BMB 655 Module 9 Milestone Three Example

Funding Plan and Capital Structure, 2026-2028

[Student Name]

Southern New Hampshire University

BMB 655: Music Business Finance

Milestone Three

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Funding Plan and Capital Structure, 2026-2028

Introduction

The publisher has committed to a catalog purchase and is considering further investments over the next three years. This milestone estimates how much money those plans require and when, compares the ways the company could raise it, and recommends a funding plan and a debt policy. The owners, three songwriters who founded the company, have said they want to keep control and have no plans to sell, which shapes the recommendation as much as the numbers do.

Funding Needs

Planned uses and sources, 2026-2028, in thousands of dollars

The credit line is capacity rather than a permanent use, so the true permanent need beyond what is already arranged is about $1.4 million, almost all of it for the possible second catalog in 2028.

Option One: Internal Cash

After loan payments, the company expects to generate about $1.5 million of cash over the three years, rising as the acquired catalog's income arrives. That is enough to fund advances and the startup stake and to rebuild cash after the purchase, but not to buy a second catalog in 2028 without new money. Internal funds cost nothing in control and carry no repayment risk, though they have an opportunity cost: cash spent on advances is not available for acquisitions.

Option Two: Catalog-Secured Debt

Specialist lenders will lend against music catalogs at roughly 40 to 50 percent of appraised value. With the founders' songs and the acquired catalog together worth perhaps $25 million or more, the company's borrowing capacity far exceeds its needs. The current loan costs about 7.75 percent, or about 5.8 percent after tax at a 25 percent rate. Brealey et al. (2020) explain that the tax deductibility of interest makes debt cheaper than equity, but that each additional dollar of debt raises the risk that a downturn will make payments hard to meet. For a company whose income depends on streaming payouts it cannot control, that risk deserves weight.

Option Three: Outside Equity

A music investment fund has offered $6.5 million for 25 percent of the company, implying a value of $26 million. The fund would take two board seats, require approval for acquisitions and new debt, and expect to sell its stake, or the whole company, within seven years. Damodaran (2012) notes that investors of this kind price their required return into the deal; based on the fund's stated target, its implied cost of equity is about 12 percent, more than twice the after-tax cost of debt. The cash would fund a second catalog without borrowing, but the conditions conflict directly with the founders' wish to keep control and never sell.

The Recommended Plan

Myers (1984) argued that firms rank their money sources, drawing on retained cash before borrowing and selling new shares last, since outsiders who know less than the managers price that gap into what they pay. That ordering fits this company well. The plan is to fund advances and the startup stake from internal cash, keep the $400,000 credit line for seasonal gaps and, if a suitable second catalog appears in 2028, finance about 70 percent of it with an extension of the catalog loan and the rest from cash. The fund's offer should be declined politely, with an invitation to talk again if a much larger opportunity arises.

Debt Policy

The company will keep total debt below three times its operating cash earnings, keep coverage of debt payments by operating cash flow above 1.5 and hold at least $600,000 in cash outside the credit line. Under the base case, debt would peak at about 2.6 times operating cash earnings after a 2028 purchase, within the limit. A 15 percent fall in streaming income would push the ratio to about 3.1 and coverage to about 1.4, which would trigger a pause in new advances and acquisitions until the ratios recovered.

Risks of the Plan

Relying on debt concentrates one risk: if royalty income falls sharply while loan payments stay fixed, the company could breach its lender's covenants. The catalog loan requires coverage above 1.25, below the company's own limit of 1.5, so the company's policy leaves a buffer before the lender's rule binds. A second risk is interest rates: the loan's rate resets in 2031, and a rise of two points would add about $40,000 a year to interest at the expected balance. A third is concentration of lenders: the company would rely on one specialist lender, so it should obtain a second quote before any 2028 extension. Taken one at a time, these exposures do not overturn the recommendation, though each carries a named response: the coverage buffer, a rate cap if one can be bought cheaply, and competitive quotes.

When Equity Would Make Sense

Outside equity would become worth considering if an opportunity arose that the company could not finance within its debt policy, such as a catalog costing $8 million or more, or if the founders' goals changed, for example if one wanted to sell part of his stake. In either case, a minority investor with no forced exit, such as a family office, would fit better than a fund with a seven-year horizon.

Conclusion

The company needs little new money beyond its existing loan unless it buys a second catalog. Internal cash and catalog-secured debt meet its needs at the lowest cost and keep control with the founders, provided it observes clear debt limits. Equity is reserved for a much larger opportunity or a change in the owners' goals. The final project will bring this plan together with the company's projections and test it against a weaker streaming market.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (3rd ed.). Wiley.

Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 574-592. https://doi.org/10.1111/j.1540-6261.1984.tb03646.x