Problem 14 When do firms receive money from... [FREE SOLUTION]

Chapter 17: Problem 14

When do firms receive money from a stock sale in their firm and when do they not receive money?

Short Answer

Expert verified

Firms receive money from a stock sale during primary stock sales, such as in Initial Public Offerings (IPOs) or follow-on offerings, where new shares are issued by the company and proceeds go directly to the firm. They do not receive money from secondary stock sales, as these transactions involve the trading of existing shares between investors, without direct financial benefits for the company.

Step by step solution

Understanding Primary and Secondary Stock Sales

A primary stock sale occurs when a company issues new shares of stock in the market for the first time, typically through an Initial Public Offering (IPO), or when they issue additional shares at a later date (also known as a follow-on offering). In a primary stock sale, the firm receives the money from selling these new shares, as investors buy the stock directly from the company. On the other hand, a secondary stock sale happens when existing shareholders (including the company's founders, employees, and early-stage investors) sell their shares in the company to other investors. In this case, the firm does not receive any direct financial benefits from the transaction, as the money goes from one investor to another.

Identifying When Firms Receive Money from a Stock Sale

Firms receive money from a stock sale when the sale is a primary stock sale. In an Initial Public Offering or a follow-on offering, the company issues new shares and directly receives the proceeds from the sale of those shares.

Identifying When Firms Do Not Receive Money from a Stock Sale

Firms do not receive money from a stock sale when the sale is a secondary stock sale. This type of transaction involves the buying and selling of existing shares among investors. In this situation, the company does not benefit directly from the money exchanged during the transaction. Instead, it is a transfer of ownership between investors. In conclusion, firms receive money from a stock sale when the sale concerns a primary stock sale (IPO or follow-on offerings), but they do not receive any direct financial benefits from a secondary sale, as the existing shareholders conduct the sale.