Equity Financing

Question 1

Venture Capital

Answer 1

Equity investment in new private companies

Question 2

Venture capital firms

Answer 2

• Pool funds from a variety of investors
• Seek out promising start-up companies
• Finance the firm’s operations (in exchange for large share of firms stock)
• Work with these companies as they try to grow
• Not passive investors as they provide ongoing advice for the firm and help it to grow

Question 3

What is a general partner responsible for?

Answer 3

Making and overseeing the investments

They receive a fixed fee plus a share of profits (carried interest)

Question 4

Investment policy of Venture capital firms

Answer 4

• Accept high uncertainty if there is even a small chance that the company will become successful
• Identify failed investments early and accept the loss rather than trying to fix the problems

Question 5

The success of venture capital market requires:

Answer 5

an active stock exchange that specialises in trading the shares of young and rapidly expanding firms

Question 6

Initial Public Offering (IPO) of stocks

Primary and Secondary

Answer 6

Primary offering: new shares are sold to raise additional cash

Secondary offering: existing shareholders cash in by selling part of their equity holdings

Question 7

Part 1 of an IPO

What are underwriters?

Answer 7

Firms that buy an issue of securities from a company and resell it to the public; they also provide procedural and financial adivce

Question 8

Part 2 of an IPO

Registration statement

Answer 8

A detailed document with information about the firms history and existing situation and the proposed projects intended to be financed with the funds raised

Question 9

Part 3 of an IPO

Publication of the prospectus

Answer 9

A formal summary of the most important information from the registration statement

Question 10

Part 4 of an IPO

Arrange a Road show

Answer 10

Talk to potential investors to get an idea of how much stock they wish to buy and for how much

Question 11

Costs of an IPO

Answer 11

Spread: the payment of the underwriter - difference between price at which underwriter buys the new issue and issue price offered to public

Administrative costs: management of the process; legal counsels; financial advisers; fee for registration of new equity with the Stock Exchange Commission (SEC)/Financial Conduct Authority (FCA)

Question 12

Underpricing IPOs

Answer 12

Occurs when the new stock has an issue price below the ‘true’ or ‘fair’ valuation of the company’s share

For existing shareholders there is a cost in terms of the lower value of their stock

Question 13

Security sales by public companies (two types)

Answer 13

• Those issues can be of two kinds:
  
  • General cash offer
  • Rights Issue (privileged subscription)

Question 14

General cash offer

Answer 14

sale of securities (equity or debt) open to all investors by an already public company; more or less the same procedure as with IPOs

Question 15

Rights Issues (privileged subscription)

Answer 15

Issue of securities offered first or only to current stockholders.