Question

this is for my "advanced corporate finance" class i need a broad and clear explanation please..

In 1983, Stewart Myers raised the question about how market inefficiencies may affect capital structure choices. Pushing these issues a bit further, how do advocates of the “Windows of Opportunity”story suggest how equity and bond market conditions may affect managers’ choices of whether and when to issue debt and equity? What sort of historical evidence do we have that stock and bond market conditions do affect decisions about when the firms issue debt or equity in primary markets?

(please do not give me a hand written answer. its a bit difficult to read)

Answer 1

Ans. So when there is a need for raising money for investment in future capacity or for any purpose, the question arises that how to raise that money whether throuh debt offering or the equity offering.

The answer is very simple as which will be cheaper to issue and will get them their desired amount with less constraints( like servicing debt etc.).Usually when a company is generating positive cash flow then the best way to raise money is through a debt issue provided the bond market is fairly valued.But when you take debt,your balance sheet becomes highly leveraged which might be reason for the downgrade rating of that firm.

So equity issue will be a good option if the market is very efficient and you can get fair value for your equity offered in the primary market.