Transcript Document

Lecture 2
Debt Financing
Debt vs. Equity
Debt holder claims must be
paid in full before the claims
of equity holders can be
paid.
Equity holders elect the
board of directors of the
corporation and thus
ultimately control the firm.
Equity holders receive cash
in the form of dividends,
which are not tax deductible
to the corporation, while the
interest payments of debt
instruments are a taxdeductible expense.
Financial Markets and Corporate Strategy, David Hillier
Types of Equity Securities
Ordinary Shares
Preference Shares
Warrants
Financial Markets and Corporate Strategy, David Hillier
Ordinary Shares
Also known as
Common Stock
Shareholders
are viewed as
the owners of
the corporation
Normally
entitled to vote
at an AGM
Have residual
ownership
Financial Markets and Corporate Strategy, David Hillier
Multiple Class Shares - % Firms with
unitary share structures
Financial Markets and Corporate Strategy, David Hillier
Different Types of Multiple Class Equities
Non-Voting
Preference
Shares
Multiple
Voting
Rights
20%
1%
3%
5%
4%
3%
-
2%
64%
19%
2%
5%
-
-
Germany
24%
-
3%
-
-
-
-
Switzerla
nd
-
12%
35%
-
-
-
-
Spain
-
-
41%
-
-
-
-
36%
-
8%
28%
-
-
-
Netherlan
ds
-
67%
-
-
29%
10%
24%
Sweden
-
75%
6%
-
-
-
-
8%
8%
11%
8%
-
3%
-
UK
France
Italy
Other
Voting Ownershi Priority Golden Depositar
Right
p Shares Shares
y
Ceilings Ceilings
Receipts
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Preference Shares
Also known as
Preferred Stock
Senior claim to
Ordinary Shares
but below Debt
Cumulative and
Non-Cumulative
Dividends
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Hybrid Security –
Fixed Dividends
Used to minimise
capital
requirements of
financial institutions
Exotic Preference Shares
Convertible
Preference
Shares
Adjustable Rate
Preference
Shares
Income
Preferred
Preference
Shares
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Warrants
Gives the holder the
right to buy shares
from the company at a
specified price within a
specified period
Similar to call options
but company must
issue new shares
Usually grouped with
debt issue – known as
a unit offering
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Volume of Global Equity Offerings 2010
($ millions)
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Depositary Receipts
• Company lodges shares in
international bank
Intermediation
• Bank issues depositary
receipt in another country
• Receipt has claim on cash
flows from underlying
equity
Issue
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• Shareholders are in target
country
• Allows foreign investors to
buy shares of a company
from a country with poor
investor protection
Marketing
Secondary Markets for Equity
Stock Exchange
OTC Market
Third Market –
Broker sells
securities on
behalf of client
Fourth Market –
Electronic
Communications
Networks
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Stock Exchange Systems
Dealer
Market
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Order
Driven
System
Dealer Markets
Dealer posts a bid
price and ask price
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Dealer posts depth
of each quote –
The number of
shares on offer
Order Driven System
Limit Order
Book
Market
Order
Limit Order
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Market Efficiency
Behavioural
Finance
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Efficient
Markets
Hypothesis
Limits to Arbitrage
The notion that the
price of an asset may
not equal its correct
value because of
barriers to arbitrage.
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Noise Traders
A trader whose
trades are not based
on information or
meaningful financial
analysis.
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Sentiment Based Risk
A source of risk to
investors above and
beyond firm-specific
risk and overall
market risk.
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Bubbles and Crashes
Bubble
A situation where observed
prices soar far higher than
fundamentals and rational
analysis would suggest.
Crash
A situation where market
prices collapse significantly
and suddenly.
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Bubbles in History
Tulipmanie
The South
East Asian
Bubble
The South
Sea Bubble
The Roaring
Twenties
The Celtic
Tiger
The
Property
Bubble
Financial Markets and Corporate Strategy, David Hillier
German Stock Exchange Volatility
Financial Markets and Corporate Strategy, David Hillier
Result 3.1
The stock market plays an important role in allocating capital.
Sectors of the economy that experience favourable share price
returns can more easily raise new capital for investment. Given
this, the stock market is likely to more efficiently allocate capital
if market prices accurately reflect the investment opportunities
within an industry.
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The Public Issue
Pathfinder Prospectus
Pre-Underwriting Conferences
Full Prospectus
Public Offering and Sale
Market Stabilization
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Alternative Issue Methods
Private
Placement
or Placing
General
Cash Offer
Rights Issue
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Public
Issues
Public Issues
Initial Public
Offering (IPO)
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Seasoned
Equity Offering
(SEO)
The Cash Offer
Three Types
Firm
Best Efforts
Commitment
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Dutch
Auction
Other Factors in Equity Financing
Investment
Banking
The Offer
Price
Underpricing
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IPO Underpricing
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Underpricing and Firm Size
Financial Markets and Corporate Strategy, David Hillier
IPO Underpricing around the World
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Number of Offerings and Average Issue
Date Return
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The Announcement of New
Equity and the Value of the Firm
Managerial
Information
Debt
Capacity
Falling
Earnings
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The Cost of New Issues
Spread or
Underwriting
Discount
Abnormal
Returns
Other Direct
Expenses
Indirect
Expenses
Underpricing
Green Shoe
Option
Financial Markets and Corporate Strategy, David Hillier
The Cost of New Issues
Financial Markets and Corporate Strategy, David Hillier
International Comparison of IPO
Underwriting Fees
Financial Markets and Corporate Strategy, David Hillier
Result 3.2
IPOs are observed frequently in some years and not in others. The
available evidence suggests that the hot issue periods are
characterized by a large supply of available capital. Given this
interpretation, firms are better off going public during a hot issue
period.
Financial Markets and Corporate Strategy, David Hillier
Result 3.3
The advantages and disadvantages of going public are as follows.
Advantages:
better access to capital markets
shareholders gain liquidity
original owners can diversify
monitoring and information are provided by external capital markets
enhances the firm’s credibility with customers, employees and suppliers.
Disadvantages:
expensive
costs of dealing with shareholders
information revealed to competitors
public pressure.
In general, a firm should go public when the benefits of doing so exceed
the costs.
Financial Markets and Corporate Strategy, David Hillier
Rights Issues
An issue of equity to
existing shareholders is
called a rights issue or
rights offering.
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Each shareholder is issued
an option to buy a specified
number of new shares from
the firm at a specified price
within a specified time, after
which the rights expire.
The Underwriting Arrangements
Standby
Arrangements
Standby Fee
Oversubscription
Privilege
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The Private Equity Market
Private
Placement
The Private
Equity Firm
Suppliers of
Venture
Capital
Stages of
Financing
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Private Equity Attractiveness Index
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Sources of Private Equity Financing
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Major Private Equity Fundraisers
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Breakdown of Private Equity Financing,
2002 - 2007
Financial Markets and Corporate Strategy, David Hillier
Stages of Financing
1
Seed
Money
Stage
2
Start-Up
3
1st Round
Financing
4
2nd Round
Financing
5
3rd Round
Financing
6
4th Round
Financing
Financial Markets and Corporate Strategy, David Hillier
Private Equity Financing by Funding
Stage, 2007
Financial Markets and Corporate Strategy, David Hillier
IPOs by VC backed Biotech Firms
Financial Markets and Corporate Strategy, David Hillier
Thank You