Capital Structure in a Perfect Market Flashcards
What are internally generated funds?
Retained earnings/ Plowback profit
What are the external sources of finance?
Debt
Equity
Are internally or externally generated funds used more to finance corporations?
Internally generated funds
What is the more favourable external financing in the US market?
Debt issuing
What are thee transitional periods in the financing choice across a corporate life cycle?
1) Going from being a private business entirely funded by the owner to accessing the private equity markets (venture capital)
2) Going from private to public with an initial public offering
3) Public companies making seasoned offerings of debt and equity
At the early stages of a company, how do they tend to finance?
Through external debt (loans from banks) or the owner’s equity
After the early stages of a company, how does the company now tend to finance?
Initial Public Offering
- Venture Capital
- Common stock
- Still low internal financing
In a public company that has been around for a few years, how do they tend to finance?
- More internal financing
- Common stocks
- Warrants
- Convertibles
How does a middle aged company tend to finance?
- High internal financing
- Debt
Who’s money does venture capitalists spend on investing?
Not their own, other peoples
Who are angel investors?
An angel investor is usually a high-net-worth individual who funds startups at the early stages, often with their own money.
In the final stages of a company, what happens to financing?
- Retire debt
- Repurchase stocks
- Small internal funding
What does a corporate life cycle look like?
Look at slides
What can stop a company issuing out shares?
Entrepreneurs that have emotional attachment to their companies
For a company that was once small and grew rapidly and is now middle aged, what might influence how they finance?
Might be reluctant to finance through debt
What are warrants?
Security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date
What is the pattern of financing?
Owner equity—-private equity—-public equity—–debt financing
what types of cost are present when issuing securities?(2)
Direct cost: due diligence, underwriting
Indirect cost: time, effort in conforming to accounting standards
What are the implications of a new equity announcement and why?
The announcement of a new equity issue is usually bad news for investors because it can be perceived as an attempt by management to sell overpriced stock
What are the choices of debt financing?
Fixed claim
Tax deductible
High priority in financial trouble
Fixed maturity
No management control
What are the choices of equity financing?
Residual claim
Not tax deductible
Low priority in financial trouble
Infinite life
Management control
Is debt and equity financing a fixed or a residual claim?
Debt= fixed claim
equity= residual claim
Is debt and equity financing tax deductable?
Debt= yes
Equity= no