Introduction
Target Inc is a discount upscale retail franchise that sells products at a low cost and of superior quality, the business boasts of having a cleaner, larger, and customer-friendly shops. It is only second to Wal-Mart as a general merchandise retailer; selling most items that one would need under one roof with emphasis on "one-stop shop," this has been enhanced by the introduction of the Super Target stores. Originally the Target Inc. was formed in Roseville, Minnesota in 1962 where the first store was opened (FORM 10-K, 2017). From then on, it has continued to grow exponentially to the current 1,330 stores located all over the country in forty-seven different states; this is with the addition of the 141 Super Target stores, that are situated all over the country. Also, the company has 22 distribution areas situated strategically in 19 states across America. Besides its number of stores, Target is involved in several investments that include: Target commercial Interiors, Associated Merchandising Corporation, Target Financial Services, and Target.com. With all its investments and business portfolio, Target has employed approximately 300,000 individuals who hail from different cultures and backgrounds. The present CEO and Chairman of Target Inc. are Bob Ulrich.
Target Inc. primarily offers accounting services and marketing functions to receive a significant slice of the returns made by the Target MasterCard and Target Credit Card customer receivables portfolio, that is, insured, financed and possessed by TD Bank Group (FORM 10-K, 2017). Previously, Target Inc. ran a division in Canada. On Jan 15, 2015, the company made an announcement on its decision to the market in Canada, and Target Canada Co. we were sure that other fully owned auxiliary businesses of Target filed for protection (the Filing) in Canada under the Companies' Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice in Toronto. Upon this being done, our former Canadian retail operations can no longer be consolidated. The financial results before the businesses Filled can be found in our financial reports and are under ceased operations.
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The value of Target Inc
Net set value or the book value of Target Inc according to 2016 financials is $24,073 million (Target Corp. 10K, 2017). The market of Target Inc. is $37.6B billion (Forbs.com, 2018). According to Waemustafa, &Sukri, (2016), the market value highlights the future growth of the company.
Forced Changes
In case Target was compelled to think of re-organizing and bankruptcy options the ripple effect and changes that might happen to its financial policies and capital structures may be disastrous. Target is at this time is the second largest retailer after Wal-Mart, and this will shift when if a kind of any re-organizing or bankruptcy changes(FORM 10-K, 2017). It will have to sell off its stock and assets to pay back its debts. It will also be forced to close its plants and let go of its employees to reduce the total expenditure. It will be forced to also sell a lot of its property around the USA to pay shareholders, especially the major stockholders ( Mallikarjunappa& Nayak, 2013) . All this will create massive repercussions in the future if it aims to make a comeback as Wal-Mart potentially will possess the prime and strategic locations.
Global Market
Target chose not to leap into the international market, though it seems to be a rewarding en-devour. Creating a long-lasting business abroad has been so much simpler with more liberalism of the world's finance structures. Furthermore, trade and information flow are nowadays really easy with the advent of technology, making it difficult to overlook or ignore the option of international trade. Together with increasing its businesses, they must think of investing in stores globally (FORM 10-K, 2017). Through its extra involvement of business in credit cards, they would have a significant advantage to do so.
There are fundamental risks in investing a business abroad and globally, especially with the foreign exchange. For instance, Target has shares in Hitachi, a business entity in Japan. The company will incur losses if the Japanese currency drops in value, this situation is similar to any nation when the currency value globules (FORM 10-K, 2017). If Target Inc was to open a Superstore in Japan, it has to contemplate that proceeds are significantly affected by the change in currency and would have to fine-tune properly to survive in Japan since instability of currency has done many businesses to crumble.
Summary of the Case
In 2016, Target Inc. had a major financial decision to make regarding its long-term financial debt. The company has unsecured bonds worth half a million dollars that are supposed to be reimbursed in the next six months. Therefore, the company should decide what to do to pay off the bondholders. The company has to decide whether to re-issue new financing to replace the funds that were lost and if so, which financing will be employed, or the company can delete all debt financing and reissue new bonds, or employ issue stock and or assimilating both options. However, Target’s Chief Finance officer has decided that accompany has to refinance at minimum 400 million dollars of the total unsecured bonds. As much paying the unsecured bond is important, the company wants to invest in additional assets that are worth $100 million in the next decade, and it is supposed to be financed either by using equity financing, debt financing or the two options. It is worth mentioning that the current bonds of Target corporation yield an annual interest of 6 percent and if the company need other bonds, it would be issued based on the same rates.
Risk of debt vs. Equity financing
Many companies are always torn between selecting debt financing, and equity financing since each of the choices has its advantage depending on what the company is experiencing. Generally, debt financing seems most appealing for most business than giving away equity in your business ( Turner, 2017) . When equity is given to investors some shares of your company are being given away, and it might affect the decision making of the company. In contrast, taking debt is a short-term move that will make the business owner be in control of the company ( Laitinen, 2018) . However, the when choosing between debt vs. equity financing may depend on several circumstances. The following are some situations that may impact the choice of management when deciding between debt and equity financing
The urgency of financing: when the company needs financing immediately it is advisable to consider debt financing since it is the first option to get financed( Laitinen, 2018) . Whereas, equity financing entails finding the proper investors, writing a business plan and pitch which will take more time.
The amount of capital required: If a small amount of money is required by the company, then debt financing is the best option ( Laitinen, 2018) . Nevertheless, equity financing does not come with small amounts, but the business loan can be obtained for less amount.
