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Equity and Debt Financing (Equity Financing (Underwriters (Types of Offer,…
Equity and Debt Financing
Equity Financing
Public Share Issues
Pathfinder Prospectus - to gauge interest
Pre-underwriting conferences - decisions about the issuance
Full prospectus - all information about the business
Public offering
Market stabilisation
Underwriters
Provides advice about share price
Markets the shares
Can agree to buy shares if they are not taken up by the public
Types of Offer
Best Efforts - sells shares using best efforts
Firm Commitment - shares sold to underwriter who bares risk of not selling
Dutch Auction - underwriter conduct auction for shares
Advantages of Public Listing
Wider pool of finance
Enhanced public image
Finance for specific projects
Easier to acquire other companies
Disadvantages of Public Listing
Greater regulation
Different investors requirements
Brokerage and underwriting fees
Why does share price decrease when new shares are announced?
Managerial information - managers know when shares are overvalued so will try to issue equity when this is the case
Debt capacity - if the probability of financial distress rises the firm will choose equity financing
Falling earnings - seeking additional equity financing suggests that earnings will not cover capital expenditure
Rights Issues
Gives existing shareholders pre-emption rights
Shareholders issued an option to buy new shares at a discounted price
Difference between original share price and post-rights share price is the value of a right
Existing shareholders neither win nor lose from exercising or selling their rights
Debt Financing
Sources of Debt Financing
Loans
Medium-term
Bonds
Long-term
Overdraft
Short-term
Lower cost
Easily available
Tax relief