Chapter 11

Question 1

Equity Financing

Answer 1

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.

Question 2

Initial Public Offering (IPO)

Answer 2

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

Question 3

Best effort basis

Answer 3

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

Question 4

Firm Commitment Basis

Answer 4

In which the investment bank agrees to purchase any shares that remains unsold following an IPO

Question 5

Issuances and Repurchases of Equity

Answer 5

There are two basic forms of equity capital - Common (ordinary) shares and preferred (preference) shares

Question 6

Common Shares

Answer 6

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

Question 7

Residual Interest

Answer 7

With high risk of common shares comes the right to vote for the board of directors and on other key corporates governance issues

Question 8

Articles of incorporation

Answer 8

The total number of common shares that may be sold by a company is specified here

Question 9

Authorized shares

Answer 9

Shares that may be sold by a company

Question 10

Issued shares

Answer 10

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

Question 11

Outstanding

Answer 11

Shares currently held by investors in the company. Outstanding shares can be computed as issued shares less repurchased shares

Question 12

Repurchased

Answer 12

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

Question 13

Par Value shares

Answer 13

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.

Question 14

Intrinsic Value

Answer 14

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.

Question 15

Book Value

Answer 15

Based on the accounting-based balance sheet value of shareholders equity

Question 16

Additional paid in capital

Answer 16

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

Question 17

Contributed Capital

Answer 17

The sum of the par value account and the additional paid in capital account.

Question 18

Multiple classes of common shares

Answer 18

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.

Question 19

Preferred Shares

Answer 19

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.

Question 20

Convertible Shares

Answer 20

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

Question 21

Paricipating

Answer 21

In which case, if a company declares a special dividend for the common shareholders, the participating preferred shareholder will share in the special dividend.

Question 22

Dividends

Answer 22

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

Question 23

Dividend Rate

Answer 23

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.

Question 24

Dividend Yield

Answer 24

Dividend paid per share divided by the market price per share

Question 25

Dividend Declared

Answer 25

Once a dividend is declared, a record date and a distribution date are established.

Question 26

Special Dividend

Answer 26

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.

Question 27

Free share Distribution

Answer 27

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

Question 28

Stock Splits

Answer 28

Are used to both increase and decrease the number of outstanding shares and hence the market price per share.

Question 29

Forward stock split

Answer 29

Increase the number of outstanding shares

Question 30

Reverse Stock Split

Answer 30

Reduces the number of outstanding shares

Question 31

Accumulated other comprehensive income

Answer 31

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.

Question 32

Stock options

Answer 32

Grant employees the right to buy a company’s common shares at a fixed price within a specified period of time.