IPO Flashcards
Why raise capital
To finance growth.
To pay off debts.
For mergers and acquisitions.
R&D
What are the 2 types of External capital a firm can raise
Equity: common, preferred, warrants
Debt: Bank loans, Bonds, Leases, Commercial paper
Main difference between bank loans and Bonds
Bank loans cannot be traded whereas bonds can be traded on the public market
Main difference between Preferred and common equity
Preferred equity typically has a higher dividend yield compared to common equity. Because of this, preferred equity investors usually receive more cash flow earlier in the life of the investment
What are equity warrants
options on the equity of the company
examples of short vs long term financing
short and medium: overdraft, trade credit, factoring, hire purchase
Long term: Debt and Equity capital
Long term financing: debt
Debt holders have a contract specifying their claims must be met before equity holders
If obligations are not met creditors can legally claim assets
interest payments are tax deductible
Long term financing: equity
Shareholders are the owners of the firm and have voting rights
they have the right to dividend payments if the company chooses to pay them
Dividend payments are considered profits so are not tax deductible
Equity financers bennefit from upside potential, once interest payments are paid proceeds go to equity holders
What are business angels
Wealthy individuals, generally with
substantial business & entrepreneurial experience.
Typically invest in equity finance but also debt and preference shares.
Usually they do not seek control of companies and normally target firms at an earlier stage than VCs.
BAs are “hands on investors” as their expertise is as valuable as their capital
What are venture capitalists
Wealthy individuals, generally with a substantial business and entrepreneurial experience.
They provide managerial assistance.
Mostly after high-growth unlisted
companies.
Typically, they are industry specialized/ institutional investors who attract funds from elsewhere
Different types of VC’s
Seed corn: development of a business concept.
Start-up: product or idea is further developed and/or initial
marketing.
Other early stage: for initial commercial manufacturing and sales.
Expansion (development): increase production capacity and working capital.
Management buy out (MBO): funding for managers making a bid to buy the business of a large company.
Management buy in (MBI): funding for new team of managers from outside the company.
Public to private: funding for returning a company to its unquoted status.
Two types of shares can be sold in an IPO:
Primary (new shares)
New shares available in a public offering that raise new capital.
Secondary (held by founders)
Shares sold by existing shareholders in an equity offering
what is the debt overhang problem
Debt overhang refers to a debt burden so large that an entity cannot take on additional debt to finance future projects. The burden is so large that all earnings pay off existing debt rather than fund new investment projects, making the potential for defaulting higher.
Advantages for a firm going public
New capital for the company to finance new
investments, make company acquisitions,
refinance current borrowings, increase payouts.
Facilitates raising new finance in the future:
going public strengthens the equity base and reduces leverage therefore reducing the debt overhang problem
Investors value liquidity. The fact that equity
is traded in a stock market minimises
transaction costs you do not have to find a
buyer yourself
Less asymmetric info enhances company image: it provides “certification” by financial market professionals; more financial press attention; provides more credibility to customers and suppliers.
Allows Cashing in
Diversification of risk for managers who could have been large stakeholders and therefore risk averse
Disadvantage of a public listing
Financial costs of an IPO: Expensive undertaking, Increase in legal requirements
Stock-price emphasis: Management short-termism, Separation between ownership and control, Hostile take-over bid risk.
More public scrutiny
More disclosure to product market competitors
