Raising Capital and Capital Budgeting

Business & Finance
Tutor: None Selected Time limit: 1 Day

 What are the two primary ways a company can raise common equity and why is there a cost associated with reinvestment earnings?Please provide150 words,cite,and reference.Thanks

Sep 23rd, 2015

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What are the two primary ways a company can raise common equity?

1. The first is a simple share offering. Companies sell shares often and they do this to raise capital. It can be done through an initial public offering (IPO) or through secondary offerings where the size of the offering is much smaller than an IPO. 

Read more : http://www.ehow.com/info_12075881_two-primary-ways-companies-raise-common-equity.html

2. A company can raise retained earnings and therefore common equity by generating net income. 

Read more : http://www.ehow.com/info_12075881_two-primary-ways-companies-raise-common-equity.html

why is there a cost associated with reinvestment earnings?

Cost of Retained Earnings (Reinvestment earnings)

This is kind of weird to think about. It takes some time to understand so take it slowly. After a company makes money (earnings), who owns that money? The shareholders, right? But when you retain earnings you are not giving the money to the shareholders. You are keeping it. In a way, you are investing it for them in your company. Well those shareholders want some return on that money you are keeping.. How much return do they expect? They want the same amount as if they had gotten the retained earning in the form of dividends, and bought more stock in your company with them. THAT is the cost of retained earnings. You as a financial genius, have to ensure that if you are retaining earning, that the shareholders will get at least as good a return on the money as if they had re-invested the money back into the company.

Read more: http://www.teachmefinance.com/costofcapital.html

Please let me know if you need any clarification. I'm always happy to answer your questions.
Sep 23rd, 2015

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