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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Analysis of financing corporate growth

Assume that the president of Elkhead Brewery made the following statement in the Annual Report to Shareholders:
The founding family and majority shareholders of the company do not believe in using debt to finance future growth. The founding family learned from hard experience during Prohibition and the Great Depression that debt can cause loss of flexibility and eventual loss of corporate control. The company will not place itself at such risk. As such, all future growth will be financed either by stock sales to the public or by internally generated resources."
As a public shareholder of this company, how would you respond to this policy?

To determine

Concept Introduction:

Financing decision is one of the crucial decisions to be made by the management. It analyses different sources of finance available considering cost of financing, risk involved, and level of control.

To Analyse:

The policy as a public shareholder.

Explanation

Sale of stock:

Sale of stock is considered a good option because it doesn't require repayment as in case of loan which can be particularly important if business don't generate profit,

As a public share holder, we can prefer stock sale over loan as it will reduce risk of business and increase profits available for equity shareholders.

Using Internally generated resources:

Using internal resources or retained earnings is considered as safest mode of financing for a business, as it does not involve any explicit cost...

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