PRINCIPLE OF CORPORATE FINANCE

Running Head : PRINCIPLE OF FINANCE

Principle of Corporate Finance

Abstract

All corporations go through the process of issuing shares or stocks to the public to raise capital for business development or operations Raising capital in this manner is termed as equity financing since it allows the general public to become part owners of the organization Today in the United States there exist various markets and transaction procedures , which facilitate this exchange process , and a sound understanding is required about the various advantages offered by each transaction process

Issuing Public

Offering

Financial Markets the world over are classified into two types of markets the primary and secondary markets . The primary market is a market for new securities issued by the corporations to raise capital on the other hand secondary markets deal in trade of securities previously issued by corporations , transactions in the secondary market typically do not involve the corporations whose financial assets are traded between two investors

The most popular method of going public is the IPO or the Initial Public Offering method . The IPO involves a financial intermediary such as an investment bank , which underwrites the new securities i .e . buys the securities form the corporation and then resells it to investors . The investment bank assumes the risk of distributing the securities . However this process is only viable for large organization with strong liquidity position because it is extremely expensive , time consuming and risky (Undercan back out at the last moment . Alternately the corporation could use the Direct Public Offering (DPO ) process , this is similar to the IPO process except that the corporation itself acts as the underwriter . The corporation registers its securities with the regulating body itself and sells it to investors directly . The process is considerably less costly however it is quite labor intensive

Other less conventional routes to the public securities market include utilizing the Exchange Act Registration of 1934 . The organization can sell its shares privately to investors and register under the act thereby listing the securities on the NASDAQ Over the Counter Bulletin Board (OTC-BB . The OTC-BB is not a stock exchange but allows brokers and investors to quote and trade the stock . The company (private ) could also acquire major shares of a public company and become publicly listed . Ideally the public company has no assets , liabilities or operations , such firms are referred as public shells . Once the merger is consummated , the merged entity could change its name and management at the discretion of the private company . Another method o get publicly listed is through a registered spin off . Under this method the private corporation issues its common stocks to a publicly traded company , the stock sale is registered with the Securities Exchange Commission and these are distributed to the existing shareholders of the publicly traded corporation . This result in two companies with pubic shareholders , the spin off company can later list itself independently

Once the company goes public i .e . its securities are listed on the Securities Exchange Markets like the NYSE...