Question

Write a 1-2 page essay considering the types of stock you might issue if you were financing a new business corporation. In addition consider whether you would market the stock,either privately or publicly.

Answer 1

A new business corporation is generally financed by general partners in partnership. But, when the corporation starts to grow and sees better future prospects and further opportunity to grow, it is in need of capital to finance its business activities either on daily basis, periodic or one-time investment. There are different sources of financing, broadly categorized in debt financing and equity financing. We will cover only equity financing here. Equity financing can be done in form of initial public offering which have high flotation cost and have five different clauses to fulfill in order to launch its IPO. IPO is quite risky as well as a certain percentage of shares have to be sold in its IPO else the corporation have to bear loss.

Two types of stock are generally issued: preferred and common stock. Preferred Stocks are those types of stock which have certain advantages over common stocks. Preferred stocks yield preferred dividends which is pre-fixed percentage and won't exceed that limit. Preferred dividends are given to preferred stockholders before common stockholders. Preferred stockholders don't have voting rights. Common stocks are other type of stocks which gives dividend after preferred dividends are paid to preferred stockholders. Common stockholders have the voting rights.

Private Placement is another option of raising capital. In this system, a certain amount of shares are issued to few existing stockholders which has been profitable for the corporation from last few periods. NPO i.e. New Public Offering is done when corporation has successfully launched its IPO ( Initial Public Offering) and is willing to issue new stocks to public.

In this case, a mixed approach of NPO and private placement will be beneficial. Private Placement will strengthen the existing relationship with stockholders and NPO will help to procure new stockholders and share the risk. Common stocks will be issued in NPO as a new business corporation is generally not stable and it's wise to share the risk with stockholders by common stock. The dividends of common stock will move accordingly to the financial performance of the new business corporation.