How do companies finance their long-term investments?
(property etc)
Internal and External funding
Internal - profit and depreciation
External - new equity and borrowing
In USA, Germany, Japan and UK what type of funding is most popular? Why?
Internal
It is far more convenient, avoiding costs of new security issuing / negotiating debt.
How do you measure a firm’s reliance on debt and equity?
ππππ‘ πππ‘ππ= (π£πππ’π ππ ππππ‘)/(π£πππ’π ππ ππππ‘+π£πππ’π ππ π βππππ )
- measures the proportion of debt relative to the firm’s value
How do you measure debt?
current liabilities + long-term liabilities
Book value vs market value
Book - how much capital firm has raised from shareholders in the past
market - measures the value that shareholders place on those shares today
What are stocks held by investors called?
- issued and outstanding
What are stocks that are bought back from investors called?
issued but NOT outstanding
Explain how and why Facebook issued two classes of shares
When Facebook issued their first shares they were reluctant to give up control. Therefore, they issued A (to the public) and B (to the founders) shares. Both had the same cashflow rights but different control rights.
Why do shares with a superior voting power sell at a premium?
- Greater control rights grant larger private benefits
What is a preferred stock?
One that is given priority over common stock when receiving dividends
What is a benefit of Debt?
It is a tax subsidy as interest is paid on pre-tax income and dividends on post-tax income
When does debt offer control rights?
When the firm defaults
Three types of debt cashflow claims?
Secured - first claim on specified collateral in default
Senior - priority to be paid in default
Subordinated - repaid after senior
What are venture capital firms?
Pool funds from a variety of investors seeking out promising start-ups, working with them (quite intimately) as they grow
Venture capital funds - investment policy:
- accept high uncertainty if there is potential
- identify failed investments early and accept loss rather than chasing it
Outline the process of an IPO
- selection of an underwriter (who resells securities to the public)
- registration statement (for approval by SE authorities)
- publication of prospectus (important info from registration statement)
- road show to talk to potential investors
- book building and setting appropriate issue price
What costs are associated with IPOs?
- spread (paying underwriter through their markup)
- loads of admin costs
- hidden cost- underpricing of the IPO where people got it as a bargain
After an IPO, how can shares be offered?
- general cash / public offer
- rights issue
