Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ECB004 - (Sem 2) Introduction to Financial Economics > WEEK 5 - Equity Financing > Flashcards

WEEK 5 - Equity Financing Flashcards

1
Q

What is Venture Capital?

A

Equity investment in new private companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What do Venture Capital firms do?

A
  1. pool funds from a variety of investors
  2. seek out promising start-up companies
  3. finance the firm’s operation (in exchange for a large share of the firm’s stock)
  4. and work with these companies as they try to grow.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the process of investment for a company?

A
  1. Most new companies rely initially on family funds and bank loans.
  2. Some of them continue to grow with the aid of equity investment provided by wealthy individuals known as angel investors.
  3. However, many adolescent companies raise capital from
    specialist venture-capital firms.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are angel investors?

A

Investing in the person or belief in the idea rather than the business itself (not as aggressive as typical lender)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are some other ways of equity financing?

A
  • Other established companies also investing (corp venture)

- Crowdfunding (similar to angel investors)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the elements of VC’s?

A
  • tend to specialize in young high-tech firms;
  • monitor these firms closely;
  • provide ongoing advice;
  • major role in recruiting senior management team;
  • their contacts are valuable to the business;
  • can help the firm to bring its products more quickly to market.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

When did we see a boom and a bust in venture capital investment?

A

During 2000’s boom in venture capital investment but with end of dotcom bubble, it slumped and never really got back up to that old level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the elements of VC Funds?

A

-Organised as limited private partnerships with a fixed life of about 10 years.
- Pension and mutual funds and other wealthy private investors
are the limited partners.

  • The management company of the venture capital firm is the general partner. (Unlimited Liability)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the general partner responsible for?

A
  • Making and overseeing the investments, receiving a fixed fee
  • Plus share of profits (called carried interest)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are some of the restrictions placed on companies by VC’s?

A
  • Some restrictions like who can be on board

- How much is gonna be invested in once (usually dispersed in stages after certain lvl of success)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is a VC fund’s investment policy?

A
  • Accept high uncertainty if there is even a small chance that the company will become big/successful (returns can be significant)
  • Identify failed investments early and accept the loss rather than trying to fix the problems (see it as a sunk cost)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How do VC’s cash in on their investment?

A
  1. Sell their shares to a larger firm

But entrepreneurs may not like option 1 due bureaucracy and red tape from larger firm

  1. Firm becomes public
    - Stocks traded in capital market so ventures can sell their stock and cash in and entrepreneurs hold control
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What does the success of a VC market require?

A
  • An active stock exchange that specialises in trading the shares of young and rapidly expanding firms (e.g NASDAQ)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the two kinds of IPO?

A

Primary Offering: New shares sold to raise additional cash

Secondary Offering: Existing shareholders cash in by selling part of their equity holdings (e.g. when Govts sell their shareholdings in companies))

Many IPOs are a mix

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the benefits of going public?

A

MAIN: Raise new capital or enable shareholders to cash out

  1. To establish value of the firm
  2. Debt has become inexpensive
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is an underwriter?

A

Firms that buy an issue of securities from a company and resell it to the public, also provide procedural and financial advice

17
Q

What is the process of an IPO?

A
  1. Selection of an underwriter (take over whole IPO process)
  2. Preparation of a registration statement
  3. Publication of prospectus
  4. Arrange road show
  5. Book building and decision on appropriate issue price
18
Q

What is a registration statement?

A

Detailed document with info about:

i. Firm’s history and existing situation
ii. Proposed projects intended to be financed with the funds raised

19
Q

What is a prospectus?

A

Summary of most important information from the registration statement.

20
Q

What is a roadshow?

A

Talk to potential investors (e.g. pension and mutual funds) to get idea of how much stock they wish to but and for how much.

21
Q

What is book building?

A

Build a book of likely orders and use this information to set issue price.

22
Q

What is issue price?

A

Initial price per share at which investors will buy the company’s stock.

23
Q

What are the costs associated with an IPO?

A
  • Spread: Payment of the underwriter. Dif between price at which underwriter buys new issue and issue price at which offered to public (Offering Price)
  • Admin Costs
  • Other Direct costs - Printing, Mailing etc.
24
Q

How do you calculate the spread cost?

A

SEE EXAMPLE IN NOTES

25
Q

How is Underpricing another cost of IPO’s?

A

Since the offering price is usually less than the true value of the issued securities, investors who buy the issue got a bargain at the expense of the firm’s original shareholders.
(Typically a hidden cost)

26
Q

How do you calculate underpricing?

A

SEE EXAMPLE IN NOTES

27
Q

When does underpricing occur?

A
  • Occurs when new stock has an issue price below the ‘true’ or ‘fair’ valuation of the company’s share.

(True or Fair means company’s fundamentals (future cash flows, growth potential etc.))

  • For existing shareholders there is a cost in terms of lower value of their stock
28
Q

How can underpricing actually be viewed as a positive thing?

A

The evidence shows that investors who buy at the IPO (low) issue price, on average, realize very high returns over the following days (when those shares started to be traded in the stock market).
↓
the price reaches and, many times, exceeds its true valuation
↓
excessive returns make the specific share desirable
↓
enhances firm’s ability to raise further equity capital in future

29
Q

Why does it also make sense to underprice new issues?

A

The Winner’s curse

30
Q

What is the Winner’s curse?

A

If you apply for an issue and have no difficulty in getting all the shares (low demand?), then you may get the impression that you overestimated their value and overpaid for them.

If you are smart, you will play the game only if there is a substantial underpricing.
The issuers are aware of this problem → possible rationale for the underpricing of new issues.

31
Q

What others issue do companies make following their IPO’s?

A

Issues can be of two kinds:

  • General cash offer
  • Rights Issue (Privileged Subscription)
32
Q

What is a general cash offer?

A

Sale of securities (equity or debt) open to all investors by an already public company; more or less the same procedure as with IPOs.
Can be:

  • Seasoned Offering
  • Shelf Registration
33
Q

What is a seasoned offering?

A

Sales of securities by a firm that is already publicly traded

34
Q

What is a shelf registration?

A

Procedure that allows firms to file one registration statement for several issues of the same security

(No need to issue shares when get approval, issue when ready)

(But has time offer of 3 years before expires)

35
Q

What are the international ways for public companies to have security sales?

A
  • Foreign Bonds:
    Companies issue bonds in another country’s domestic currency (governed by the rules of that country).
  • Eurobonds:
    Bonds underwritten by a group of international banks and offered simultaneously to investors in a number of countries.
  • Global Bonds:
    Bonds where one part is sold internationally in the Eurobond market and the remainder sold in the company’s domestic market.
36
Q

What is the rights issues (or privileged subscription)

A

Issue of securities offered first or only to current stockholders

37
Q

How do you calculate the Rights Issues?

A

SEE EXAMPLE IN NOTES

ECB004 - (Sem 2) Introduction to Financial Economics (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions