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Foundations Of Financial Management
Found in: Page 471
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

Short Answer

Do corporations rely more on external or internal funds as sources of financing?

Corporations rely more on external funds than internal as sources of financing.

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Step by Step Solution

Funds

In terms of corporate, funds refer to the pool of money collected or raised by its management to carry out its business activities.

A corporation can gather funds from internal and external sources.

Reliability on funds

Corporations often rely more on external funds because it facilitates them to speed up their operations without using their retained earnings and other profits.

In addition, external funds are a great source of capital for corporations, and it improves the view of positional statements.

Most popular questions for Business-studies Textbooks

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

Bailey corporation

Income statement

For the year 20X1

Sales (all on credit)

$42,680,000

Cost of goods sold

$32,240,000

Gross profit

$10,440,000

Selling and administrative expenses

$4,558,000

Operating profit

$5,882,000

Interest expense

$600,000

Net income before taxes

$5,282,000

Taxes

$2,120,000

Net income

$3,162,000

Bailey corporation

Balance sheet

As of December 31, 20X1

Assets

Current assets:

Cash

$250,000

Marketable securities

$130,000

Accounts receivables

$6,000,000

Inventory

$8,300,000

Total current assets

$14,680,000

Net plant and equipment

$13,970,000

Total assets

$28,650,000

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$3,800,000

Notes payable

$3,550,000

Total current liabilities

$7,350,000

Long-term liabilities

$5,620,000

Total liabilities

$12,970,000

Stockholder’s equity:

Common stock (1,800,000 shares at $1 par)

$1,800,000

Capital in excess of par

$6,300,000

Retained earnings

$7,580,000

Total stockholder’s equity

$15,680,000

Total liabilities and stockholder’s equity

$28,650,000

d. Now assume that, of the initial 800,000 share distribution, 400,000 belong to current stockholders and 400,000 are new shares, and the latter will be added to the 1,800,000 shares currently outstanding. What will earnings per share be immediately after the public offering? What will the initial market price of the stock be? Assume a price-earnings ratio of 12, and use earnings per share after the distribution in the calculation.

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