One of the three sources of capitol a firm has is offering new equity (stock) to the public. Unlike debt, companies do not have to repay the money raise. So why would a company borrow money instead issuing new stock?
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One of the three sources of capitol a firm has is offering new equity (stock) to the public. Unlike debt, companies do not have to repay the money raise. So why would a company borrow money instead issuing new stock?
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- Which of the following statements is true? a. High liquidity means a company is short on cash and may be unable to pay its debts.b. When a company decides to go public through an IPO, it is typically targeting to sell its shares to only a handful of shareholders. c. If the company has a higher than expected extremely high profit this year, equity holders will benefit more than debt holders as debtholders are the residual claimers for the cash flows of the company.d. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.e. Equity holders expect to receive dividends and the firm is always legally obligated to pay them.Which of the following is a disadvantage of a company going public? Going public mandates compliance with ongoing SEC disclosure requirements. The amount of equity capital that can be raised in the public equity markets is typically less than the amount that can be raised through private sources. A company can raise equity capital only once by going public. There are millions of investors in public stock markets, and it is not easier for firms to reach these investors through public markets.3. Which one of the following statements is NOT true? A) Retained profits represent a free source of funds. B) The issuing of shares to raise finance can be expensive. C) Retained profits are the main source of business funds. D) Borrowing can increase the risk that a company faces.
- If the stock market is efficient, why do companies manage their earnings? O To avoid violating debt covenants. O To receive bonuses based on reported earnings. O Because companies do not believe the Efficient Market Hypothesis. O All of the above.Many companies that go public with an IPO don’t actually need additional cashto continue growing their operations. Why might such a firm decide to go public?True or False: Private equity investors can easily sell or exchange their investments for cash anytime? True or False: Private equity firms only invest in small companies? True or False: Everything else stays the same. If a company's gross debt amount increases, its equity value decreases?
- David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Now assume that Firms L and U are both subject to a 25% corporate tax rate. Using the data given in part b, repeat the analysis called for in parts b(1) and b(2) using assumptions from the MM model with taxes.David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: d. Suppose that Firms U and L have the same input values as in Part c except for debt of 980,000. Also, both firms have total net operating capital of 2,000,000 and both firms are expected to grow at a constant rate of 7%. (Assume that the EBIT in part c is expected at t = 1.) Use the compressed adjusted present value (APV) model to estimate the value of U and L. Also estimate the levered cost of equity and the weighted average cost of capital.A firm is planning to borrow money to make an equity repurchase to increase its stock price. It is basing its analysis on the fact that there will be fewer shares outstanding after the repurchases, and higher earnings per share. There are no taxes. a. Will earnings per share always increase after such an action? Explain.b. Will the higher earnings per share always translate into a higher stock price? Explain.c. Under what conditions will such a transaction lead to a higher price?
- 1. What do you think the consequences might be in financial markets if individuals consumed more of their incomes and thereby reduced the supply of funds available to financial institutions? 2. Stem Corporation received confirmation that all its PSE listing requirements were in order, and that it may proceed to issue its stock. The company plans to raise P500 million on the stock issue. On what market do you expect this stock to be traded? Would this transaction take place on the money market or the capital market? 3. Over the past 100 years, the level of government regulation of financial institutions and markets has ebbed and flowed or, as some economists might argue, has ebbed and flooded. Although the laws and regulatory agencies created by the government have various defined and not-so-well defined goals, what might you argue is the single biggest benefit of government regulation?The company cost of capital depends on current profits and cashflows, which measures what investors require from the company: A) True B) False Corporate debt can be dependable or risky, which depends on the value and the risk of the firm's assets. Bondholders can take steps to eliminate default risk: A) true B) FalseWhich of the following statements is FALSE? O A. Public companies typically have access to much larger amounts of capital through the public markets. B. The two advantages of going public are greater liquidity and better access to capital. OC. The process of selling stock to the public for the first time is called a seasoned equity offering (SEO).
