Question

In: Finance

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?

Solutions

Expert Solution

Shares are always issued in the primary market. Investors owning those shares can buy or sell shares with other potential investors in the secondary market. The secondary market trading cannot be ignored as it gives a indication of the firm's share value as perceived in the market.

For example, if the firm issue a share at face value $10. This share is purchased by an investor who after one year is ready to sell it to someone else in the secondary market. Whether he is able to sell the share at a profit depends on the share's perceived value in the eyes of other investors. This depends on what the firm has done within one years' time i.e. awarded some govt. contracts/ acquired a new business/ expanded in other areas/ announced dividend payout to investors. All such news increase the value of the shares in the secondary market. This creates a demand for the share and investors are willing to purchase it at a higher price than $10. So, such trading activities cannot be ignored as they give an indication of firm's shares demand in the market.

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

How are bonds utilized by investors and by a company desiring to raise capital? Primary objective...
How are bonds utilized by investors and by a company desiring to raise capital? Primary objective of the company , pros and cons of bonds, risk and return of bonds
TacosRus has decided to raise $6.665 million in the capital by issuing 500,000 new shares of...
TacosRus has decided to raise $6.665 million in the capital by issuing 500,000 new shares of common stock in a rights offering. Currently, there are 1.5 million shares outstanding. What will each current shareholder have to provide to purchase one share of this new offering?
With celebrity​ bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of...
With celebrity​ bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of the music are used to pay interest and principal on the bonds. In April of​ 2009, EMI announced that it intended to securitize its back catalogue with the help of the Bank of Scotland. The bond was issued with a coupon rate of 6.7​% and will mature on this day 38 years from now. The yield on the bond issue is currently 6.4%. At...
With celebrity​ bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of...
With celebrity​ bonds, celebrities raise money by issuing bonds to investors. The royalties from sales of the music are used to pay interest and principal on the bonds. In April of​ 2009, EMI announced that it intended to securitize its back catalogue with the help of the Bank of Scotland. The bond was issued with a coupon rate of 7​% and will mature on this day 32 years from now. The yield on the bond issue is currently 6.45​%. At...
Discuss why the secondary markets are critical to firms who want to raise capital given that...
Discuss why the secondary markets are critical to firms who want to raise capital given that firms raise capital in the primary markets and not the secondary markets. To get full credit, you need to clearly explain your answer. Note that while there is more than one viable reason, you need to only address one reason – just address it well.
Discuss why the secondary markets are critical to firms who want to raise capital given that...
Discuss why the secondary markets are critical to firms who want to raise capital given that firms raise capital in the primary markets and not the secondary markets. To get full credit, you need to clearly explain your answer. Note that while there is more than one viable reason, you need to only address one reason – just address it well.
Describe the sources of capital and how firms raise capital
Describe the sources of capital and how firms raise capital
CSL Ltd is considering issuing additional ordinary shares to raise capital for developing and manufacturing a Covid-19 vaccine
  CSL Ltd is considering issuing additional ordinary shares to raise capital for developing and manufacturing a Covid-19 vaccine. The company is expected to pay a dividend of $0.50/share at the end of year 4 and dividends will grow at a constant rate of 3% per annum forever. CSL Ltd has a beta of 1.5. Long-term treasury bonds are yielding 4% per annum and the long-term return of the ASX200 (i.e. the market portfolio) is 10% per annum. a) Using...
Imagine you're creating a venture capital fund and you need to raise capital from investors (your...
Imagine you're creating a venture capital fund and you need to raise capital from investors (your prospective LP's) to invest in private companies. How would you pitch your fund - what is your overall strategy/philosophy of investing (how are you going to find companies to invest in and what will you be looking for), How much capital do you have to raise to execute that strategy, and why should the prospective investors give you their money.
Financing Goals Small firms tend to raise funds from private investors and venture capitalists. As these...
Financing Goals Small firms tend to raise funds from private investors and venture capitalists. As these firms grow larger, they focus more on raising capital from the organized capital markets. Explain why this occurs.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT