Summary Fundamentals of Corporate Finance by Hillier, 3rd edition. (Chapters 14-22)
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Course
Corporate Finance
Institution
Universiteit Twente (UT)
Book
Fundamentals Of Corporate Finance
Summary on the Fundamentals of Corporate Finance, chapters 14 until 22. This includes subjects such as how to raise capital, financial leverage and capital structure policy, dividends and pay-out policy, financial planning and management, international corporate finance, behavioural finance, financ...
Summary Fundamentals of Corporate Finance - Hillier, Clachler, Ross, Westerfield & Jordan
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International Business Administration
Corporate Finance
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Corporate Finance FENSI
Chapter 14 Raising capital
14.1 The financing life cycle of a firm: early-stage financing and venture capital
Private financial markets: markets for the creation, sale and trade of illiquid securities having less
standardized negotiated features
Public financial markets: markets for the creation sale and trade of liquid securities having
standardized features.
Private equity Public equity Private debt Public debt
IPO Bank loans Bonds (long-term)
SEO Lease Notes
Supplier credit Bills (short-term)
Convertible debt
Venture capital (VC) = Financing for new, often high-risk, ventures
If you do not have enough assets you might turn to either private equity and venture capital market
Private equity firm = an investment management company that provides financial backing and
makes investments in the private equity of start-ups or operating companies
There are at least four types of supplier of venture capital:
1. A few old-line, wealthy families have traditionally provided start-up capital to promising businesses
2. A number of private partnerships and corporations have been formed to provide investment funds
3. Large industrial or financial corporations have established venture capital subsidiaries
4. Participants in an informal venture market, individuals.
Buy-outs = When one buys out the actual owner, for example owning over 50% of equity (take a firm
off of the stock exchange)
FEATURE EQUITY DEBT
INCOME Dividends Interest
TAX STATUS Dividends are taxed as personal income. Interest is taxed as personal income. Interest is a
Dividends are not a business expense business expense, and corporations can deduct
interest when computing corporate tax liability
CONTROL Ordinary shares usually have voting right Control is exercised with a loan agreement
DEFAULT Firms cannot be forced into bankruptcy for Unpaid debt is a liability of the firm. Non-payment
non-payment of dividends results in bankruptcy
Venture = Firms that are in early life cycle stage
Non-venture = Firms that are in later life cycle stage
Venture capital = Funds investing in 1) new ventures, often high risk, and 2) distressed firms
(ventures and non-ventures, also with high risk)
Private equity firms can also have part of their investment portfolio investments in (or finance) (a) VC
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, Corporate Finance FENSI
Stages of financing
1. Seed money – A small amount of financing needed to prove a concept or develop a product.
Marketing is not included in this stage
2. Start-up – Financing for firms that started within the past year. Funds are likely to pay for
marketing and product development expenditures
3. Later stage capital – Additional money to begins ales and manufacturing after a firm has spent its
start-up funds
4. Growth capital – Funds earmarked for a firm to enable it to reach its potential and achieve
successful growth
5. Replacement capital – Financing for a company to buy out other investors in a firm
6. Buyout financing – Money provided for managers and outside investors to acquire a fully
functioning firm
Risk and return above decrease with each stage
access to venture capital is very limited:
- Venture capital companies receive huge numbers of unsolicited proposals which mostly are dumb
- Venture capitalists rely heavily on informal networks of lawyers, accountants, bankers and other
venture capitalists to help identify potential investments
- Therefore, personal contacts are important in gaining access to the ‘introduction’ market
- Venture capital is expensive
14.2 Selling securities to the public: the basic procedure
Steps in public offering Time Activities
1. Pathfinder prospectus Several months before issue An initial indicative prospectus is released that
presents the proposed offering
2. Pre-writing conferences About 4 weeks before the full The amount of money to be raised and the type
prospectus is issued of security to be issued are discussed. Initial
expressions of interest are collected, and an issue
price is set. An underwriter and approved advisor
will be appointed
3. Full prospectus Several weeks before the offering The prospectus contains all relevant financial and
takes place business information
4. Public offering and sale Shortly after the last day of the In a typical firm commitment contract the
registration period underwriter buys a stipulated amount of equity
from the firm and sells it at a higher price. The
selling group assists in the sale
5. Market stabilization Usually within 30 days of the The underwriter stands ready to place orders to
offering buy at a specified price on the market
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, Corporate Finance FENSI
14.3 Alternative issue methods
For equity sales there are two kinds of public issue:
General cash offer = An issue of securities offered for sale to the general public on a cash basis
Rights issue = A public issue of securities in which securities are first offered to existing shareholders.
Also called a rights offering
Initial public offering (IPO) = A company’s first equity issue made available to the public. Also called
an unseasoned new issue or an IPO
Seasoned equity offering (SEO) = A new equity issue of securities by a company that has previously
issued securities to the public
The methods of issuing new securities:
Method Type Definition
Public traditional Firm commitment cash offer The company negotiates an agreement with an investment
negotiated cash offer firm or bank to underwrite and distribute the new shares. A
specified number of shares are bought by underwriters and
sold at a higher price
Best efforts cash offer The company has an investment firm or bank sell as many of
the new shares as possible at the agreed-upon price. There is
no guarantee concerning how much cash will be raised
Dutch auction cash offer The company has an investment firm or bank auction shares
to determine the highest offer obtainable for a given
number of shares to be sold
Privileged subscription Direct rights issue The company offers the new equity directly to its existing
shareholders
Standby rights issue Like the direct rights issue, this contains a privileged
subscription arrangement with existing shareholders. The
net proceeds are guaranteed by the underwriters
Non-traditional cash Shelf cash offer Qualifying companies can authorize all shares they expect to
offer sell over a two-year period and sell them when needed
Competitive firm cash offer The company can elect to award the underwriting contract
through a public auction instead of negotiation
Private Direct placement Securities are sold directly to the purchaser, who, at least
until recently, generally could not resell securities for at least
2 years.
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