(F) Chapter 8: Equity Financing (1st set) Flashcards
Refers to the ff.:
→ investments with NO LEGAL OBLIGATION TO REPAY the principal amount/interest
→ requires sharing ownership and profits with the funding source (investors)
Equity Financing
T or F: Equity Financing is relatively riskier than Debt Financing
False (equity is considerably much safer than debt financing due to no payment requirements)
What are the 3 common instruments that give investors a share in ownership for equity financing?
Hint: remember LCS
- Loans with Warrants
- Convertible Debentures
- Stocks
Common Instrument for Equity Financing:
→ the investor has the right to buy stocks at a fixed price at some future date (terms are negotiable)
Loans with Warrants
What is the usual percentage term in loans with warrants?
More than 100% (e.g. 130%)
What is the common future date for loans with warrants?
5 years following the offer date
Common Instrument for Equity Financing:
→ unsecured loans that can be converted into stock
→ conversion price, interest rate, and provisions are all negotiable
Convertible Debentures
In convertible debentures, the loan started out as what? (mentioned during the discussion, not in the book)
Bonds
Common Instrument for Equity Financing:
→ comes in the form of preferred or common
Stocks
These stocks gives investors a place among creditors incase the venture is dissolved (is fixed but has lower returns)
Preferred Stocks (remember that people prefer stability hence why it is preferred)
These stocks are the most basic form of ownership (is uncertain but yields higher returns when successful)
Common Stocks
This is the term for when a company raises capital by selling securities in public financial markets
Initial Public Offerings (IPOs)
What is another term for IPOs?
Going (seventeen char) Public
What are the 4 advantages of IPOs?
Hint: LIVS
- Size of capital amount
- Liquidity
- Value
- Image
Advantage in IPOs:
Selling securities is one of the fastest ways to raise large sums in a short amount of time
Size of Capital Amount
Advantage in IPOs:
The market provides this for owners that can readily convert their stock into cash
Liquidity
Advantage in IPOs:
The market puts importance on the stock which also places importance on the company
Value
Advantage in IPOs:
A publicly traded venture is often viewed as “stronger” by suppliers, financers, and customers
Image
T or F: A publicly traded venture is often viewed as “weaker” by suppliers, financers, and customers
False (stronger)
What are the 4 disadvantages of IPOs?
Hint: CRDS
- Costs
- Disclosure
- Requirements
- Shareholder Pressure
Disadvantage in IPOs:
Expenses in IPOs are higher than other sources (e.g. accounting, legal, printing, distribution, etc.)
Costs
Disadvantage in IPOs:
Company affairs must be made public (new ventures prefer to keep their details private)
Disclosure
Disadvantage in IPOs:
Paperwork (e.g. SEC regulations) drains large amounts of time, energy, and money
Requirements
Disadvantage in IPOs:
Management decisions are sometimes short-term which can lead to failure in giving consideration to the long-term goals
Shareholder Pressure
