How Financing is Important for the Success of the Company Case Study - 37

How Financing is Important for the Success of the Company - Case Study Example As the paper outlines, sourcing finance is one of the critical factors determining the success or failure of a company. For example in 1971 Phil Knight was faced with a crunch situation regarding his company Nike. The company had at that point of time owned several stores and sales turnover was nearly $300,000. The company was poised for expansion. But the problem the Knight faced was that the company needed capital to finance the growth and this capital was not available with Knight at the point of time. It got this much-required finance from Nissho Iwai Corporation, a Japan-based trading company. Through this finance, the company could start manufacturing its own line of products outside its home country and then bring the finished goods back to the USA in order to market those. Any firm has access to mainly three sources of finances Debt, Equity, and Retained earnings. Different sources of finance have different associated costs. The cost of debt is calculated as the coupon rate ( 1-tax rate). Cost of equity, on the other hand, is calculated as = (Dividend per share/ Market price of the share (MPS)) + growth rate of dividends. Normally debt capital is considered as a cheaper source of capital than equity capital. However, both Debt and Equity come with associated advantages and disadvantages. Normally the firm should go in for a balance of debt and equity financing. The total debt capital used by Nike is $2,743,000 whereas the total equity capital of the firm is $10,824,000. The viability of a financing option depends primarily on the issue of whether the return of the investment proposal is greater the cost of the particular source of finance. For example, in 2002 Nike decided to enter into a contract with the University of Alabama whereby it agreed to pay them $100,000 annually (Kish, 2013). Whereas this deal may sound as too expensive but such deals are pretty important for sports giants like Nike.