DQ1 Problem Response, and conclusion, DQ Payouts to Shareholder w9DB Essay

DQ1 Problem Response, and conclusion, DQ Payouts to Shareholder w9DB - Essay Example In a situation where the managers know that the correct value of their shares is $14.50, the best thing they should do to raise $500 million is by borrowing the money. This is because the investors will know that the price of the share is underpriced and will not be willing to buy equity. This can be explained as follows: We know the cost of borrowing is $ 0.20 per share and if the firm sells 37 million shares at a discount of $1 per share ($14.50 - $13.50), they will have to bear the cost of $37 million or, $0.27 per share (Putra, 2008). Therefore it will be advisable to issue debt in such a scenario. According to my personal opinion, if the firm has no distress costs and only tax benefits, it will issue equity only if it is overpriced. However the investors will try to buy the shares of the firm at the lowest possible price since they know that the equity is overpriced. This will result in declining the market price of the equity and the firm will not benefit at all. So it would be better for IST to issue debt in such a scenario as it will only enhance its market price. Putra. (2008, September 12). How are Earning Per Share (EPS) calculated? In Accounting Financial and Tax. Retrieved from http://accounting-financial-tax.com/2008/09/how-are- earning-per-share-eps-computed/ Repurchase Tender offers – This approach is generally used in large equity purchases. In this approach, a firm fixes the specific price at which it wants to purchase back the shares, the number of shares it wants to buy back and the time period for the offer. It further invites the stockholders who are willing to surrender their shares for repurchase by the firm (Putra, 2009). Open Market Purchases – This approach is primarily used for smaller repurchases. In this method, the firm has the liberty to decide the number of share it wants to buy back and also the time of repurchase. In this approach, the firm buys back the shares from the market itself but at the