Ratio Case

1. Because Merit Enterprise Corp would need $4 billion, so I think that it might long-term loans from banks. Pros: A. Financing fast; compared to issued stocks and bonds, long-term loans simple procedures and spent short time to get borrowing. The Merit has good relationship with a bank as the article said a bank had served Merit well for many years with seasonal credit lines as well as medium-term loans. B. Low borrowing costs; Merit to the long-term loans has the lower interest rate than bond rates generally, and since it is a direct financing, less financing costs. C. Larger borrowing flexibility; Merit negotiated directly with bank loan amount, interest rate, if some changes in the financial situation of Merit as also in consultation with banks again. Therefore, it is good for Merit to based on their financial situation to do operation. D. Loans to banks, Merit does not need to open the company's situation to the public, the confidential role.

Cons: A. High risk; burden of loan has a fixed interest rate and a fixed repayment period, $4 billion is a huge number if Merit does not run well during this time, it might result Merit cannot repay and even bankruptcy. B. Limited number of loans; the $4 billion is very hard to loaned from one bank so it might need loan from a group of banks, it will result Merit cannot raise sufficient money at one-time. C. Restrictive provisions; some provisions may limit the operating activities of Merit and even affect future financing capacity.

2. Pros: A. Issued stocks do not have a fixed expiration date and no reimbursement, unlike loan money from bank need to repay. B. There is no minimum cash dividend payment pressure, so Merit does not need pay additional money. C. Merit issued stocks in the primary market, faced to the public, it will attract more investors and stocks have good circulation, strong ability of stock into cash. Therefore, it is good for Merit to get more money quickly. C. Stock public offering help to enhance the visibility of Merit and expand its influence. Stock at risk sharing, if Merit does not achieve the expected gains or losses, such risks are investors to shoulder, Merit can effectively preserve their own.

Cons: A. high capital cost; in general, the cost of equity financing higher than debt funding costs, so it is a big problem for Merit to cost the capital and also with risky. B. Although Merit's excellent financial performance in recent years might their stocks command a high price in the market, but there have so much facts could effect their price, such as the government policy, people income, these facts would be damage for the stocks, reduce earning per share. C Merit issued the stocks would open their company's situation to the public, then without privacy.

3. I think that the option 1 should be recommend because Frances Mayes in 1984 had come up with a new theory