Management is more likely to focus on short-term results instead of long-term earnings growth if a company raises equity through:
A. Venture capital.
B. A leveraged buyout.
C. An initial public offering.
Answer (2)
The focus on short-term results is most likely when a company raises equity through a leveraged buyout (B), due to the high debt involved, which demands immediate profitability. In contrast, venture capital (A) encourages long-term growth, while an initial public offering (C) can have a mix of both pressures. Therefore, the answer is option B.
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When a company raises equity through different methods, it can influence how management focuses on growth and results. Let's explore each option:
A. Venture Capital : Venture capital involves raising equity from investors who provide capital to early-stage, high-potential companies. These investors typically focus on long-term growth and the potential for a substantial return on investment as the company matures. Therefore, management is encouraged to focus more on long-term strategic goals rather than short-term financial results.
B. A Leveraged Buyout (LBO) : In a leveraged buyout, the acquisition of a company uses a significant amount of borrowed money to meet the cost of acquisition. This option tends to put a lot of financial pressure on the company because of the debt taken on. As a result, management is often more focused on short-term financial performance to ensure debt obligations can be met. This requires emphasizing immediate profitability and cash flow.
C. An Initial Public Offering (IPO) : An IPO involves offering shares of a private corporation to the public in a new stock issuance. While IPOs focus on raising capital for future growth, public companies are subject to the pressure of quarterly reporting and the scrutiny of public investors. This can sometimes shift management's focus to short-term results to satisfy shareholder expectations.
Based on this analysis, B. A leveraged buyout is most likely to encourage management to focus on short-term results due to the immediate pressures of meeting debt obligations. The need to generate sufficient cash flow to handle debt repayments typically takes precedence over long-term earnings growth in this scenario.