If the Business owner needs more than financing: if the business owner is seeking more than financial gain, then equity financing is the best option ( Laitinen, 2018) . Equity gives the business owner the knowledge of investor, expertise, and contact.
How big the business owner wants the business to get: Venture capitalist always take in consideration companies which has the potential to grow into a national and global business brand. If the main goal of business is to go global, then equity financing is the best option ( Laitinen, 2018) . However, for that business that wants to remain small debt financing is the best option.
In our case, Target cooperation needs financing urgently, the amount to be financed is high, and therefore, equity financing is the best option compared to debt financing. Since the CFO of the Target is seeking to pay off the unsecured bond that is 400 million dollars within six months, it implies the bond is huge to settle and the time frame is quite long ( Laitinen, 2018) . Therefore, it is advisable for the management of target to seek equity financing since the bond is huge for lending institutions such as banks to credit the company ( Turner, 2017) . Besides, the company has close to a half a year to settle the unsecured loans, capital ventures or investors can be sourced to help settle the debt through pitching. Therefore, I recommend for the company to pursue the option of equity financing because the amount of debt is big and there is enough time for the company to source for an investor that can finance the debt through equity financing.
The ability of Target cash flow to support the routes you decide on
To determine the ability of cash flow to support equity financing can be analyzed using two rations; debt to equity ratio and return on equity. Since the preferred financing is equity on financing the company has to pay the investor 6 percent interest until the debt is settled.
Therefore, the company will pay
400 million x 1.06= $424 million as total money to the investor
Also, the company wants to invest $100 million in the next decade, and the equity financing will help realize the company’s dream. So, the company would have to pay the investor
$100m X 1.06= $ 106M
In total, the company would have to
$424 + $ 106M = $530M
Debt to Equity Ratio
= Total Liabilities/ Total Shareholder’s Equity
$37, 431/ $10,953
=3.145
The Debt to equity ratio implies that Target Inc has $3.145 of debt for each dollar on equity. It implies that Target Inc like to have more liabilities ( Waemustafa&Sukri, 2016) . The ratio will allow equity financers to advise the company on how the company can service without acquiring more liabilities.
Return on equity
ROE = Net Income/ Average Shareholder Equity
= 2,737/ 37431
= 0.7312
The ratio implies that for every dollar that invests will invest in settling the unsecured bond of the company they are likely to earn 0.7312.
Others Method the Company Can Finance Its Debt
Lease
Leasing is a legal agreement between two parties that have laid down terms that should be observed when on party rents an asset or property. Usually, the agreement is between financing organization and the company leasing the property. When the lease expires, the property is returned to the owner ( Turner, 2017) . In our case Target can lease its assets to generate more cash that will help to settle the unsecured bond. Leasing property is good for the company since it does not tie up funds from buying properties.
The table below shows how Target Inc. can lease its property to earn more money
Factoring
This kind of financing has commenced being popular. Factoring provides reliable funding for a company that has long-term debt because customers reimburse their invoices gradually. However, Factoring can be employed in the company with government or commercial customers who have good credit ( Laitinen, 2018) . If it is used appropriately, the method can help target pay off long-term debt by improving the company’s cash flow.
Conclusively, Target Inc needs to pursue equity financing since it seeks a large amount of money to finance its unsecured loan. Also, equity financing is the best option because the company has six months to reimburse its debt which is enough time for the company to seek an investor to help them pay off the bond. Besides pursuing an unsecured loan, the company can explore other option such as leasing and factoring. The company has several properties across America, and it can lease to raise extra money to pay off the bond. Moreover, the company can consider factoring finance where the company does business with the government and commercial institutions; this will help pay off the unsecured bond through invoices. I recommend that the management of Target Inc to consider the three proposed way to settle the unsecured bond since the company can meet the potential choices.
References
Danbolt, J. (2004). Target company cross‐border effects in acquisitions into the UK. European Financial Management , 10 (1), 83-108.
Forbs. (2018). #214 Target.
https://www.forbes.com/companies/target/#113c4f405274
FORM 10-K. (2017). Welcome to our 2016 Annual Report.
https://corporate.target.com/_media/TargetCorp/annualreports/2016/pdfs/Target-2016-Annual-Report.pdf
Laitinen, E. K. (2018). Financial Reporting: Long-Term Change of Financial Ratios. American Journal of Industrial and Business Management , 8 (09), 1893.
Mallikarjunappa, T., & Nayak, P. (2013). A study of the wealth effects of takeover announcements in India on target company shareholders. Vikalpa , 38 (3), 23-50.
Riley, M., Elgin, B., Lawrence, D., &Matlack, C. (2014). Missed alarms and 40 million stolen credit card numbers: How Target blew it. Bloomberg Businessweek, 13.
Rui, X. (2015). The Legality of Valuation Adjustment Mechanism Contract with Target Company Being Counterparty. Securities Market Herald, 5, 013.
Schmitz, P. (2016). Sell-side analysts’ impact on M&A outcomes: An analysis of the effect of analysts, covering both the acquirer and the target company before the deal announcement, on the probability of merger completion (Vol. 1987). GRIN Verlag.
Turner, A. (2017). Between debt and the devil: money, credit, and fixing global finance . Princeton University Press.
Waemustafa, W., &Sukri, S. (2016). Systematic and unsystematic risk determinants of liquidity risk between Islamic and conventional banks.
