CORPORATE FINANCE (LL)-W/ACCESS
CORPORATE FINANCE (LL)-W/ACCESS
11th Edition
ISBN: 9781259976360
Author: Ross
Publisher: MCG
Question
Chapter 14, Problem 1CQ
Summary Introduction

To discuss: The rules to follow while making financing decisions and the ways to create valuable financing opportunities

Introduction:

Financial decision mainly depends on maximizing the wealth of the value of shareholders.

Expert Solution & Answer
Check Mark

Explanation of Solution

The main rule to follow while making financing decisions is that the firm should accept financial proposals only when it has positive net present values. The financing decision includes the quantum of debt and equity to be sold, dividend decision, and the time for sales of debts and equity.

The ways to create value through financing opportunities:

Fool investors:

Many theories suggest that it is difficult to fool the investors on a consistent basis.

Increase the subsidies and reduce the costs:

To increase the value of the firm, the firm can use securities. The usage of securities tends to reduce the firm’s tax burden. Irrespective of tax burdens, the firms incurs more costs like bankers, lawyers, and accountants. Packing securities helps to reduce these costs and helps to increase the value of the firm.

Creation of new security:

The firm can create new securities as it is beneficial to the unsatisfied investors. This is because creating a new security at a favorable price will increase more number of investors.

Conclusion

Thus, the financial decision and financing opportunities play a vital role in the market. The managers of the company must concentrate on the creating the value of the firm, rather than trying to fool the investors.

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Similar questions
  • How does a firm's dividend policy reflect its approach to financial decision-making, and what are the two primary strategies discussed in this context? A. Explain the concept of treating dividends as the residual part of a financing decision. B. Outline the key characteristics and principles of an active dividend policy strategy. C. Compare and contrast the implications of these two strategies on a firm's overall financial management. D. Provide examples illustrating situations where each strategy may be suitable for a firm. E. Assess the potential impact of a firm's dividend policy on investor perceptions and shareholder value.   Choose the correct options (A, B, C, D, or E) to complete the statement, considering the various aspects of a firm's dividend policy and its significance in financial decision-making.
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    Given asymmetric information between investors and managers, )How would investors interpret firm’s decision to finance through debt? )How would investors interpret firm’s decision to finance through equity? )How would investors interpret firm’s decision to buy back its equity? )Given the signaling theory above, what is the implication on firm’s financing preference (hint: pecking order hypothesis)?
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