Sources of Equity

Question 1

What is equity?

Answer 1

Selling ownership of part of the business (i.e. shares) to receive funds to invest into the business

Question 2

What are the 4 types of ordinary shares?

Answer 2

1. New issue
2. Rights issue
3. Placement
4. Share purchase plan

Question 3

What are ordinary shares?

Answer 3

Shares in a public company (anyone can buy shares)

Question 4

What is private equity?

Answer 4

Shares sold in a private company (shares aren’t listed on the ASX and new shareholders must be approved by existing owners)

Question 5

What is a new issue?

Answer 5

A new share in the business is sold on the ASX

Question 6

What is a rights issue?

Answer 6

New shares are sold to existing shareholders in proportion to the percentage of shares they already own (e.g. if you own 10% of the existing shares, you have the right to buy up to 10% of the new shares)

Question 7

What is a placement?

Answer 7

New shares are offered at a discount to specific investors the business wants to attract as part-owners

Question 8

What is the benefit of a new issue?

Answer 8

Can gain the largest amount of funds of any type of equity because the shares can be purchased by anyone

Question 9

What is the disadvantage of a new issue?

Answer 9

Needs a prospectus (which is costly and time consuming)
New owners dilute the ownership of existing shareholders

Question 10

What is the benefit of a rights issue?

Answer 10

Existing shareholders have the opportunity to ensure that their percentage ownership of the business is not diluted

Question 11

What is the disadvantage of a rights issue?

Answer 11

Needs a prospectus (which is costly and time consuming)

Question 12

What is the benefit of a placement?

Answer 12

Attracts new owners with specific skills desired by the business.
Doesn’t require a prospectus

Question 13

What is the disadvantage of a placement?

Answer 13

New owners dilute the ownership of existing shareholders

Question 14

What is the benefit of a share purchase plan?

Answer 14

Does not require a prospectus.
Existing shareholders have the opportunity to limit the extent to which their ownership is diluted

Question 15

What is the disadvantage of a share purchase plan?

Answer 15

Sold at a discount, so less funds are raised.
Shareholders can only purchase up to a certain amount (usually $15,000 per owner), so may not raise sufficient funds.

Question 16

What is the benefit of private equity?

Answer 16

New owners must be approved by existing shareholders.
Private companies do not need to publicly disclose financial information about the business.

Question 17

What is the disadvantage of private equity?

Answer 17

By limiting who can buy shares, the business cannot receive the highest possible price for its shares