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Chapter 5: Q7DQ (page 493)

What are the disadvantages to being public?

Short Answer

Expert verified

When a company trades publicly, its management faces a loss of control and an increase in liabilities.

Step by step solution

01

Trading

In financial terms, trading refers to the process of buying and sellingsecurities. The securities include debt, equity, derivatives, and hybrid securities.

02

Disadvantages of being public

Following are the disadvantages of being public:

  • The management of the company may lose its control.
  • The process of public trading is expensive and time-consuming.
  • More attention is paid to the dilution of equity.

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Most popular questions from this chapter

Discuss the reason for the differences between underwriting spreads for stocks and bonds.

Becker Brothers is the managing underwriter for a 1.45-millon-share issue by Jay’s Hamburger Heaven. Becker Brothers is “handling” 10 percent of the issue. Its price is \(27 per share, and the price to the public is \)28.95.

Becker also provides the market stabilization function. During the issuance, the market for the stock turns soft, and Becker is forced to purchase 50,000 shares in the open market at an average price of \(27.50. It later sells the shares at an average value of \)27.20.

Compute Becker Brother’s overall gain or loss from managing the issue.

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

In \( millions
In \) millions

Current assets

\(70

Current liabilities

\)30

Fixed assets

\(70

Long-term liabilities

\)30

Total liabilities

\(60

Stockholder’s equity

\)80

Total assets

\(140

Total stockholder’s equity and liabilities

\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

c. Compute total debt to total assets on the original and revised balance sheets.

What are three forms of corporate securities discussed in the chapter?

Discuss the relationship between bond prices and interest rates. What impact do changing interest rates have on the price of long-term bonds versus short-term bonds? (LO16-2)
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