Question

1. Go to Yahoo! Finance or another source and pick a stock to track for the last year. Discuss the performance of the stock over the last year and offer your thoughts being specific about why the stock has done well or not.

2. What are some reasons that a company might choose common stock as means of financing their business rather than using debt? Also comment on why a company might choose debt over common stock.

Answer 1

1]

The stock is Walmart. The stock has done well over the past year, appreciating from around $98 to $114 currently. The stock has been volatile since February on account of the Covid-19 scenario, but that is due to entire market being highly volatile during this period.

The stock has done well because :

• Improved shipping of online orders. Walmart's online business grew faster than its peers.
• Addition of curbside pickup to its delivery methods
• Addition of in-store kiosks to make checkout easier
• Strategic investment in Flipkart, India's leading e-commerce platform is expected to drive high growth in the emerging market

WMT 99.54 yahoo/finance 125.00 120.00 1150 113.97 110.00 105.00 100.00 D 18.47M 95.00 Apr May Jun Jul Aug Sep Oct Nov Dec 2020 Feb Mar

2]

Some reasons why a company might choose common stock as means of financing over debt are :

• Common stock does not require mandatory periodic payments, unlike debt where periodic interest payments have to be made
• As common stock does not require mandatory periodic payments, there is less pressure on the company's cash flows, and is therefore less risky than debt
• Raising debt requires collateral, which may involve pledging the assets of the company to cover any possible default
• Debt may contain covenants which restrict the actions of the company, or require the company to maintain certain financial ratios

Some reasons why a company might choose debt as means of financing over common stock are :

• Debt does not involve sharing the profits of the company, unlike common stock where the investors are entitled to a share in the profits
• Debt does not involve dilution of voting power, unlike common stock where the investors are entitled to voting rights
• Debt can improve the return on equity for common stockholders due to financial leverage