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John Moffat.
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Syed Ahsan Ali
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1) How do we know whether the Equity or Debt finance raised by the company is beneficial to undertake or not. Do we have to calculate ratios to know whether the Equity or Debt finance would be favourable to us or not by seeing these ratios impact before & after Equity Finance or Debt finance?
2) Is it true that when the company raised new finance either by the Equity or Debt; the impact of such finance raised could be or could not be beneficial for the company which depends on a number of factors such as whether it has increased the share price of the company.
Therefore, the ratios needed to calculate to see the impact of such finance raised by the company to know whether it would be favourable to take to not are such as: Debt-to-Equity ratio has reduced; Increase in Interest Cover; Increase in EPS; Increase in PE ratio; Increase in Earning Yield & many more.
3) If these ratios indicate that equity finance or debt finance has impacted them then, it is beneficial for the company to undertake otherwise the finance simply should not be raised.
John Moffat
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1. It depends on exactly what the question asks for and what information is given in the question.
Ultimately, if the information is available, it is the effect on the share price that is the most important. The object always is to increase shareholders wealth.2. Yes it is true. Although according to Modigiliani and Miller (with tax) debt should always be more beneficial because it should decrease the overall cost of borrowing.
The ratios you state do not in themselves indicate which is the most favourable way of raising finance. The first two simply indicate whether or not the gearing has increased or decreased. The others may be useful in determining the effect on shareholders wealth, but again it depends on the information given in the question.
3. It is how the finance is invested that determines whether or not it is beneficial to shareholders. Raising finance but not investing it certainly does not benefit shareholders. The effect on the share price depends on how the finance is raised and how the additional finance has been invested.
Have you watched all of my free lectures relating to this?
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