Issuance Qs Q1) in Term Of, Issuance Essay

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Issuance Qs

Q1) in term of, Issuance Costs:

The cost of selling stock to the public list below which contains 6 categories as follow:

Gross Spread

Other direct expenses

Indirect expenses

Abnormal returns

Underpricing

Green Shoe option

Explain how will each category ( cost of issueing security) will affect raising capitals ( positively or negatively)

Gross Spread: This refers to the simple difference between the underwriting price of each share of stock (that is, the price the issuing company actually receives for the stock) and the price the underwriters offer to the public (generally the estimated market value of the stock) (Minarss, 2003; Carey, 2009). This is a cost to the company, but the profits to the underwriters provide their incentive for performing the underwriting tasks, and so this spread is necessary (Minarss, 2003; Carey, 2009).

Other Direct Expenses: Other direct expenses involved in issuing stock range from human resources costs (i.e. The labor hours involved in performing necessary audits, paperwork, communications, etc.) to fees to the exchange where the stock is to be sold to a host of other miscellaneous expenses (Minarss, 2003).

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These are simple costs to the company and do not really affect capital generation but do require capital themselves, and so they should be reduced as much as possible (Minarss, 2003).

Indirect expenses: Indirect expenses of issuing stock involve any expense that is not an actual line-item cost (i.e. direct expense) of the issuance, and so includes things like the spread and underpricing while not including any thing like exchange fees or human resources costs (Minarss, 2003; Carey, 2009). These costs are often unpredictable, and while they should be contained it is often difficult for a company to do so (Carey, 2009).

Abnormal returns: As the name implies, this cost area refers to returns on the stock price that are abnormal -- either lower or higher than expected. A lower-than-expected return doesn't really affect the capital raising of the company, or could perhaps be seen as a benefit; the company gets whatever price is agreed upon by the underwriters (Carey, 2009). A higher-than-expected return means that the company could have received more capital -- a higher price.....

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