Why are firms likely to prefer INTERNALLY generated equity to issuing new shares of common? Identify...

Why are firms likely to prefer INTERNALLY generated equity to issuing new shares of common? Identify and briefly explain two reasons.

Expert Solution

Companies like to prefer Internally generated equity in comparison with issuing common shares. The reasons for this are as under:

1. Ownership: By issuing common equity shares, the company has to transfer its ownership to the shareholders. But in case of internally generated equity, the company can retain its ownership and outsiders can’t claim the same.

2. Risk of the takeover: In case of common equity shares, sometimes, the competitors try to buy out the company’s shares and take over a major stake in the company, resulting in a decision making a position among the board of directors of the firm. This can result in the take over of the firm by its competitors.

3. Dividends: Apart from transferring the ownership to the common public, a firm is also required to share its profit after taxes to all shareholders as dividends. In case, of internally generated equity, the firm can retain this cash flow and reinvest it further.

jeff jeffy answered 2 years ago

Discuss why more firms are turning to internally generated funds to finance new projects.

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus...

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus on capital structure? 3. What do you think of a high profit firm like Microsoft with over 200 billion of cash and marketable securities on its balance sheet, would issue debt?

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus...

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus on capital structure? 3. What do you think of a high profit firm like Microsoft with over 200 billion of cash and marketable securities on its balance sheet, would issue debt?

Explain the long-term underperformance of firms issuing equity

The cost of external equity capital raised by issuing new common stock (re) is defined as...

The cost of external equity capital raised by issuing new common stock (re) is defined as follows, in words: "The cost of external equity equals the cost of equity capital from retaining earnings (rs), divided by one minus the percentage flotation cost required to sell the new stock, (1 - F)." Group of answer choices True False

Why do you think that internally generated intangible assets should not be carried forward as assets?...

Why do you think that internally generated intangible assets should not be carried forward as assets? Justify your answer.

An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a...

An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a price of $31.30 per share and with an expectation to continue to provide a dividend of $4.75 per share. There are 50,000 preferred shares outstanding, with a 3.10% dividend, $100 par value per share, and $61.80 market value per share. Given this information, what is the company's WACC? a) 13.53 % b) 12.91% c) 13.22 % d) 12.61 % e)12.30 %

The costs of issuing common shares: a. They are recorded in a separate account (unamortized stock...

The costs of issuing common shares: a. They are recorded in a separate account (unamortized stock issue costs) and amortized over a period of no more than 10 years b. They are posted to a separate account but are not amortized unless the company withdraws the shares c. They are subtracted from the capital paid in excess (additional paid-in capital) d. They are accounted for as an expense as incurred 2. When a company issues shares (common or preferred) in...

Firms raise capital from investors by issuing shares in the primary markets. Does this imply that...

Firms raise capital from investors by issuing shares in the primary markets. Does this imply that corporate financial managers can ignore trading of previously issued shares in the secondary market?

You will provide the journal entry to record issuing of common stock shares by a corporation,...

You will provide the journal entry to record issuing of common stock shares by a corporation, record issuing of cumulative preferred stock, and record a declaration of stock split. Part 1: Company A During 2018, Company A has the following transactions involving its common and preferred stock: Issued 20,000 shares of $8 par common stock for $26 a share; brings total shares outstanding to 50,000 shares Issued 6,000 shares of $100 par, 6%, cumulative preferred stock for $150 per share...

Question

Why are firms likely to prefer INTERNALLY generated equity to issuing new shares of common? Identify...

Solutions

Expert Solution

Related Solutions

Discuss why more firms are turning to internally generated funds to finance new projects.

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus...

1. Why do firms issue debt instead of only issuing equity? 2. Why do firms focus...

Explain the long-term underperformance of firms issuing equity

The cost of external equity capital raised by issuing new common stock (re) is defined as...

Why do you think that internally generated intangible assets should not be carried forward as assets?...

An all-equity company has common and preferred shares. There are 250,000 common shares outstanding with a...

The costs of issuing common shares: a. They are recorded in a separate account (unamortized stock...

Firms raise capital from investors by issuing shares in the primary markets. Does this imply that...

You will provide the journal entry to record issuing of common stock shares by a corporation,...