Question

When businesses think about issuing stock, there are many things to think about. The sound of getting large amounts of money into the firm with relatively few strings attached is quite appealing to many companies, but what are the drawbacks of relying on equity financing? In this exercise you will be evaluating the consequences of issuing stock. Stocks are shares of ownership in a company. A stock certificate represents stock ownership. It specifies the name of the company, the number of shares owned, and the type of stock it represents. Today, stock is generally held electronically; that is, the owners don't get a paper certificate unless they specifically want to hold the certificates themselves. Select whether each characteristic is an advantage or disadvantage of issuing stock, from the standpoint of the issuing company.

1. Dividends Advantage Disadvantage

2. Future buy back Advantage Disadvantage

3. Net profit after taxes Advantage Disadvantage

4. One vote per share Advantage Disadvantage

5. Repaid Advantage Disadvantage

6. Shareholders Advantage Disadvantage

Answer 1

Advantages=Dividends, Repaid, Future buyback

Disadvantages=One vote per share, Net profit after taxes and Shareholders

The main advantages of issuing stock include the payment of dividends and it increases the credibility and goodwill of the company and it causes the stock of the company to increase in terms of its price. This also has the benefit of buying back in the future and facilitating the monetary supports at present. However, by issuing the stocks, the company also faces the loss of voting rights as each share has a voting right equal to its proportion, an increase in the number of shareholders will result in greater complexities in managing them.