In the late 1990s the Internet explosion sent the share values of well-known Internet companies soaring. Many of these companies took advantage of the high prices by making major share issuances and using the funds as their major source of financing. Lycos collected $111 million from a 1998 issuance; Yahoo! Collected over $800 million over a three-year period; and America Online topped them all, collecting over $1 billion. While each company used the proceeds a little differently, they all used some of it to reduce debt, update equipment, and increase current assets.
REQUIRED:
a. Describe how the issuance of stock to reduce debt, update equipment, and increase current assets affects the fundamental accounting equation.
b. Explain how the issuance of stock could increase a company’s credit rating.