How should I reply?

Question 1

Par value is the face value of the stock, not the market value. Par value is determined when the company is incorporated, and is the minimum amount a corporation may accept for a share of stock. Harry and Lloyd have the option of issuing no-par stock, which can be sold for whatever price the board of directors determines, or the market price. In this instance, neither Lloyd nor Harry is correct, but they can use either method to determine the par value of the stock. It would be in their best interest to go with the lower number because they may be liable for any difference if par value is greater than market value.

Question 2

The advantages of an IPO are several. If a corporation has a lot of debt, it makes sense to raise money by issuing stock, instead of taking on more debt. There are costs associated with issuing stock, but they are less than interest payments on debt. An IPO can also raise awareness of the corporation by bringing in new investors, and stock can be used as a form of compensation. Finally, the price of stock can increase, which results in additional revenue.

The disadvantages of an IPO are also several. The price of the stock can decrease which would result in a loss to the shareholder. By issuing an IPO, Harry and Lloyd are diluting the ownership of the corporation. The more owners there are, the less equity each has in the corporation. The risk of an IPO is that the stock can be undervalued, which would result in less capital than a company could have received. The corporation could have an insufficient number of purchasers, resulting in insufficient capital being raised. A public firm falls under the SEC, which has continuing disclosure requirements. Additionally, when a firm is an issuer, it releases information to the public that may be proprietary and of interest to competitors.

Question 3

Preferred stock is typically non-voting stock that less risky than common stock. The business has specific liabilities to preferred stockholders. Preferred stock generally attracts more conservative investors. The business usually details what it owes to preferred stockholders in its articles of incorporation. The first of which is typically the dividend payments. Preferred stockholders are entitled to a dividend before anything is distributed to common stockholders. If the company were liquidated, preferred stockholders would be entitled to share in a distribution of the assets before other classifications of shareholders.

Question 4

Selling corporate bonds also has pros and cons. One of the advantages of issuing debt is that Lloyd and Harry won't be giving away ownership of the company. Bonds are typically less risky than stock. Bonds are given a rating prior to issuance, which lets potential buyers know the risk of purchasing the stock ahead of time. Bonds can be issued for varying amounts, payment terms, value, and other factors, so they create more flexibility for companies. The bond market is also larger than the stock market, so they can attract more investors. Harry and Lloyd and also make the bonds "callable" which means that they can make the investor sell the bonds back to the corporation at a premium cost. Bonds can also be convertible to stock, and interest payments made on the debt can be tax deductible to the corporation.

Bonds are also debt, which can be a disadvantage if the company is already carrying debt. A company has to make its regular debt payments, and if it doesn't, the bondholders can make the company file for bankruptcy. So, if it has tight cash flow, and has a lot of debt, issuing more debt is not a great idea. Additionally, if interest rates are high, the corporation has to pay more interest in order to attract investor.

Question 5

One option Lloyd and Harry might consider is private equity, which is when private investors pool their money to invest in a company in exchange for an interest in the company. A private equity firm can provide venture capital financing to startup companies who don't want to issue debt or stock. A private equity firm will be interested in the operations of the business and would likely ask a lot of questions to make sure the business model is solid, so they don't lose their money. A private equity firm may also buy all the publicly traded stocks of a firm to finance a firm. Angel investors are another source of private equity. Angel investors are affluent people who provide funding to businesses in exchange for ownership interest.

If Harry and Lloyd want to raise $5 million to purchase a building, more custom vans, and a corporate retreat in Aspen, they will want to consider different options. They would likely find private equity investors for the building and custom vans, but they may have a hard time finding anyone who wants to invest in a corporate retreat in Aspen. For this option, it may be in their best interest to reinvest any earnings into the corporation, called plowback, and they can raise the $5 million themselves through operations. I would suggest this method if the corporate retreat is non-negotiable. If they want to raise $50,000, they can also reinvest their profits. If they are looking to raise $500 million, I would recommend either an angel investor or venture capital financing.