1. Kumar Fernando

2.  Capital Markets  New share issues  Rights issues  Issue of marketable debt Bank Borrowings Venture Capital Funds Government and similar sources

3.  First level  Second level Third level Fourth level  Fifth level

4.  Cost of different sources of finance  How long the requirement of funds  Lending restrictions  Gearing level  Ability to service debt  Currency of cash flow of the project  Impact on FS of different options  Tax implications  Availability

5.  Equity is another name for shares or ownership rights in a business  Shareholders receive returns from their investments in shares in the form of dividends and also capital growth in share price Share- A fixed identifiable unit of capital in an entity which normally has a nominal value which may be different from its market value

6.  Ordinary shares pay dividends at the discretion of the entity directors  They are the owners of the company  They receive their money last- subordinate to all other finance providers  They receive the entire residual after settling all  Preference shares are a from of equity that pays a fixed dividend  It is paid in preference to ordinary shareholders  In a winding up they get paid just before ordinary shareholders

7.  Preference shares pay a fixed dividend proportion of the share’s nominal value  Thus it is considered there is an obligation to pay preference dividend and treated as non current liability in SOFP  Preference dividend is paid out of profits where as interest is paid before arriving at profits.  Thus preference dividends are not tax deductible where as debt interest is tax deductible  Debt interest is obligatory and cannot be skipped but preference dividend may be skipped in certain circumstances  Because of the non tax deductibility preference shares are relatively unattractive to companies as a source of finance

8.  Cumulative preference shares- Here dividends must be paid including skipped dividends  Non cumulative preference shares- No need to pay skipped dividends  Participating preference shares- This gives the holder fixed dividend rights plus extra earnings based on certain conditions just like ordinary dividends  Convertible preference shares- They can be exchanged for a specific number of ordinary shares at some given future date  Redeemable preference shares- Here holders will be repaid their capital usually at par on some future date

9.  Capital markets (stock markets) must fulfil two functions:  Primary function- This function enables companies to raise new finance (equity or debt)  Through the stock market a company can communicate with large pool of potential investors thus facilitating company to raise finance this way than contacting investors individually  In UK a company must be a plc before it can raise finance in the stock market  Secondary function- This function enables investors to sell their investments to other investors  Therefore a listed company shares are more marketable and thus more attractive to investors.

10.  A private company limited by shares is usually called a private limited company  Shareholders have a limited liability and shares may not be offered to the public  Limited liability means the liability of the shareholders to the creditors is limited to the capital originally invested.  Disclosure requirements for a private limited company are lighter and for this reason shares may not be offered to the public

11.  Public limited company may sell share to public  It can be an either unlisted company or a listed company on the stock exchange  When an entity obtains a listing (quotation) for its shares on a stock exchange it is referred as a flotation or an IPO  Shareholders will normally benefit from a listing because their shares are becoming more marketable  Listing can have a positive impact on the reputation of the company thus share price may rise  It will also raise the profile of managers and employees  The better reputation will enhance its credit ratings and thus cost of capital may be lower.  More favorably viewed by suppliers

12.  Advantages  Once listed market will provide a more accurate valuation of the entity  Realization of paper profits  Mechanism to buying and selling shares in the future  Raise of profile entity  Facility to raise capital for the future  Makes ESOP more accessible

13.  Costly for a smaller entity such as floating costs/underwriting costs etc;  Loss of control as you need to make enough shares available to the market  Reporting requirements are very onerous  Rules to obtain a quotation may be very stringent

14.  Full stock exchange- This is the market for larger companies  Entry costs are high  Scrutiny is very high for companies listed on the full exchange  Profile of a company listed here is very high and shares are extremely marketable  Alternative Investment Market (AIM)- This is a market for a smaller company with lower associated costs and less stringent entry  Prices of shares in nay stock market is determined by the forces of supply and demand  A company that is performing well there will be a demand and thus upward movement in share prices

15.  There are three common methods:  1.IPO -Shares are offered for sale to investors through an issuing house  Offer could be made at a fixed price set by the company or in a tender where investors are invited to offer their price. Here all shares are subsequently sold at the best single price at which they would be taken up.  2. Placing- Here shares are placed directly with certain investors (normally institutional investors) on a prearranged price  3.Rights issue- Here shares are offered to existing shareholders in proportion to their size of their holding.

