5. time value of money equity finance

Question 1

time value of money diagram

Question 2

sources of finance for a firm (2)

Answer 2

1. internal sources
2. external sources

Question 3

-
-

Answer 3

• retained profit -> cheapest but not suitable for rapid expansion
• surplus current assets -> Toyota and Just in time system
• underutilized fixed assets -> sale of platinum mines by Anglo American PLC

Question 4

external sources
1.
-
2.
-
-

Answer 4

1. without financial liability
   - government, local authority and EU Grants - tax credits, direct support
   - company doesnt have to repay any funds
2. with financial liability
   - finances company is supposed to return to investors
   - equity
   -debt

Question 5

definition of equity

Answer 5

the ordinary shares within a company

Question 6

what does equity represent

Answer 6

the claim of the owners against the business

Question 7

nature of equity

Answer 7

• shareholders become true owners of the company
• directors maintain day to day control of company
• shareholders influence directors by voting at the AGM, one vote per share
• shareholders may regain capital by selling shares
• companies usually pay divident, however if profits are low, dividend may not be paid. risk is borne by the shareholders
• any equity owning ‘50% plus 1 shares or more’ of the issued equity, controls the company

Question 8

timeline of business growth, and equity
start up -> early development -> turn around buy in/buy out bridge/mezzanine -> expansion and diversification

Answer 8

own capital. seed capital by venture capitalist. funds to start business -> venture capital. private equity. product enters market -> venture capital. private equity -> venture capital. private equity. rights issue. public issue

Question 9

what is a venture capitalist

Answer 9

• a private equity investor who provides capital to companies
• with high growth potential
• in exchange for an equity stake

Question 10

slide 10

Question 11

registration (creation of company)

Answer 11

• Face Value of Share and Authorised Share Capital
• Initial issuance of shares to Promoters at Face Value
• Authorised Shares Vs Issued and Paid-up shares
• Subsequent Issue – Promoters, VC, Investor ‘at a premium’
• Private Placement, outside stock exchange

Question 12

sell new shares (IPO)

Answer 12

• when company gets its shares listed on an exchange and general public can trade in these shares for the first time
• choice of market (exchange) largely depends upon the size of the business and the amount of funds to be raised
  - secondary market
  - main place for raising equity capital is LSE
  - different market within LSE

Question 13

additional shares

Answer 13

New Public Offerings
* Open to all investors
* Process is more or less same as that of new shares
Rights Issue
* Only for existing shareholders
* They can buy it at lower than market price
Bonus Issue
* Only for existing shareholders, but shares are given out
to shareholders for free
* No additional capital comes into company
* Not a method to finance, but to reward the existing
shareholders

Question 14

issue of equity - how it works & the numbers

Answer 14

• registering a company
• issuing shares
• issuing shares at premium

Question 16

valuing equity
book value

Answer 16

balance sheet equation
- assets = equity + liability

Question 17

valuing equity
market value

Answer 17

market price of a share x total no. shares