American Superconductor Case

American Superconductor call electric power infra structure from its generation to distri howeverion. AMSC is the leader in alternate energy. The high society has two main work units AMSC power systems and AMSC Superconductors. AMSC Superconductors American Superconductor has spent nearly 18 years as public control comp all developing transmission wires of high quality in install to generate and deliver power. The Company has been posting continuous losses and broadly dwindling on cash.It has how incessantly posted recently its commencement exercise ever internet for the quarter ended 31st March 2009 by earning a profit of $1. 3 million or 3 cents per share. (MSN Money) Debt Verses Equity pay Equity and debt support both have their advantages and disadvantages explaining why most hulking companies select an optimal capital structure which is a mix of debt and equity. theoretically having a higher ratio of debt in the capital structure maximizes the hand over on equity. Th e interest payments on debt are tax deductible and usually the cost of debt is much lower than the cost of equity.With debt funding a family pays a fixed interest payment irrespective of the amount of profit or growth it has achieved i. e. it does not have to share its profits with its creditors. For a profitable company requiring extra capital, debt financing is the vanquish option because with debt financing it does not have to share its profits or the ownership of the vexation with others. Equity injection however results in further dilution of earnings and trouble control. With the above argument one may feel that debt financing is the best option.Debt financing is a good option as long as the company has huge profits and liquid assets to support it. For a business that is facing losses, debt payments can be a huge burden in the form of interest payments. The creditors will have to be paid plot of ground the stockholders on the other hand will not get any dividends since the company is only making a loss. We can therefore place that equity financing puts less of a burden on a companys financials when profitability is depleting or business is posting a loss.Higher equity percentage in the capital structure impacts the financial ratios of the company positively. Restructuring to 100% Equity It all started after the 2003 black out which occurred receivable to the over load of power grids and American Superconductors stocks surged by nearly 42% as an expectation that the quality wires manufactured by American Superconductors could be used to relieve congestion on the power grids. The company took this place as an opportunity and the managers and board of directors decided to forgo debt financing of $50 million and adopt an equity financing strategy.The company raised $51. 1 million by selling shares which helped strengthen the balance sheet and deepen the liquidity condition of the company. American Superconductors however continued making losses, b ut conversion of capital structure to 100% equity allowed the company to take its interest expense significantly. Since higher leverages magnifies return on equity of a profitable business but also maximizes the loss by putting additional pressure on the profit and loss account of a company.AMSC after converting to 100% equity capital structure saved millions of dollars all year in bourns of interest expense. Recently AMSC has posted its first profit since the capital restructuring in 2003. If AMSC had not converted to equity financing it would have had a major problem financing its cash ineluctably and credit worthiness would have gotten worse. The Debt to Equity ratio would have increase and debt would have gotten more and more expensive for the company thus change magnitude the interest expense of the company and it may have never became profitable.Long term debt continues to be zero whereas the number of outstanding shares can be seen increase from 19. 7 million shares to 41. 5 million shares. Conclusion American Superconductor beingness a technology company had to face many challenges such as failed projects, higher cost of business and ever changing environment. Board of Directors in my opinion took a very good decision by not using long term debt in their capital structure. AMSC has been a payoff of criticism but it has finally posted a profit and if it rest profitable they might want to rethink their optimal capital structure.