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.

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

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