Question

Answer 2 of the following 4 discussion questions below. thanks

1. Discuss the benefits of a public company vs a private company.
2. Explain the process in determining if the company should buy or lease its new building.
3. As an investor, when would convertible preferred stock be an attractive investment?
4. Explain the use of futures contracts in limiting your risk in a sale of equipment to a German buyer

Answer 1

a) Benefits of the public company versus a private company.

Public company raises funds by issuing shares to the general public while the private firms raise funds with the help of few investors who are willing to invest in the company. also private company can increase its funds by simply selling more shares in the market whereas in case of private company the funds cannot be easily expanded unless the investors are willing to.

One of the disadvantages of public company is that it needs to pass through a lot of regulations setup by either the central bank or any such Institutions which regulate the the public companies.

So though the overall structure and functioning of private and public companies is the same the method of raising funds is different in both of them one raises funds through general public while others raises funds through few investors

b) In order to determine whether the company should buy or lease the building the main factors to be kept in mind are

cash flow analysis while taking the decision to buy or lease the building the company should take into consideration the cash flow analysis if the company is inclined towards a hefty payment now on less in the long run then buying the building should be preferred. But if the company is new and uncertain about about its future position , and lacks funds then it should lease the building.

Also if the company is new and does not have a good credit rating, some financial institutions would not provide mortgage facilities , so in such a case they should prefer leasing.

If the economy is in recession or the prices of real estates are declining and expected to decline in future, one should prefer leasing than buying.

Location: it is also an important determinant of such a decision. If the suitable location where one wants to set the company is not found, leasing should be preferred; otherwise if the location is perfect for the company in the long run owing to input costs etc , the firm should make a decision to buy it.

c) as an investor one would prefer convertible preferred stock as an attractive investment when one does not want say in the management or a vote in the decision making of the company. Convertible preferred stock are usually attractive for the type of investors who want to invest in the firms that are in the initial stages or growing a good rate .This is because these kind of stocks can protect them or insulates them from the volatility of a stock in case the prices fluctuate frequently and gives them an option to convert this into equity shares as per the conversion ratio as and when they believe as and when they believe that its profitable for them to convert into equity shares and have a say in the management of the company

d) Future contracts are a type of derivative which help in limiting the risk due to foreign exchange fluctuations in future a future contract is basically an arrangement when two parties decide to buy or sell an asset at some Fixed time in future. This is done to limit the risk and fluctuations in price . In this case use of future contract would limit the risk if the prices in future are less than the current ones and the seller would incur loss. So by buying the future of the commodity in which trade is done or a similar commodity the risk can be reduced.

(You can comment for doubts)