Class 11 Flashcards
(29 cards)
what are some key features of equity financing
voting rights
board decides if dividend is paid or not / what amount
what is equity financing
funds in exchange for ownership interest in the firm
what is limited liability
corporate loss will not exceed amount invested in partnership
who is paid first in bankruptcy?
debt financiers
key features of debt
principal payment
maturity date, payment schedule, interest
indenture and covenants
what is debt financing?
creditors offer loans in return for interest on loans and principle value at maturity date
what is an indenture
legally binding agreement, contract or document between two or more parties
what is a covenant
term placed on loan/debt ensuring borrower continues or stops certain activity
what are hybrid securities (+examples)
combine characteristics of debt and equity
examples: preferred shares, convertible debt
examples of frictions in capital markets
information assymmetry
investors limited ability to monitor mangers discretional use of funds
what are equity financing options for small firms
insider financing, angel investors, venture capitals
what is insider financing
owner/manager providing personal savings to firm
what are angel investors
wealthy individuals who are willing to fund startups in exchange for shares in the business (shark tank)
what is venture capital
firms that specialize in raising money for startups
Limited Partners (LPs) provide funds
General Partners (GPs) manager the company
what are debt financing options for small firms
short term debt financing, trade credit
what is short term debt financing
- short term loans
- banks effectively monitor and discipline borrowers
- builds trust and long term relationships with creditors
what is trade credit
- credit terms give a certain number of days to make payment, giving firms enough time to sell product and then use those funds to pay back creditors
examples of equity financing for medium size firms
private equity firms
what are private equity firms
similar to VC but focus on established and more mature private firms (scope and size is much greater than VC)
examples of debt financing for medium sized firms
larger bank loans (medium term debt)
syndicated bank loans
what is a syndicated bank loan
single loan that is funded by a group of banks
what are examples of other investors providing private equity
- institutional investors (banks, pension plans, insurance companies)
- sovereign wealth funds (state owned pools of money that are invested in businesses)
- corporate investors (investors for strategic purposes)
what are advantages of offering an IPO and going public
1) greater liquidity (stocks to cash)
2) better access to capital
3) firm is more visible
what are disadvantages of offering an IPO and going public
1) owners reduce ownership
2) firms must comply with all requirements of public companies
