Question

1-According to M and M proposition 1 and 2, discuss the factors that will influence the capital structure of a public listed company.

- Reduce conflict between manager and shareholder, so can reduce agency cost.

- Asynmetric information between issuer and merchant bank

-M and M admit that with corporate tax, Tax saving due of increase debt.

- Finance Distress cost, occus when promises are broken as result of having too much debt.

- Transaction cost in arbitrage proses.

2- Why timing, current gearing ratio and dilution of share are important when we do financing. (300words)

Answer 1

Timing ,Current Gearing ratio and dilution of share are important when we do financing. Each have its own importance while financing.

Timing is most important for doing finance. It should be done at proper time with all proper requirements and within a limited time. In such a case we can reduce our time with using appropriate requirements and gaining maximum profits.

Gearing is the amount of debt – in proportion to equity capital – that a company uses to fund its operations. A company that possesses a high gearing ratio shows a high debt to equity ratio, which potentially increases the risk of financial failure of the business. Gearing ratios measure a company’s level of financial risk. A company with a low gearing ratio is generally considered more financially sound.

Dilution is important for investors to take a closer look at how dilution happens and how it can affect the value of their shares.When a company issues additional shares of stock, it can reduce the value of existing investors' shares and their proportional ownership of that company.

Therefore Timing, Gearing ratio and dilution plays a vital role in finance.