Finance - Source of Financing -Equity Sources

Question 1

Explain what is equity financing

Answer 1

• Equity investors are exposed to higher risk, equity owners have higher returns than lenders. More flexible.
• Maximum capital at risk is due that has been invested

Dilution - The loss of proportionate ownership of existing shareholder
Pre-emptive right - rights ensure that current equity holders have the first opportunity to purchase additional shares being issued

Question 2

What are the two types of equity financing

Answer 2

1. Common share - can be voting or non-voting elect from BOD, right to receive dividend when declared.
2. Preferred shares - Class of ownership in a corporation with a higher claim on the assets and earnings than do common shares

Cumulative dividend - promised that an unpaid dividend will be repaid in the future before the dividend is paid
Non-cumulative dividend - received only when declared, with no payment for any prior period when a dividend is paid
Retractable - The investor has the right to demand that the company repurchase the shares for specified purposes

Question 3

What are two types of sources of equity financing. Also, how can investor exit their investment

Answer 3

1. Angel investor - angels are typically individuals who invest their own funds in start-up business
2. Venture capital - Professional investor who provides funding to early-stage companies
   - Frequently look for disruptive business ideas and often favor certain industries

Types of exit
1. Sales of the business to a strategic buyer
2. Sale of their position to private equity
3. Taking the company public, giving them liquidity to sell a portion of their entire stake

Question 4

Explain what private equity is and the three bases of private equity financing

Answer 4

Private equity - Is a group of investors tend to participate a little later in the life cycle
- Maybe - pension funds, wealthy families, investment funds

Three basis of private equity
1. High-growth companies - Private equity tends to pick up where venture capitalists leave off
2. Buyouts - Private equity can be called upon to facilitate special transactions. management buyout - a transaction in which the shares of an entity are acquired
3. Turnaround situation - Private equity can be brought in to provide for a company facing challenges.

Common exit
1. Selling the business to a strategic buyer
2. Taking the company public, giving them liquidity to sell a portion or all of their stake
3. Introducing more debt into the capital structure to repurchase some

Question 5

How is a public offering used to raise money

Answer 5

• Public offering involves raising money by issuing shares to the public through a regulated exchange
• IPO is a lengthy expensive process, that takes up to a year
• Reverse takeover - private company acquire sell company that is already listed on the stock exchange

Question 6

Explain what IPO is and how can be it successful

Answer 6

IPO - used to help enable the founder to monetize the value of their shares by selling them
- Accessing a large pool of capital to further grow the business
-Elevating the profile of the company

Successful IPO - History of operational success
- Experience management team
- Compelling growth prospect

Question 7

Explain what is the right offering

Answer 7

Right offering - is for common shares made initially to the existing shareholder
- By exercising all the rights given, shareholders can maintain their proportionate ownership

The important date is given:
Announcement date
Record date
Rights on period
Ex-right date
Ex-right period
Expiry date