F. Explain the role of equity securities in the financing of a company’s assets and creating company value

Question 1

Equity securities provide funds to the firm to buy productive assets, to buy other companies, or to offer to employees as compensation. Equity securities provide liquidity that may be important when the firm must raise additional funds.

Answer 1

• Securities issued to:
– Raise capital
– Increase liquidity
• Equity capital is used for
– Purchase of long‐term assets
– Research and development
– Expansion into new businesses or geographic areas
– As “currency” for Acquisitions
– Incentive compensation

While issuing equity securities can improve a company’s solvency ratios and increase the firm’s visibility with the public, the primary reason to issue equity is to raise the capital needed to acquire operating assets.

Equity securities are least likely issued to finance: inventories.

Equity securities are typically issued to finance a firm’s long-lived assets, such as equipment, and long-term projects such as research and development.

Equity capital is used for the purchase of long-term assets, equipment, research and development and expansion into new businesses or geographic areas. Book value and market value of equities are almost always valued differently. Management can only indirectly affect the market value of equity.