Chapter 5 - Equity Finance Flashcards
What conditions come with Venture Capitalists funds?
- High risk finance
- Significant equity participation
- Influence over company policies
What are the principles of Preferance Shares
- Paid before Ordinary S/h
- Paid out of Post-Tax so no tax benefit
- On Wind-Up will only be paid back Share Cap but no premium
- Can be redeemable and non reedemable
- Often used in MBO’s
- Fixed Percentage of Nominal Value
- Risk is lower than that of Ord S/h but higher than Debt Holder
- Tend to be attractive to risk adverse investors looking for stead stream of income
- Biz tends to prefer debt finance as its tax deductable
- Also attracts investors who like high growth companies while being insulated from drop in share price
What are the different types of preference shares
- Cumulative PS - Div must be paid even if its skipped a year (cumulative)
- Non-Cumulative PS - Skipped div does not have to be paid following year
- Participating PS - Fixed Div + % of extra earnings based on certain conditions
- Convertible PS - Exchanged at date for certain amount of Ordinary Shares (rate is set at inception)
Note: Some Preference Shares are redeemable, meaning they will be repaid their capital (nominal value) on some future date
What are the features of a Private LTd Company
- Shares cannot be offere dto general public
- S/h has limited liability to the money invested but not personal assets
- Lighter disclosure requirements
What are the features of a Public Limited Company
- Shares may be sold to public
- Heavier discloures required
- May be listed or unlisted
What are the Adv and DisAdv of a listing
Advantages
- More accurate Market valuation of business
- Better perception of business which may increase Share Price/Revenues
- Employee Schemes more accesible
- Raise capital for future investment
- Lead to better pay for employees as revenues increase
DisAdv
- Costly
- More onerous requirements
- Making eneough shares available therefore losing some control of business
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What are the 3 types of methods of issuing shares and explain
- IPO - for when company goes public for the first time. can be a fixed price or tender
- Rights Issue - to existing S/h
- Placing - Whereby shares are placed with (institutional) investors. Does not have to be announced and no need for prospectus (does not lead to attractive market after floatation)
What is meant by Stagging and IPO Lock up Period
Stagging - where people apply for new shares in the hope of selling them immediatley to make profit
IPO Lock Up - Existing S/h (Ee’e/Managers etc) cannot sell shares for a certain period of time after IPO to make sure market is not flooded with shares and dilute share price
What is meant by Private Equity
Equity that is not traded publicly. Investment direct into private business for BuyOuts of public companies which result in a delisting
Can be for new technologies or increase workign capital
Tend to be for long term to allow them to turn around business and cash out
Explain the role of Investment Banks, Stockbrokers and Instituional Investors
Inv Banks will ADVISE on:
- Other experts to use (Lawyers, Underwriters)
- No of shares to be issued at share price
- SE requirements
- Director requirements
- Forms of new capital to be made available
- Publishing the offer
Stockbrokers will ADVISE on methods of obtaining listing and identify Instituional Investors
Instituional Investors provide indication of the likely uptake and acceptable price of shares. They have major influenece on the evaluation and market of the shares
What is meant by Pre-emption rights
Whereby new shares are offered to existing S/h so their stake is not diluted. It is protected by Law and can only be waived by the S/h
NOTE:
Rights Issue is less costly than public offer but may be more expensive than Placing
What are the implications of a RI and why?
- Share price will fall upon announcement
- Becase future profits are uncertain
- Future Div uncertain
- Consequences of the issues taken
- Share price will fall again once issued
- EPS will fall
- DPS will fall
- No more shares in issue
NOTE:
On Yield Adjusted TERP - if the new funds are expected to give rise to a higher return than exisitng funds, there will be less dilution of the Market Price than suggested by original TERP
What courses of action are available to a S/H when a RI is announced and what are the implications
Do Nothing - Company will sell at best possible price and return the difference (less RI price and selling costs) to investor. S/H stake will be diluted
Sell rights to new shares - (TERP less RI price) less and dealing costs. S/H stake will be diluted
Take up offer in full - S/H stake will be not be diluted. But they need to have funds available
Part sell to part buy - S/H stake will be diluted
