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Chapter 5: Q6DQ (page 493)

Discuss the benefits accruing to a company that is traded in the public securities markets.

Short Answer

Expert verified

A publicly-traded company can develop new products and acquire assets by gathering funds from security markets.

Step by step solution

01

Securities market

Securities market is a place where financial instruments are traded. It includes the sale and purchase of debts such as bonds and equity such as stocks

02

Benefits of trading publicly

A company can enjoy the following benefits of trading publicly:

  • A company can raise funds quickly and can improve its cash flow.
  • The capital raised by the company helps it to reduce itsdebts.
  • The collection of funds facilitates companies to grow and expand their operations.

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Most popular questions from this chapter

What are some specific features of bond agreements? (LO16-1)

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

a. Calculate the present value of total outflows.

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

Under what circumstances would a call on a bond be exercised by a corporation? What is the purpose of a deferred call? (LO16-3)

What was the primary purpose of the Securities Act of 1933?

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