Lecture 9 - Practicalities of equity and debt financing

Question 1

Two choices to raise long term capital

Answer 1

Issue new shares (Equity)
Borrow funds or through public issue of debt

Question 2

Types of equity finance

Answer 2

Initial public offering (IPO)
Seasoned equity offering (SEO)
Private placement

Question 3

Initial public offering (IPO)

Answer 3

Sale of a company shares to the public for the first time

Question 4

Seasoned equity offering (SEO)

Answer 4

A new share issue when the company’s shares are already publicly traded

Question 5

Private placement

Answer 5

A share issue that is sold to a few institutions or investors privately

Question 6

Advantages of a stock market listing

Answer 6

Access to wider pool of finance
Enhanced public image
Original owners selling shares
Easier to seek growth by acquisition

Question 7

Underwriter

Answer 7

Underwriters agree to buy at the issue price any shares which are not taken up by the investing public reducing risk for the company

Question 8

3 Roles of an underwriter

Answer 8

Best effort basis:
- Underwriters act as agents to sell the shares using their best efforts to do so

Firm Commitment:
- Underwriter guarantees that it will sell all stock for the company at the offer price

Auction IPO:
- Rather than setting a price itself and then allocating shares to buyers, the underwriter takes bids from investors and then sets the price

Question 9

Disadvantages of a stock market listing

Answer 9

-Greater public regulation
- Greater legal requirements
- Wider circle of investors
- Additional costs

Question 10

Reasons for choosing debt finance

Answer 10

-Generally lower cost than equity finance
- More easily available
- Debt finance provides tax relief on interest payments

Question 11

Sources of debt finance

Answer 11

-Short or medium term bank loan
- Overdraft
- Bonds