Corporate Finance: Goods Or Services Essay

Questions:

1. Elaborate more about "why economies of scale are one of the reasons of lower issuance debt cost" (hilighted in red font). Please write 1 additional page for this point.
2. Write more: Analyse more reasons/advantages of rights offering.Structure the answer according to these reasons. Please write 2 additional pages for this.

Answers:

1. Economies of scale are referred to that situated when more amounts of goods or services can be produced at a less input costs. This also means that a company is able to grow and produce more number of units and has a better scope for decreasing its costs. The lower issuance debt cost has been evident in from of internal Economies of scale. The advantage of this in terms lower issuance debt cost may be seen to occur due to several reasons. The primary reason behind this may be due to Specialization and division of labour. The company may be able to save a considerable amount of resources, as the workers will be requiring little training. In several cases, the lower issuance of the debt cost due to the economies of scale may be evident with bulk buying of the items. When the items are bought in large quantities then the companies are seen to provide a considerable amount of reduction in the final payment. This in turn can be utilized to pay off any additional debts or borrowing from the financial institutions taken by the company. The advantages in terms of the lowering the debt cost has been further seen to exist due to the financial economies which is a result of more production within the company. Due to these financial economies, firms can get a better interest rate and this in turn will assists in lower issuance debt cost. The various types of the external economies of scale are further seen to assist the companies in terms of the benefits, which related to good supply networks, access to specialized labor and better availability of infrastructure. Due to the aforementioned benefits due to the economies of scale, the company will be able to get the leverage in terms of higher financial economies and lower the debt cost (Economicshelp.org, 2017).

2. Horseshoe Corporation can retain the control of the company by the issue of rights to the existing shareholders. The investors pay for the new shares that are being issued and in this way the company will be able to raise the capital. This will help the company to repay debts, acquire new assets or in some cases even save themselves from bankruptcies. The issue of rights is a preferred way of raising capital even if company is not doing well. For instance, in case the rate of interest for bank loans is high or the company is not in a situation to bear the bond rate, then raising of capital through rights issue is identified as the most appropriate measure. Horseshoe Corporation should further note that this decision will result in net profit to spread over a number of shares. This decision will further lead to reduced earnings per share and cause several changes in the cash flow of the company. However, this method of raising capital will be able to strengthen the balance of the company and the allow Horseshoe Corporation to pursue for strategic opportunities in main market (Rogoff, 2015).

One must understand the existing shareholders are not seen to suffer because of dilution as the fresh issue of the shares is seen on terms of lower amount of face value on the shares. This decrease in the value of the shares can be observed to be compensated in terms of the by getting new shares at a reduced market price. The company is further able to get a better image during the issue of the rights as the existing shareholders of the company are seen to be satisfied in terms of the possession of the shares (David Myers, 2015). It is often considered that fresh issue of the stocks to the existing shareholders often results in higher return rather than issuing of the stocks to the public. This form of the distribution of the shares is often considered to be a more fair and ethical process. The directors of the company cannot misuse the opportunity for distributing the shares among their friends and relatives at a reduced value, thereby retaining more control by offering to new shares to the existing shareholders. Some of the other benefits of rights issue is often recognized in terms of the less stringent formalities in compare to IPO. The disclosure of the internal matter of the company is further constrained within the existing shareholders of the company. Rights issue will further allow Horseshoe Corporation to raise capital without changing the percentage holding of the existing shareholders (Kaplan & Atkinson, 2015).

Reference List

David Myers CEcD, M. A. (2015). economies of scale. Economic Development Journal, 14(3), 11.

Economicshelp.org. (2017). Definition of economies of scale | Economics Help. [online] Available at: [Accessed 13 Feb. 2017].

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Rogoff, K. (2015). Costs and benefits to phasing out paper currency. NBER Macroeconomics Annual, 29(1), 445-456.

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