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source of finance: debt&equity external funding (equity financing…
source of finance: debt&equity
external funding
equity financing
properties
limited liability
ownership
residual claim - ranked last in net income distribution and liquidation
ordinary shares
cash flow rights
voting rights
preferred shares
fixed dividend
non-voting
senior than ordinary in liqudation
convertible preferred stock (for young companies)
it is a preferred stock
owners have the option to convert it into common stock (ordinary shares)
from fixed cash flow to floating cash flow and voting rights
sources:
start-ups
family/friends
outside funds
angel investors
individual investors & personal funds
small firms, early-stage, high-risk
large proportion of ownership and decision-making power
private equity
LBO: leverage buyout
venture capital
limited partnership & specialise in raising money
internal funding
Go Public: IPO
reasons
funding demand-> more captial
realisation of return-> the share price surge
reduce risk by diversify initial investment
advantage:
greater liquidity
access to more capital
disadvantage:
ownership dispersion-> management control
meet all the agreements and initial costs
underwriter
an investment banking firm that manages a security issuance and designs its structure
underwriter spread: underwriter's buy price - its' sell price
types of underwriting
best-efforts basis
firm commitment
auction IPO
roadshow
book-buiding
decide the share price in IPO based on institutional investors' demand
price determination
future cash flow prediction
recent IPO comparison
make the demand equal to supply
market reaction:
oversubscribed
undersubscribed
IPO Puzzle:
underpricing
cyclical
high costs
poor long-run performance
same for the case in SEO
second step
seasoned equity offering (SEO)
cash offers
cause dilution for existing shareholders
reduce in price and ownership ratio
need shareholder's approval
MARKET normally reacts with a price decline
rights issue: avoid the dilution
no approval needed
entitled to buy new shares based on current holdings
shareholders can choose to
exercise
the rights or
**sell
it**