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CHAPTER 2
RAISING CAPITAL, CHRISTINE ISABELLE AJJULUS
2020979117
FIN544…
CHAPTER 2
RAISING CAPITAL
INTRODUCTION
- Obtain capital is the must for a firm to operate
- So, firm has to 2 ways either to borrow money or issuing equity
- Depends on the size of the firm, its life cycle growth, and growth prospects
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VENTURE CAPITAL
- It is a financing for a new, high risk ventures
- It is to grow the firm until they can sell it to the public in IPO
- Some venture capitalists may sell the company to the investors before IPO, which this tend to be high risk but at the same time get high return
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- Bigger deals - financed by them where it is specialize in pooling funds from any sources, and investing them
- Sources of fund: HIGH NET-WORTH INDIVIDUALS and INSTITUTIONS such as pension funds, insurance comp, large corporations
- Financing for non-public companies = private Equity
STAGES
- 1st Stage: Seed money to build prototype and complete the manufacturing plan
- 2nd Stage: Financing to the actual begin manufacturing the product
- Further Stages: Providing marketing, Distributing the manufactured product
SEED MONEY
- Also known as Seed Capital
- First round for a start-up business
- To enable the early business to grow
- To get fund is the most difficult that may cause failure of business
- Since it is hard for a new venture due to the lack of records
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SUCCESS OF A START-UP
- If the company is sold or goes public
- Investment banks involved
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UNDERWRITERS
- Any party that evaluates and assumes the another party's fee risk, ex: commission, premium, spread or interest
- Operates in financial, include mortgage industry, insurance industry, equity market, and common types of debt securities
- Risk experts
- Contribute to sales-type activities, as in IPO process, and reselling debt securities
- Syndicate - group of investment bankers that market the securities
- Spread - difference between what the syndicate pays the company and what the security sells for in the market
ROLES
- To ensure all regulatory requirements are satisfied
- Contact large network of investment organizations, ex: mutual funds
- Set the IPO price of the company's stock
- Financial specialists
- Help to determine the best type of security to issue
SERVICES PROVIDED
- Formulate method used to issue securities
- Price the securities
- Sell securities
- Price stabilization
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Firm Commitment Underwriting
- Underwriter guarantees to purchase all the securities offered for sale by the issuer
Best Efforts Underwriting
- Underwriter sell the securities at an agreed-upon offering price
- Bear risk on their money if it is not sold
Dutch Auction Underwriting
-Underwriter accepts the bids series where its include number of shares and price per shareGreen Shoe Provision
- Allow the syndicate to buy another additional 15% of the issue from the issuer
Lockup Agreements
- Restriction on insiders from selling selling their shares of an IPO in a specific period
IPO Underpricing
- The price is lower than its real price in the stock market
New Equity Issues and Price
- Stock prices will be declined when the new equity is issued
- Very expensive for issuing new stock
Issuance costs
- Spread, Other direct expenses, Indirect expenses, Abnormal returns, Underpricing, Green shoe option
Right Offerings
- Issue of CS offered to existing shareholders
Value of a right
- Price specified in a right offering < current MP
TYPES OF LONG TERM DEBT
- BONDS
- PRIVATE ISSUES
- Term loans - 1-5 years
- Private placement (more longer maturity)
- Easier to renegotiate
- Lower costs
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