2.2.2.1. Raising Equity Capital

Question 1

What are the sources of funding?

1.
2.
3.
4.
5.
6.

Answer 1

• angel investors
• venture capitalists
• private equity
• institutional investors
• established corporations
• outside investors

Question 2

Angel Investors | Objective

Answer 2

individual investors who buy equity in tiny private firms (start-ups); bring expertise

Question 3

Venture Capitalists | Objective

Answer 3

Limited partnership that specializes in raising money to invest in the private equity of younf firms

Question 4

Private Equity | Objective

Answer 4

organized very much like a venture capital firm, but it invests in the equity of existing privately held firms rather than start-up companies

Question 5

Established Corporations | Objective

Answer 5

might invest for corporate strategic objectives in addition to the desire for investment returns

Question 6

Outside Investors | Objective

Answer 6

providing equity through (convertible) preferred stocks, issued by younger companies or common stock for established companies

Question 7

Pre-money Valuation
vs
Post-money Valuation

Answer 7

• the value of the prior shares outstanding at the price in the funding round
• the value of the whole firm (old plus new shares) at the funding round price

The difference: the amount invested -> Post money valuation = pre-money valuation + amount invested

Question 8

Initial Public Offering IPO

1.
2.
3.

Answer 8

• process of selling stock to the public for the first time
• before going public, check that the company is ready for the stock exchange
• three main goals: financing, ownership, corporate

Question 9

Financing Goals of IPO

1.
2.
3.

Answer 9

• improvement of equity ratio
• basis for future share and bond issues
• share as acquisition currency for corporate takeovers

Question 10

Ownership Goals of IPO

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2.
3.
4.

Answer 10

• Regulation of company succession
• exit of venture capitalists (e.g. venture capital companies)
• going public of subsidaries [Porsche]
• privatization of state-owned companies [Dt. Telekom]

Question 11

Corporate Goals of IPO

1.
2.
3.

Answer 11

• realization of growth targets
• increase in brand awareness
• attractiveness for employees (e.g. by issuing employee shares)

Question 12

What are the Types of Offerings?

1.
2.

Answer 12

• Primary offering: shares that are sold in the IPO that raise new capital
• Secondary Offering: existing shares that are sold by current shareholders (as part of their exit strategy)

Question 13

At an IPO, a firm offers a large…

Answer 13

…. block of shares for sale to the public (P and S)

Question 14

For smaller IPOs, the underwriter commonly accepts the deal on a…
In this case…
Often, such deals have an…

Answer 14

…. best efforts IPO basis.
… the underwriter does not guarantee that the stock will be sold, but instead tries to sell the stock for the best price possible
… all-or-non-clause.

Question 15

1. More commonly, an underwriter and an issuing firm agree to a… in which the underwriter…
2. In this case, the underwriter purchases…
3. If the entire issue does not sell out…

Answer 15

1. … firm commitment IPO
   … guarantees that it will sell all of the stock at the offer price.
2. … the entire issue at s slightly lower price than the offer price and then resells it at the offer price.
3. … the underwriter must take the loss

Question 16

1. In an….. markets determine the price of the stock by auctioning off the company.

Answer 16

…auction IPO (Open IPO)

Question 17

What happens during an auction IPO?

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2.
3.
4.

Answer 17

1. the markets determine the price of the stock by auctioning off the company
2. investors place bids over a set period of time
3. an auction IPO then sets the highest price such that the number of bids at or above that price equals the number of offered shares
4. all winning bidders pay this price, even if their bid was higher
5. mechanism, however, has not been widely adopted

Question 18

The Mechanics of an IPO

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2.
3.
4.
5.

Answer 18

• underwriters and the syndicate
• SEC filing process (regulator)
• valuation process including road show
• pricing the deal and managing risk (e.g. greenshoe provision for over-allotment)
• lockup period (180 days)

Question 19

Underwrites and the Syndicate as Mechanics of an IPO

1.
2.

Answer 19

• lead underwriter responsible for managing the deal
• syndicate arranged by underwriter help to market and sell the issue

Question 20

SEC Filing Process (regulator) as Mechanics of an IPO

1.
2.
3.

Answer 20

1. registration statement incl. preliminary prospectus (red herring)
2. SEC review of registration statement
3. final prospectus

Question 21

Cost of an IPO - What is a typical spread?

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2.
3.

Answer 21

• the discount below the issue price at which the underwriter purchases the shares from the issuing firm
• typically, 7% of the issue price
• even more puzzling is the seeming lack of sensitivity of fees to issue size

Question 22

SEOs
1. Firm´s need for outside capital rarely ends….
2. Often firms return to…

Answer 22

1. …at IPO
2. equity markets and offer new shares for sale, called a seasoned equity offering (SEO)

Question 23

What is a SEO and their kinds?

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2.
3.
4.
5.

Answer 23

1. seasoned equity offering
2. when a firm returns to equity markets and offers new shares for sale
3. bc theres more need for outside capital than IPO
4. there are two kinds of SEOs - cash offer and rights offer
5. primary and secondary shares

Question 24

SEO: Shares

1.
2.

Answer 24

• primary shares - new shares issued by company
• secondary shares - sold by existing shareholders in equity offering

Question 25

SEO: kinds

1.
2.

Answer 25

• cash offer: firm offers new shares to investors at large
• rights offer: firm offers new shares only to existing shareholders

Question 26

Computing the Value of one right (Vr)

1.
2.

Answer 26

• upon request, each shareholder must be allocated a portion of the new shares corresponding to his or her portion in the previous share capital
• intention or rights: protection against dilution / changes in voting rights

Question 27

Rights offers protect…

Answer 27

…. existing shareholder from underpricing