Bailey Corporation Case Study Example | Topics and Well Written Essays - 1250 words

Bailey Corporation - Case Study ExampleCapital structure represents the proportion in which heterogeneous long-term capital components ar employed. The capital decisions have been recognized as the most important decisions touch on the successful working of any firm. This is due to the fact that the capital structure affects the cost of capital, net profit, moolah per share, dividends payout ratio and liquidity position of the firm. These variables coupled with a number of other factors determine the value of a firm. thitherfore capital structure is a very important determinant of the value of a firm.There are different melodic lines of financial securities offered by a attach to in order to secure the required funds from the investors. The most car park method of raising long term finance is the issue of common stock. The common stocks of a corporation do not carry any special rights in toll of payment of dividend as compared to preferred stock. Preferred stocks carry a spe cific percentage of return on the investments by the preferred stock holders. In addition the preferred stock holders stand in anteriority to the common stock holders in getting a distribution of the assets of a corporation in the issuance of its winding up. In some instances the preferred stock holders also carry special voting rights as distinguished from the common stock holders.Convertible securities are bonds or preferred stocks that are standardized into a specified number of shares of common stock at the option of the stock holder. This is yet another of form financial security being offered by the corporations to secure the long term investment of the stock holders. The convertible security provides the convertible holder a fixed return in the form of interest or dividend and also the option to exchange a bond or preferred stock for common stock.Warrants and derivatives are a relatively long term option to purchase common stock at a specified exercise price over a specifi ed period of time. Warrants are used to acquire a lower interest rate and to raise funds when the firm is considered as having a peripheral credit risk. Warrants are also issued to compensate the underwriters and venture capitalists at the time of founding a company in return for their services or as commission payable to them. (Chapter 22)Bailey Corporation Casea) topic of Shares Outstanding 1,800,000New shares Issued 800,000Total Number of Shares 2,600,000Retained Earnings $ 7,580,000Earnings per Share after the whirl $ 2.92(7,580,000/2,600,000)Assumed price earnings 12Initial Price per share12 * 2.92 $ 35.04b) Total comeback 800,000 * $ 35.04 $ 28,032,000Less Underwriting spread 5% $ 1,401,600Less Out of Pocket Expenses 300,000 Total Cost $ 1,701,600Net growth $ 26,330,400c) Current Earnings $ 7,580,000Number of original bang-up stock1,800,000EPS on original stock outstanding $ 4.21($ 7,580,000/1,800,000)Return needed for achieving