Sources of Equity Flashcards
What is equity?
Selling ownership of part of the business (i.e. shares) to receive funds to invest into the business
What are the 4 types of ordinary shares?
- New issue
- Rights issue
- Placement
- Share purchase plan
What are ordinary shares?
Shares in a public company (anyone can buy shares)
What is private equity?
Shares sold in a private company (shares aren’t listed on the ASX and new shareholders must be approved by existing owners)
What is a new issue?
A new share in the business is sold on the ASX
What is a rights issue?
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)
What is a placement?
New shares are offered at a discount to specific investors the business wants to attract as part-owners
What is the benefit of a new issue?
Can gain the largest amount of funds of any type of equity because the shares can be purchased by anyone
What is the disadvantage of a new issue?
Needs a prospectus (which is costly and time consuming)
New owners dilute the ownership of existing shareholders
What is the benefit of a rights issue?
Existing shareholders have the opportunity to ensure that their percentage ownership of the business is not diluted
What is the disadvantage of a rights issue?
Needs a prospectus (which is costly and time consuming)
What is the benefit of a placement?
Attracts new owners with specific skills desired by the business.
Doesn’t require a prospectus
What is the disadvantage of a placement?
New owners dilute the ownership of existing shareholders
What is the benefit of a share purchase plan?
Does not require a prospectus.
Existing shareholders have the opportunity to limit the extent to which their ownership is diluted
What is the disadvantage of a share purchase plan?
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.
What is the benefit of private equity?
New owners must be approved by existing shareholders.
Private companies do not need to publicly disclose financial information about the business.
What is the disadvantage of private equity?
By limiting who can buy shares, the business cannot receive the highest possible price for its shares
