chapter 2- equity: the lifecycle of a company Flashcards
(41 cards)
what is a company’s working capital?
their outgoings
what is venture capital?
a source of equity funding for young and fast-growing companies
once a company is listed, what it can it do with its shares?
- buy other companies through M&A
- these are either agreed bids (where the target agrees to be bought) or hostile (where the target’s directors resist)
why is fixed capital needed for businesses?
- for long term funding
- e.g. to buy the shop, fit it out, buy a van for deliveries etc
- ^these are assets of the business that you need otherwise not in business at all
why is a working capital and why is it needed for businesses?
- their outgoings
- paying for staff, electricity, water etc
- money that keeps the business going
- ensures cash flow, which without, would cause a cash flow crisis
what are the 2 types of funding businesses need?
fixed capital
working capital
what is equity finance and what is it used for?
- provided by investors
- professional equity investors are also known as venture capitalists/ VC’s
- this is because investing in a new business is risky
what are the 3F’s in the city and what do they mean?
family, friends and fools
these are people who are more likely to invest as they don’t want to disappoint and believe you have a great business prospect
how many businesses go bust in the first 5 years?
3 out of 5
how much do venture capitalists seek to own of your business and why?
over half as it is high risk and they want to ensure that their return is adequate
eventually, they will sell their investment in order to receive profit and then invest back into future start-up businesses
what are the 4 exit routes for venture capitalists?
- recycling- selling their stake to another VC - this is because different VC’s provide different funding- some provide seedcorn or start-up funding, whereas others invest in businesses that have some heft, also known as late- stage equity.
- MBO/ management buyout- happens in 2 circumstances:
- founders of a business buying a stake back from an original VC backer
- managers of an established business buying it off the parent company because it is non-core to the parent companies strategy
- trade sale- VC will encourage the founder to sell the business to a bigger company who could help it get to the next stage
this can beef it up or diversify the business - flotation- transfer from private to public- involves doing an Initial Public Offering (IPO)
this means shares are listed and could be sold on the LSE
what are some limitations of flotation?
- the company must consult shareholders with any decision
- need to provide financial details on a regular basis
- respond to pressure from biggest shareholders in terms of how you run your business
what are the advantages of flotation?
more investors= shares will be in demand= price will go up= if you want to issue more shares, you will raise the capital more cheaply
how is the LSE a business?
- can list itself
- charges companies to list
- charges investors a fee for buying and selling their shares
- sells information generated by the buying and selling activity
what is insider dealing?
the trading of a public company’s stock or other securities based on material, nonpublic information about the company
it is a criminal offence
what does the LSE want to ensure?
1) that companies are transparent about what they are doing and how
2) investors are operating on a level playing field and aren’t trying to gain unfair advantages over each other
give 2 examples of markets for company’s to float on?
LSE- London stock exchange (businesses 3 years plus)
AIM- alternative investment market (owned and regulated by LSE) (companies less than 3 years of trading history and riskier)
what are some requirements of listing on the LSE?
sponsor- these chaperone companies to ensure that they follow the listing process
publishing a prospectus- this explains what the business is about, how it has done and how well it is likely to do. It contains detailed financial information, for instance about cash flow
the company also agrees to regularly update information to notify its shareholders
from the company’s perspective, what does the success of flotation depend on?
1) whether its the sort of business with good prospects that investors want to invest in
2) the state of the market in general
what is involved in getting a share issue underwritten?
where a broker is sponsored and acts a bit like insurance- for a fee, the company knows that any shares not bought will still be bought
what are the different types of listing on the LSE?
- introduction- where no fresh capital is raised, 25% of their shares are in public hands, doesn’t require underwriting as there are no new shares, is only listed for its shares in issue to be publicly traded on the exchange, cheapest way
- placing/ private offering- offered a sale on a selective basis, mainly to institutional investors, often used by smaller businesses where the placing is on behalf of VC’s or existing shareholders, cheap but the company ends up with a narrow shareholder base as the main aim is to increase the number of investors without a full blown public offer
- public offer- shares to anyone who wants them, issues that are underwritten and require a full-blown prospectus, most expensive route but widest spread of investors and raises the largest amount of fresh capital
what does the term over-subscribed mean when referring to issues?
if the demand exceeds the number on offer
what does the term under-subscribed mean when referring to issues?
when underwriters pick up the unallocated shares at the agreed price
what is considered a premium and discount in relation to shares?
once shares are issued or sold and are traded, if they rise above the issue price then that is considered premium
if below issue price, then discount
