American Superconductor Case Study Founded in April Essay

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American Superconductor Case Study

Founded in April 1987 with $4.5 million in seed capital from an investment consortium (Google Timeline. American Superconductors. 2010); American Superconductor has grown into a "global leader in renewable energy, providing proven, megawatt-scale wind turbine designs and electrical control systems" (American Superconductors: Investors. 2010). The company works to "develop solutions and manufacture products to dramatically improve the cost, efficiency and reliability of systems that generate, deliver and use electric power" (AMSC. Annual Report 2003). Throughout its two decades of operation the company has needed capital to expand its operations, develop innovative technologies, and invest in capital projects with a design on profitability for the company and its shareholders; a feat the organization achieved for the first time with "$16.2 million, or $0.36 per diluted share, in net income for full year fiscal 2009" (AMSC. Annual Report 2010). The long road to profitability though is marked by difficult management choices regarding how to raise requisite capital. The 2003 article detailing the company's decision to raise capital through a stock offering rather than utilizing "a 50 million secured debt financing agreement" (Esposito, A. August 26, 2013) was characterized by management as "in the best interest of our shareholders" (Esposito, A. August 26, 2013). The management's decision provides an opportunity to explicate the positives and negatives of equity as opposed to debt, and whether the company's strategy was correct given their circumstances.

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At the outset there is an important distinction to be made; companies rarely have strictly a one or the other choice between debt and equity, rather there is ratio of debt and equity referred to as the capital structure. For American Superconductor the company's balance sheet lists approximately liabilities of 11 million in 2003 and 119 million in 2009 respectively. The company prior to the stock offering reported 21 million and 20 million shares issued and outstanding respectively in 2003 (AMSC. Annual Report 2003). A company's decision on debt or equity also is not strictly a stock issuance or bank financing arrangement, an organization can also consider bond issuance as a form of borrowing. These components comprise what is known as the Weighted Average Cost of Capital; "a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt are included in a WACC calculation" (Investopedia. Weighted Average Cost of capital N.D.). This calculation in turn reflects an organization's requisite return on investment for projects. In determining capital budgeting decisions the WAAC provides the foundation for determining the hurdle rate for evaluating potential….....

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