Sources of Equity Financing For sole proprietorships or partnerships Owner or owners invest money in the business Venture capital For corporations Sale of stock Use of profits not distributed to owners Copyright © Cengage Learning. All rights reserved

Sources of Equity Financing (cont’d) Selling stock Initial public offering When a corporation sells common stock to the general public for the first time Advantages of selling stock Firm does not have to repay money received from sale of stock Firm does not have to pay dividends to stockholders Two types of stock Common stock Preferred stock Copyright © Cengage Learning. All rights reserved

Sources of Equity Financing (cont’d) Selling stock (cont’d) Common stock Stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others Preferred stock Stock whose owners usually do not have voting rights, but whose claims on dividends and assets are paid before those of common-stock owners Par value An assigned (and often arbitrary) dollar value printed on a stock certificate Convertible preferred stock Preferred stock that the owner may exchange for a specified number of shares of common stock Copyright © Cengage Learning. All rights reserved

Sources of Equity Financing (cont’d) Retained earnings The portion of a corporation’s profits not distributed to stockholders Venture capital Money invested in a firm with the expectation that the firm has the potential to become very successful and increase in value Investors usually receive an equity position in the business and share in its profits Private Placement Stocks and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors Copyright © Cengage Learning. All rights reserved