Unit 4 Discussion Board

Unit 4 Discussion Board
Anne Mackintosh
Applied Managerial Finance
Professor Yvan Nezerwe
December 15, 2015

When it comes to issuing equity for additional financing, a company must understand the costs that come with this action.   In most cases, companies raise new capital by issuing more common stocks.   The issuing of common stocks can be done privately or publicly.   For efficient reasons, many companies choose to sell their stocks publicly.   When a company first issue common stock to the public it is called an Initial Public Offer (IPO).   When it comes to issuing securities to the public, underwriters are involved.   Underwriters are investment firms that act as intermediaries between a company selling securities and the investing public (Ross et al, 2013).   They perform services such as formulating the methods used to issue stocks, pricing new securities, and selling new securities.   Underwriting involves a lot of risks, and to manage it many underwriters work together in groups called syndicates.   Now lets take a look at some the cost that come with issuing equity.
Costs Associated with Issuing Equity

Gross Spread: Gross spread is compensation paid to the underwriter. It is the difference between the underwriters’ buying price of the new security and what the underwriter resells the new security for.
Green Shoe (Overallotment Option): This is when underwriters are allowed to purchase additional shares from investors at the offering prices.
Direct Expenses: These are expenses that a company has to pay.   These expenses include filing fees, legal fees, and taxes.
Indirect Expenses: These are expenses that deal with management working on the new issuing of securities.
Abnormal Returns: When stocks are seasonal issued, the price of existing stocks drop.
Underpricing: In this case stocks are sold below price and losses occur.

Advantages of Issuing Equity
Fixed Cost Unchanged by Equity Capital: Financing by using equity does not have fixed payments...