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26 Cards in this Set
- Front
- Back
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What stages of the business lifecycle have what types of funding? |
- how firms raises capital depends on size, business lifecycle place and growth outlook -> can either be debt or equity Stages: 1. Idea - Family & Friends 2. Prototype & Launch - Angel Investors 3. Growth & Expansion - Venture Capital 4. Diversification - Capital Markets |
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What is Seed Capital? |
- initial funding used to begin creating a company or product - modest sum of money -> cover only first essentials - might come from personal assets, friends, family or angel investors |
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What are Angel Investors? |
- also provide Seed Capital - high net worth individuals, not only cobtribute cash but also business knowledge - require very high return within first 5 years because of because of risk they take (10 times plus usual) |
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What is Venture Capital? |
- once start-up survived intial stage provides more capital for larger financing need - VC firms are specialized in pooling capital from sources like pension funds, individuals or insirance comanies - focuses on financing emerging companies while private equity focuses on financing larger firms - VCs want stake (40% +) in company but also substantial control over decision making (seats in Board of directors) and give stratigic advice |
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What are the Venture Capital Financing Stages? |
Stage 1(Series A round): help comany to gain traction on sales/increase manufacturing capacities Stage 2+ (Series B/C): provide further working capital for company to expand marketing and distribution, not yet profitable Mezzanine round: provide expansion capital for newly profitable firm Exit: Provide financing to exit the company through secondary sale or IPO (for founders as well) => for each stage specified goals need to be met, financing provides incentive for founders because woth each stage the value of their stakes rises |
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What is an IPO? |
- first time a firm is selling securities to the public - IPO process: 1. Select Investment Bank 2. Perform due diligence and prepare for regulatory filings 3. Determine the offering price 4. Stabilise the offer 5. Transition to Market competition |
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What does the due diligence process entail? |
- engagement of outside key advisor - validation of 2/3 years of audited financial statements - review of significant accounting policies and company agreements - review of tax structure and regulatory obligations - establishmemt of board of directors, best practive corporate governance & reporting processes |
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What is the registration statement? |
- discloses all material information concerning the company -> financial statements of firm -> background of management -> insider holdings -> legal problems firm faces -> future ticker symbol of company => filed with help of investment bank at the SEC -> effective date where offer price is disclosed is set then, one day before this date the issuer and underwrite decide on share price and number of share to be issued |
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What is After Market stabilisation? |
- underwriter carries after market stabilisation in case of order imbalance after the issue was brought to market - is allowed to trade and inlfuece price of the issue because manipulation prohibitions are suspended - 25 days after IPOthe offering is transitioned to market competition |
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How is the performance of an IPO judged? |
1. Market Capitalisation: is successful when market cap is equal or higher than that of competitors within 30 days of IPO 2. Market Pricing: IPO sucessfull when average percentage change of offering price to market price within 30 days following IPO is less than 20% |
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Who are underwriters? |
- investment bank that is responsible for IPO - performs services like: -> formulate method used to issue security -> pricing the ne security -> selling the new security - underwriters form syndicate among each other to share risk of underwriting and co manage it - compensated via difference between buying price that underwriters get and the offering price, called gross spread or underwriting discount |
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What are the types of underwriting? |
1. Firm Commitment Underwriting - issuer sells entrie issue to underwriter who tries to resell it, issuer receives agrees amount and entire IPO risk lies with underwriter 2. Best Effort Underwriting - underwriter is legally bound to do his best effort to reach agreed upon offering price, but does not guarantee it 3. Dutch Auction Underwriting - no fixed price for shares is set, instead shares are auctioned to investors, offer price is determined by bids. - ALL successful bidders pay same price for share eventhough they might have bid more |
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What is the "Green Shoe Provision"? (or "overallotment option") |
Members of underwriting group get option to buy additional shares at offering price from issuer |
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What are Lockup Agreements? |
- specify how long insiders have to hold onto their shares before they can sell them after IPO - ensure that they maintain significant economic interest in firm even after IPO |
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What is a "Quite Period"? |
- period during which firm and managing underwriters communicarion with the public is limited to only ordinary announcements and purely factual matters |
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What determines the initial offering price? |
- sales, expenses, earnings, expected earnings growth of company - price to earnings multiple compared to peers - marketablility in the industry and general market development - depth of investor base |
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What is Underpricing? |
- listing of an IPO is below thr market value, is the price development from initial offering price to first closing day price - benefits new shareholders but causes indirect costs for existing shareholders |
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Why does Underpricing exist? |
1. Often occurs in small, speculative issues. Must be underpriced to be attractive for investors. 2. May becaused due to overreaction of investors that cause the price to spike 3. Investment banks set lower offering price to attract interest in the stock and collect opinions about a suitable price |
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What is a Seasoned Equity Offering? |
- subsequent capital rise, offering of company that already has outstanding securities - used to: -> increase Working Capital -> invest in new assets -> pay down debt -> recapitalize the business -> fund operations to grow firm -> pursue mergers and acquisitions - also handled by underwriting firm but price is set by oustandin share price |
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What is a dilutive and non-dilutive seasoned offering? |
-depends on wheather includes primary or secondary components -> primary components: new shares are issued which dilutes the value of existing ones -> secondary component: not dillutive because shareholders sell to each other and number of share outstanding remains the same |
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What is a rights offering, rights issue or a privileged subscription? |
- issue of common stocks offered to existing shareholders -> shareholder gets right to buy specific number of shares to a specific price in a specific time frame - advantage is that no underwriter is needed which saves costs -> however often use standby underwriting which means that underwriter takes unsubscribed portion of issue |
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What is the effect of a seasoned offering? |
- stock prices of the issueing company decline following the anouncement of the issue but do not change after a debt announcement - possible reasons: -> Intrinsic Value: new issue will dilute the distribution of net profits and therefore reduce intrinsic value -> Enticemement: lowering share prices will attract current and potential shareholders to participate in offering -> Issue Cost: there are substantial costs connected to issuing securities |
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What are the costs of issuing Equity Securities? |
1. Gross Spread: difference between the underwriters buying price and the offering price 2. Other direct expenses: legal fees, filing fees and taxes incurred 3. Indirect expenses: indirect costs related to management time spend on the issue etc. . 4. Abnormal Returns: price adjustments due to announcemnet of issue (in seasoned offering) 5. Underpricing: losses arised from selling stock below true value in IPO 6. Green Shoe Option: underwriter option to buy additional shares at offer price to cover overallotments |
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What are the two form of direct private long-term financing? |
1. Term loans - direct business loans, maturity 1-5 years, repayed during life of loan, - lenders are companies specialized in corporate finance like commercial banks or insurance companies 2. Private Placements - same as term loans just the maturity is longer |
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What is a Public Issue of Bonds and how is it done? |
- seek funds from wider public instead of individuals like private long-term financing - procedure follows the same stocks, must register with SEC etc. - BUT registration statement mus onclude indenture which is a legal contract that states: -> basic terms of bond (maturity, amount of binds issued etc) -> description of property used as security if applicable -> Seniority -> Sinking fund provisons -> Convertible features -> Call provisions -> Protective covenants |
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What are the differences between direct private long-term finaning and public issue of debt? |
1. Dir. LT Financing avoids cost of SEC registration, distributing bonds on provate market is cheaper2. It is easier to renegotiate Term loan or private placement in event of default (less parties involved)3. Direct Placement is likely to have more protective covenants4. Interest rate on term loans and private placements usually higher than on equivalent public issue5. Life insurance and pension funds dominate private placement of bond market. Commerial banks play significant role in term loan market. |
