Chapter 11 Flashcards
Equity Financing
Small businesses start nd grow for many years utilizing financing provided b their owners, family and friends, or from such external sources as the small business administration or bank.
Initial Public Offering (IPO)
Only after a business model has been vetted and refined, and a history of operating earnings and cash flow established, will the company to “go public”.
- Provides the original founders and investors and perhaps those angel and venture capitalist’s, with an “exit strategy” that is, a means to gain liquidity by converting some or all of their shareholdings to cash
Best effort basis
IPO’s are executed on a best effort basis in which the investment bank attempts to place (sell) all of the shares available for sale but without a guarantee of complete success
Firm Commitment Basis
In which the investment bank agrees to purchase any shares that remains unsold following an IPO
Issuances and Repurchases of Equity
There are two basic forms of equity capital - Common (ordinary) shares and preferred (preference) shares
Common Shares
The purest form of equity capital and all corporations must have at least one common shareholder.
-Most riskiest form of capital because in the event the company liquidates, common shareholders are only paid if their is anything left after paying off all of their investors in the company
Residual Interest
With high risk of common shares comes the right to vote for the board of directors and on other key corporates governance issues
Articles of incorporation
The total number of common shares that may be sold by a company is specified here
Authorized shares
Shares that may be sold by a company
Issued shares
Shares sold to investors, and not since retired, over the life of the company. These shares are accounted for in the “common (or preferred) stock and paid in capital accounts
Outstanding
Shares currently held by investors in the company. Outstanding shares can be computed as issued shares less repurchased shares
Repurchased
Shares are repurchased by a company with the intent of re-issuing them for some future corporates purpose
-Shares that are repurchases without any intent to reissue become cancelled, reducing both the number of shares issued and outstanding
Par Value shares
Sometimes referred to as stated value, is an outdated legal concept that was developed when security markets were largely unregulated and there was a required protected value for a company’s common or preferred shares.
Intrinsic Value
Refers to the underlying economic value of a going concern-that is, the value that a business could be sold for in an efficient market. It is considered a market-based value.
Book Value
Based on the accounting-based balance sheet value of shareholders equity
Additional paid in capital
When shares are sold for an amount greater than their par value, any payment in excess of the par value if placed in a shareholders equity account labeled additional paid in capital
Contributed Capital
The sum of the par value account and the additional paid in capital account.
Multiple classes of common shares
These categories refer either to the voting rights of the shares or to the fact that one or more classes of shares represents tracking shares.
Preferred Shares
Take their name from the fact that this form of equity is legally entitled to receive dividends before any dividends are paid on the common stock. Preferred stock is entitled to a periodic fixed dividend and in the event that the company liquidates, is paid before the common shareholders.
Convertible Shares
Some preferred shares are convertible into common shares at a predetermined share conversion ratio. This enables the preferred shareholder to benefit from the success of the company, as reflected in any appreciation of the common shares
Paricipating
In which case, if a company declares a special dividend for the common shareholders, the participating preferred shareholder will share in the special dividend.
Dividends
As a mechanism to provide an immediate cash return to a shareholder, as well as a means to attract investor interest in a company, some companies pay a regular dividend on their equity shares
Dividend Rate
In the case of preferred shares, regular dividends are paid at a fixed rate, much like interest on a bond. In the case of common shares, however, the dividends rate frequently changes over time as a company’s performance and operating cash flows increase or decrease.
Dividend Yield
Dividend paid per share divided by the market price per share
Dividend Declared
Once a dividend is declared, a record date and a distribution date are established.
Special Dividend
Occasionally, a company facing a limited investment opportunity set, but with large amounts of available cash on hand, will pay its shareholders a special dividend. A one-time distribution of cash unrelated to a stocks regular dividend. Maximize share holder value.
Free share Distribution
Occur in two forms-a stock dividend or a stock split. Free share distribution take their name from the fact that investors receive the additional shares without having to pay for them
Stock Splits
Are used to both increase and decrease the number of outstanding shares and hence the market price per share.
Forward stock split
Increase the number of outstanding shares
Reverse Stock Split
Reduces the number of outstanding shares
Accumulated other comprehensive income
Under US GAAP, companies are required to report various increases an decreases in shareholder wealth that have not yet been realized and thus, not yet reported on the income statement.
Stock options
Grant employees the right to buy a company’s common shares at a fixed price within a specified period of time.
