Since graduation from college, you have worked at Precision Manufacturing Pty Ltd, as a financial analyst. You have recently been promoted to the position of senior financial manager, with responsibilities that include capital budgeting decisions and the raising of long-term financing. Therefore, you decide to investigate the various alternatives for raising funds. Your goal is to make sure that the benefits received from undertaking long-term projects are greater than the costs of raising the long-term funds needed to finance those projects. With this goal in mind, you decide to answer the following questions:
1. What should managers consider when making the decision whether to finance internally or externally?
2. What services does an investment banker offer to businesses that choose to raise funds in the capital market?
3. What are the benefits to the company of going public?
4. What are the drawbacks to the corporation of going public?
5. What returns can investors in the ordinary equity expect on the first day of trading if they commit to purchase shares through the IPO issue? What factors may affect the relative amount of these first-day returns?
6. Describe the following offers: (a) seasoned equity offer; (b) rights offer, and (c) private placement. In what circumstances would a company use each of these offerings to raise funds?
7. Discuss the implications of the various capital structure theories for optimal capital structure including Trade-off Theory and Pecking Order Theory.