Chapter 2- Equity

Question 1

What are the two major forms of long-term financing for incorporated companies ?

Answer 1

Equity - raising finances through investment for shareholders

Debt - borrowing funds from shareholders and/or financial institutions.

Question 2

What are the two types & characteristic of equity available for issue ?

Answer 2

Ordinary shares:
-Confers part ownership
-Higher risk, higher return investment

Preference shares:
-Does not confer ownership or voting
- Fixed dividend (coup%*par)
-Takes dividends preference over OS

Question 3

What are the advantages of Ordinary shares?

Answer 3

-No fixed interest payments
-No repayment requirements
- Shares can easily be disposed of for listed companies

Question 4

What are the disadvantages of Ordinary shares ?

Answer 4

• Diluted ownership
• No tax relief on dividends
• More expensive (issue cost)
• Raises WACC

Question 5

How would unlisted companies find raising equity capital?

Answer 5

Unlisted companies will find it difficult due to:

• Low availability of audited information
• Low marketability
• Higher risk in unlisted companies

Question 6

Explain when companies become listed?

Answer 6

When an unlisted company grows enough to meet the requirements of its local exchange it seeks to become listed?

Question 7

What are the advantages of becoming listed?

Answer 7

-Creates a market for the companies shares
- Improved status and financial standing
- Improved public awareness of company and products
- exit route for owners
-improved acquisition opportunities
-Access to additional finances
-Opportunities to implement share options schemes for employees

Question 8

What are some disadvantages of becoming listed?

Answer 8

-Increased media attention
-Increased accountability to stakeholders
-Higher auditory requirements
-Compliance with the strict rules of the governing body’s
- Becoming more vulnerable to takeovers
- Increased compliance costs with reporting
- Need to maintain dividend growth
-Loss of control

Question 9

What are some methods for becoming listed?

Answer 9

Fixed price: general public offer to widest market to max financing

Tender: Bid but only accept at strike price

Private placement: institutional for cheaper issues

Stock exchange: Current owners can dispose of shares