Question

a) Discuss the advantages of shelf registration. Try to find an example in US which did shelf registration and provide reasons highlighted by the Company.

b) Briefly describe the traditionalists’ position on capital structure

c) Briefly discuss bankruptcy costs – please provide in addition shortly an real life example from the past to demonstrate effects of bankrupcy.

Answer 1

1. The advantages of self registration are discussed below-

i) It allows a comapny to perform its registration procedure early enough, making it easy to issue securities fast when there is a need for funds and when there are favourable market conditions.

ii) It enables a comapny to have immediate access to the amrket without having to wait for the a clearance from the securities exchnge.

iii) it offers a comapny a change to take advantage of the window when the performance of the company stock is strong or when the capital amrket window is strong.

SafeStitch Medical Inc., a manufacturerof robotic surgical technology, used shelf registration to prepare new offerings to correspond with the launch plans f a new product. When shelf registrations were expanded pursuant to the release of a new product line, the market responded with a 10% increase in the share value. Even though the risk of share dilution was present, market responded to the favorable news regarding the oending technological advancement.

2. There is nothing called traditionalist's position in capital structure. However, I can explain the traditional theory of capital structure- it says that any company or investment there is an optimal mix of debt and equity financing that minimises the WACC and maximizes value. Under this theory, the optimal capital structure occurs where the marginal cost of debt is equal to the marginal equity.

3.When an organisation is unable to honour its financial boligations or make payment to its creditors, It files for bankruptcy. A petition is filed in the court for the same where all the outstanding debts of the comapny are measured and the paidout if not in full form the company's assets.

Example:- Apple. Its hard to believe that the world's largest company by market capitalization was once in dire condition. While never actually filing for the bankruptcy, Apple was on the verge of going bust in 1997. At the last minute, Microsoft invested $ 150 million investment and saved the company.