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1. in the textbook it says that ‘wacc caused by the increase in financial risk and keg’
what is it mean by keg ? ke is cost of equity and kd is the cost of debt…. i’m not sure what is keg
2. for rights issue, it is the issue of shares to a company’s existing shareholders at a discounted price. Therefore isn’t it obvious that more quantities of shares lead to dilution ? but why the textbook says that “existing shareholders’ control is not diluted for the rights issue” in the section for specific equity financing option ?
3. in one of the way that managers act in the interest of shareholders than debt holders. The textbook says that managers try to hide the problem by cutting back on research and etc but from creditors’ point of view, it is better for them if a firm goes bankrupt(if the firm is going to be bankrupt) quickly. But what is the benefit for shareholders if the firm delays that bankruptcy ?
4. is there a difference between agency effect and agency relationship ? isn’t the same ?
1. Keg is the geared cost of equity.
2. Given that it is the same shareholders owing the shares, there is no loss of control (i.e. voting power in the company) – they will still own the same % of the total shares.
3. There eis not necessarily a benefit for shareholders. It is more likely that the managers are trying to protect their own positions.
4. Effectively it is the same. The relationship is the connection, the effect is the result it has, but it is a small distinction.
Thank you for answering other questions.
I just have some doubts in the number 2for the number 2,
– then shares will only be diluted when rights issue are offered to new shareholders ???– if not then when will shares be diluted ???
i really appreciate your help John ! !
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