robodrill fails or requires regular maintenance, loan funding would be disadvantageous as the company may incur additional costs. Equity financing, on the other hand, allows the company to receive finances through investors who will profit from the benefits the new technology would bring once it is operational. Equity financing also allows the company to distribute financial risks to larger groups in contrast to debt financing, where the company would bear the financial risks alone.
Effects of Inflation
During times of inflation, there are changes in pricing economy-wide due to the shortage of money supply. Inflation acts as a kind of tax that increases wealth inequality (Boel, 2018). Financing the purchase of the Robodrill with debt during times of inflation can be a daunting task. This is because the loans the company will receive may be insufficient or request high-interest rates. During inflation, debt also increases real liabilities and default risks (Kang & Pflueger, 2015). A similar outlook can be experienced when the company considers making the purchase using equity financing. The company may have to sell shares at lower prices. However, equity financing is still the better option of the two as when inflation fades; both the company and the investors reap from the benefits the new technology brings. The new technology will also aid in cost-efficiency for the company; hence, it is the best option of the two.
However, during inflation, bonds and stocks are key players for investors’ money. Bonds may be safer than stocks. Stocks do well when there is no inflation as investors sell bonds and buy stocks. During inflation, the consumers are less, and the investors will prefer the regular payments guaranteed by bonds. Bonds are small loans a company gives to other corporations or the government. During inflation, the company can, therefore, not afford to give out loans while it is considering to purchase the Robodrill. Ultimately, the financial option still centers on using equity instruments such as shares with new investors to finance the acquisition and integration of the new technology.
References
Boel, P. (2018). The redistributive effects of inflation and the shape of money demand. Journal of Economic Dynamics and Control , 90 , 208-219.
Goh, B. W., Lim, C. Y., Lobo, G. J., & Tong, Y. H. (2017). Conditional conservatism and debt versus equity financing. Contemporary Accounting Research , 34 (1), 216-251.
Kang, J., & Pflueger, C. E. (2015). Inflation risk in corporate bonds. The Journal of Finance , 70 (1), 115-162.
