Corporate Finance Horseshoe Corporation

Question: Discuss about theCorporate Financefor Horseshoe Corporation. Answer: Introduction:- Horseshoe Corporation is planning to issue the fresh capital by issuing common stock. Initial public offering is a difficult process. The corporation is intending to make the public issue and the desired process for issuing the shares is underwriting cash offer. The company shall appoint the underwriter in accordance with the Maldives stock exchange. If the entity is to underwrite the issue, then there is a need on its part to furnish the financial capabilities to purchase the shares. The corporation underwriting should be an institutions that is duly authorized to underwrite the securities by capital market development authority. Underwriting Cash Offer for Raising Equity Capital:- If the company is making the public issue through the process of book building, the issue needs to be underwritten by the runner of books. The corporation needs to enter into the underwriting agreement with the book runner and subsequently the book runner would enter into the underwriting with the syndicate members. The corporation should also indicate the number of securities to be issued in the event of the description in the issue of the shares and specify the predetermined price. If the syndicate members do not fulfill the underwriting agreements, the runner of book shall fulfill the obligations of underwriting. The syndicate member and the book runner shall not subscribe to the issue except the manner for fulfilling the obligations of underwriting. Before the opening of the bids, the copy of the agreement with the syndicate members shall be filed with the boards. The lead book runner or the merchant banker shall undertake the underwriting obligations in the event of every underw ritten issue. This has to be done as per the specification of the Maldives stock exchange. The obligation of underwriting will be for the entire hundred percent of the offer through the document. This should not be restricted to the minimum subscription level (Fernando et al., 2015). In case of right issues if the company once announced the rights issue could not cancel it except with the permission of Maldives stock exchange. The permissions will be granted by the stock exchange except in the case where trading has not taken place between the date on which the right issues has been announced and on the date on which the variation or cancelation is made (De Carvalho et al., 2015). The cost of underwriting is most important item in the total initial public offering cost .The shares issued as an underwriting cash offer and the entity having the underwriting services would be able to build the relationship that would help in improving the probability of securing the current and future business with the firm. Cost reduction under underwriting are more pronounced as the financing cost are reduced. The relationship between the underwriter and the entity receiving the underwriter services will help in reducing the cost of financing by way reducing the fees (Dubovyk Chala, 2013). The company gets the assurance of the success of issue as the underwriter takes over the risk of uncertainty of the public issue of shares of the company. They play and active role in underwriting of the shares of the public corporation. Issue of Shares by offering Rights to Shareholders:- Another mode of equity financing is to offering rights to the current shareholders directly. In such procedure, companies offer its current shareholders to purchase the new shares directly in proportion to the numbers of shares, held by the individual shareholders. The new shares are offered the shareholder at lower rates in comparison to the prevailing market price. The existing shareholders are not obliged to accept the offer. Moreover, they are free to trade the newly acquired shares in the stock market (Fong Lam 2014). Companies use to follow this practice for various reasons. By offering rights to the existing shareholders directly, the company can reduce the cost of issuing new shares and do not have to bear any underwriting fees for the same. In the time of economic depression, the investors do not want to invest in new stocks. The underwriting agencies also ignore to take risk of selling of new shares. In such circumstances, raising equity capital through offering rights to existing shareholders can be proved very beneficial (Massa et al., 2013). However, it has been noticed that sometimes this procedure may create negative impact in the market. The stakeholders of the company may think that the financial condition of the company has become unstable and therefore, it is offering its new shares at a discounted rate. Moreover, if most of the existing shareholders would sell their shares in the market, then the value of the outstanding shares would be diluted. It may affect the current market price of the price quite significantly (Holderness Pontiff 2016). Recommendation:- The primary objective of Horseshoe Corporation is to raise equity capital. The corporation can fulfill its objective either by underwriting cash offer or by offering rights to existing shareholders. However, the corporation may not be able to sell all the new shares to its existing shareholders, as; many of them may not accept the offer. Whereas, in underwriting cash offer, if the underwriter cannot sell all the shares in public, then the company may force the underwriter to purchase the balance number of shares through firm commitment deal (Chen Wu, 2015). Hence, it can be stated that if the corporation wish to raise capital only, then the underwriting cash offer will be more preferable and secure. However, the management of the company wants to maximize the wealth of the current shareholders as well. In that case, if the corporation issue new shares through underwriting cash offers, then, as discussed earlier, the value of the current shares will be diluted and the stock market price of the company will fall downwards (Ginglinger et al., 2013). On the other hand, if the existing shareholders accept the rights, offered, and do not re-sell the rights in the market, then the market price of the stocks will not be affected so highly. Moreover, as the numbers of shares under each existing shareholder will increase, they will get higher amount of dividends. Hence, it can be stated that if Horseshoe Corporation wish to fulfill both the objectives, then it should offer rights to its existing shareholders, as through this process it can raise capital, as well as, maximize the current shareholders wealth. References:- Chen, H. C., Wu, S. C. (2015). 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