16.  These offers could be completely new shares or a transfer of shares already held by existing shareholders privately  An issuing house normally a merchant bank acquires the shares and offers them to public at a fixed price  Offers are usually made in the form of a prospectus detailed in newspapers etc;  Government privatizations are done through IPO  Stagging- Some investors apply for new shares with the hope of selling immediately and reaping a quick profit  IPO lock up period- This is a contractual restriction that prevents insiders such as founders, managers who are holding company shares before it goes public from selling shares for a period which could range 90– 180 days after the company goes public  The purpose of lock up period is to prevent market from being flooded with a large no of shares which could depress the share price

17.  This is an alternative to a fixed offer price  Under this method subscribers tender for shares at above a minimum fixed price  Once all offers are received the company sets a strike price and allocates shares to bidders who have offered the strike price or more  Strike price is set to make sure that the company raises the required amount of finance from the share issue  Once the strike price is set all bidders who offered the strike price or more are allocated shares and they all pay the strike price irrespective of what their original bid was

18.  Placing is the sale of securities to a relatively small number of select investors as a way of raising capital  Investors are generally large banks, mutual funds, insurance companies and pension funds  Since placement offers shares to a few the placement does not have to be registered or publicly announced  Generally a need for a prospectus is waived  Generally since placement is private average investor is made aware of it only after it has been occurred  This method is very popular because it is cheaper and quicker to arrange than most other methods  However it does not normally lead to a very active market for shares after a flotation

19.  Private equity is equity capital that is not quoted on a public exchange  It consists of investors and funds that make investments directly into private companies  They invest in public companies that result in a delisting of public equity  Capital for private equity is raised from retail and institutional investors and others who can commit large sums of money for a long period of time  Private equity investments often demand long holdings giving time for a distressed company to turn around, or to prepare a company for IPO etc;  They try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO.  Sometimes private equity firms conduct large leveraged buyouts (LBO) where large amounts of debt are issued to fund a large purchase

20.  Investment banks- They take the lead role in IPO and will advise on:  The appointment of other specialists such as lawyers  Stock exchange requirements  Forms of any new capital to be made available  The number of shares to be issued and the issue price  Arrangements for underwriting  Publishing the offer  Stockbrokers- Provide advice on the various methods of obtaining a listing. They will work with investment banks on identifying institutional investors but generally they are involved with smaller issues and placing  Institutional investors- They may be asked about the likely take up price for shares. They will also have a major influence on evaluation and the market for shares

21.  This is where new shares are offered for sale to existing shareholders in proportion to the size of their shareholding  The right to buy new shares ahead of outside investors is known as the pre-emption rights of shareholders  The purpose of pre-emption rights is to ensure that shareholders have an opportunity to prevent their stake being diluted by the new issues  Pre-emption rights are protected by law, and can only be waived with the consent of the shareholders  Rights issues are far cheaper to organize than a public share issue but expensive than a placing

22.  The price should be set below the existing market price to secure acceptance of shareholders  Should not be too low to avoid excessive dilution of EPS  Generally issued around 20% discount to the market price  Inn theory there is no upper limit to an issue price but in practice it would be never set above the prevailing market price  In theory there is no lower limit but in practice should never be lower than the nominal value  However if the issue price is reduced you need to issue a higher quantity of shares to raise the required sum

23.  This avoids the risk of that the entity will not sell all of the shares it is issuing and so receiving less than what it expects.  Underwriters are normally financial institutions such as merchant banks and in return for a fee they agree to buy any shares that are not subscribed in the issue  They receive their fee whether or not they are required to take up any unsubscribed shares.  Underwriting costs could be avoided through a deep discounted rights issue thus reducing the possibility of shareholders not taking their rights.

24.  Decide 1 st on the rights issue price  Then depending on the amount required to raise decide the quantity  The effect on EPS /DPS and dividend cover should be considered  Then the selected additional quantity wlil be issued in proportion to the existing no of shares to decide on terms of issue.

25.  After the announcement of a rights issue generally the share price drops  This fall is due to uncertainty about the consequences of the issue, future profits and future dividends  After the actual issue the market price will normally fall again because there are more:  Shares in issue (adverse effect on EPS)  And also shares were issued at market price discount

26.  When rights is announced all existing shareholders have the right to buy new shares and thus there are rights ( cum rights )attached to the shares and thus are traded at cum rights.  On the 1 st day of dealings in the newly issued shares the rights are no longer exist and old shares and new shares all are traded at ex rights without rights attached  Theoretical ex rights price is calculated TERP= (N * cum rights price)+ issue price/N+1 N= no of rights required to buy 1 share TERP= (N * cum rights price)+ issue price/N+1 N= no of rights required to buy 1 share Value of rights= (TERP-issue price)/N

27.  Do nothing- Here the market value of the investment could be expected to fall of the shareholder. The company would normally reserve the right to sell any unaccepted shares for the best price in the market  Sell the rights- in this case shareholder sell the rights to buy the shares to another investor. No ne will offer over the value of rights. The existing shareholders % holding will get reduced  Fully subscribe for the new shares- The shareholder % will be maintained  Sell some rights to buy some new rights- He can use funds sold from rights to buy some rights. This also will reduce shareholder %

28.  From shareholder point of view  They have the option to buy shares at a preferential price  They have the option of withdrawing cash by selling their rights  They are able to maintain their existing relative voting position From view point of the company It is simple and cheap to implement it is usually successful (fully subscribed) it often provides favourable publicity

33.  First bullet point here  Second bullet point here  Third bullet point here Group AGroup B Class 18285 Class 27688

34. Group A Task 1 Task 2 Group B Task 1 Task 2 Group C Task 1  First bullet point here  Second bullet point here  Third bullet point here