Financing

Equity financing Debt financing

Equity financing: owned Stocks: Claims on assets Part ownership Common stock Preferred stock

Common Stocks With voting rights Last to get paid in the event of bankruptcy, after preferred stocks, bonds, creditors, etc. Preemptive rights: retain proportional ownership Potential earnings in terms of dividends and capital appreciation Par value: face value, to be retained Market value: price in the market Book value: owners equity / shares

Preferred Stocks fixed dividend rate No voting rights Priority over common stocks in payment of dividends and upon liquidation (after debt holders) Prior Preferred stock: highest priority; lower yield Preference preferred stock: ranked by seniority Convertible preferred stock: exchange for common stock Participating preferred stock: opportunity for extra dividend

Equity Financing Less risky in terms of cash flow Dilution of ownership, control and earnings Higher cost than debt

Venture Capital: private equity For early-stage, high potential growth companies Cash for share High tech industries (biotech / ICT) From institutional investors and high net worth individuals pooled by investment firms Core skill: ability to identify novel technologies with high commercial return potential

Venture Capitalist A person or investment firm Adding capital, managerial skills and technical expertise for high returns Pooled investment of capital from third party For projects that are too risky for standard capital markets or bank loans Most attractive for new, small, high potential, innovative, rapid growth, business model, management team Significant control, significant portion of ownership, significant share of value

Debt Financing: owed Bonds Loans

Bonds: IOU Promise to pay by a future date, with interests paid regularly Rated default risks Government bonds Municipal bonds Corporate bonds Registered bond: checks mailed out based on registration with company Bearer bond: payment on coupons Secured bond: backed by assets Debenture: unsecured

Other Classifications Fixed rate bonds: (coupon) constant through life Floating rate notes: (coupon) floating with interest rate Zero coupon bonds: no regular interest payment Inflation (equity – income - GDP) linked bonds: Perpetual bonds: annuities Asset-backed securities (mortgage, collateralized mortgage, collateralized debt): Lottery bond: random redemption Serial bond: maturity in installments Revenue bond: only pay back with revenue generated

Loans Secured: assets as collateral Mortgage Auto Unsecured: monetary loans not backed by assets Credit card Personal Bank overdraft Line of credit Demand loans: short term, no fixed dates for repayment, floating interest rate

Financing Decision: debt vs. equity Pecking Order Theory: avoid external financing when there is internal financing available Avoid new equity financing when there is debt financing available at reasonably low interest rate Trade-Off Theory: Tax benefit of debt Bankruptcy costs of debt Market Timing Hypothesis: Look for cheaper financing regardless of current capital structure

Securities Markets Securities: stocks and bonds Primary market: for new stocks and bonds Private placements: sold privately, not in open market Secondary market: for existing securities NYSE, …

T6: Financing Needs and Plan Based on your operations, identify the needs for funds and needs for financing Determine the financing methods and amount to meet the needs Explain your choice Upload to moodle by 12/26/2010