Question 2 10 marks Suppose that your company would like to

Question 2 (10 marks) Suppose that your company would like to raise $10 billion of funds by issuing new shares. After reviewing the financial needs of the company, Open Bank, the investment bank of your firm, recommended to use public offering to raise the required capital (10 marks) Discuss two advantages and two disadvantages of public offering in equity inancing.

Solution

Advantages:

Point 1) Equity is an interest-free financing. The company doesn’t have to pay interest, which reduces net income, but can pay dividend if there is substantial amount of net income. This thing eliminates the burden of interest payment.

Point 2) There is no repayment burden. The amount acquired through equity issue is done forever; there is no necessity of repaying of such after some time.

Disadvantages:

Point 1) Equity issue distributes ownership rights. The original owner must lose ownership rights, suppose after the equity issue it goes down by 20%. Distribution of profit may be difficult in this scenario.

Point 2) Equity issue reduces control in operation, because shareholders having higher number of shares may execute their power in the management.