Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-1

• Outline the characteristics of ordinary shares .
• Explain the advantages and disadvantages of equity as a source of finance .
• Outline the main sources of private equity in the
Australian market.
• Disclose information when issuing securities .
• Outline the process of floating a public company .
• Discuss alternative explanations for the underpricing of initial public offerings (IPOs).
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-2

• Discuss long-term performance of IPOs.
• Explain how companies raise capital through rights issues, placements, share purchase plans, and share options.
• Outline the different types of employee share plans.
• Outline the advantages of internal equity as a source of finance.
• Outline the effects of bonus issues, share splits and share consolidations.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-3

• Ordinary shares represent an ownership interest in a business.
• Residual claim
– The holder has a claim to the profits of the business
(through dividends). In the event of failure, the holder has a claim to the residual value of the assets after claims of all other entitled parties are met.
– Due to this residual claim, shareholders are more likely to lose their investment if the company fails (shareholders are said to provide the company’s risk capital).
– To compensate for this risk, shareholders expect a return that is greater than that received by lending.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-4

• Fully and partly paid shares
– When new shares are created, they will have a stated issue price, which may be paid in full at issue.
– Alternatively, shares may be issued for part payment, with the balance paid in subsequent instalments, often referred to as calls .
– The size and timing of calls may be specified at the outset or determined at some date after issue.
– If the issue price has not been paid in full, shares are called partly paid or contributing shares.
– Instalment receipts are marketable securities for which only part of the issue price has been paid.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-5

• Fully and partly paid shares (cont.)
– The balance of an instalment receipt is payable in a final instalment on or before a specified date.
– A well-known example is the Australian government’s sale of Telstra shares, which was executed through the issue of instalment receipts.
– Main differences from partly paid shares are:
 timing and size of instalments are specified up front,
 instalments are payable to vendor of shares rather than issuing company, and
 holders of instalment receipts are entitled to the same dividends as ordinary shareholders.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-6

• Limited liability:
– Protects shareholders' liability to meet a company’s debts.
The liability is limited to any amount unpaid on the shares they hold.
• No liability (NL) companies:
– Restricted to operating in the mining industry.
– Holders of partly paid shares are not obliged to pay calls made by the company — though shares are forfeited if calls are not paid.
• Rights of shareholders:
– Entitled to proportional share of any dividend declared.
– Right to exert a degree of control over management through use of voting rights attached to ordinary shares — (typically need at least 50% of shares to execute rights).
– Shareholders have the right to sell their shares.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-7

• Advantages
– Dividends are discretionary.
– No maturity date.
– The higher the proportion of capital structure made up by equity, the lower the cost of debt.
• Disadvantages
– Issuing more shares can dilute existing shareholders’ ownership and control.
– Returns to shareholders can be subject to double taxation (non-residents).
– Transaction costs of issuing shares.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-8

• What is private equity?
– Securities issued to investors are not publicly traded. This includes family members and friends, but a more formal source is a private equity fund.
– Private equity or venture capital — not only for new ventures.
• Four categories of private equity financing:
– Start-up : new companies, funds to develop products.
– Expansion : additional funds required to manufacture and sell products commercially.
– Turnaround : assist a company in financial difficulty.
– MBO : where a business is purchased by its management team with the assistance of a private equity partner or fund.
• In illiquid markets, investors must hold funds for
5 –10 years.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-9

Information problems and new ventures:
• Three information problems with new ventures:
–
Information on venture value — incomplete and uncertain.
–
Information asymmetry — either party, the entrepreneur or investor, may have more information than the other.
–
Idea may be stolen by potential investors.
• New ventures are typically financed in stages to overcome uncertainty and information asymmetry problems.
• Entrepreneur may require confidentiality agreements with potential investors in order to prevent them from stealing the idea.
• Venture capitalists usually do not sign such agreements.
• Instead, they focus on establishing and protecting a reputation for honesty and integrity.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-10

• Sources include bank loans, private equities and IPO funds.
• Stages of a venture include:
– R&D phase .
– Start-up phase , equipment and personnel assembled.
– Rapid growth , if product is successful.
– Slower growth , followed by maturity and possible decline.
• Different sources of finance are appropriate at different stages.
• Personal savings, personal loans and home mortgages are the most likely sources at R&D stage.
• Business angel may enter the R&D stage if these other sources are exhausted.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-11

• Business angels — investors in the early stages of new ventures.
• Bring useful expertise as well as funds to a new venture.
• Attempt to help develop a project to a point where outside finance from private equity funds and other financial institutions can be attracted.
• Investment horizon is medium to long term
(5 –10 years).
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-12

• ABS estimates $15.2b committed to private equity market at 30 June 2007.
• As at June 2007, 280 private equity funds operated in Australia by 186 fund managers, investing in 1076 companies.
• According to ABS, these 186 managers reviewed
8769 potential investments in 2006 –07, of which only 229 have been successful.
• Investments range from $500 000 to $20m over
3 –7 years.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-13

• Looking for projects with high growth prospects.
• Private equity investments are relatively risky — higher rates of return are typically required.
• To obtain private equity, require a well-structured and convincing business plan.
• Private equity fund managers usually require a seat on the board of the company.
• These managers specialise in new, fast-growing companies. They can offer specialised expertise to help the venture succeed.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-14

• Private equity fund managers seek capital gains rather than dividends and will plan to divest within 3 –7 years.
• While disposal of the investment can result in spectacular gain, the level of risk is high, it is to be expected that a significant proportion of the disposals that occur will involve loss. In some cases, project will fail and investment liquidated.
• Larger sources of private equity include superannuation funds, fund managers and banks.
• Government has encouraged private equity with incentives such as the Pooled Development Funds
Program and the Innovations Investment Fund
Program.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-15

• Corporations Act 2001 has provisions that protect investors in public companies by disclosure of information requirements.
• Specific requirements apply to offers of securities.
• Typically, the provision of a disclosure document with details of the issuer and securities being offered.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-16

• Offers of unlisted securities include IPOs of shares and offers of new classes of securities by listed companies.
• In these cases, securities do not have an obvious market price and information can help determine the appropriate price.
• Offer cannot proceed until disclosure document has been lodged with ASIC.
• Prospectus:
– Most comprehensive disclosure document.
– Contains details of the issue, capital sought, price, use of funds, etc.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-17

– Non-financial information on issuer — description of business and reports from directors and/or industry experts.
– Risks associated with business and expensive disclosure documents to prepare.
– Financial information on issuer — most recent and audited financial statements.
– Contributors to prospectus are liable for prosecution by investors over losses resulting from misstatements in, or omissions from, disclosure documents.
• Offer Information Statements (OIS ):
– An OIS may be used instead of a prospectus in smaller capital raisings cases. Total raisings must be < $5m.
– OIS is less costly to prepare, less information to disclose.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-18

• Disclosure requirements for offers of listed securities are less onerous.
• Listed entity is subject to continual disclosure requirements.
• Much of the relevant information is publicly available anyway.
• Market provides a guide on price.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-19

• Various offerings may not require a disclosure document:
– Small-scale offerings.
– Offers to sophisticated investors.
– Offers to executive officers and associates.
– Offers to existing security holders.
• These exemptions assume that participants have relevant skills or information to judge the merits of an offer.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-20

• A float is the term given to the company’s first invitation for the public to subscribe for shares — an initial public offering (IPO).
• For a stock exchange listing, the company needs to satisfy the listing requirements of the exchange.
• A prospectus is required — a legal document that provides details of the company and the terms of the issue of shares.
• Companies unable to meet ASX listing requirements may list on Bendigo or Newcastle Stock Exchanges
— aimed at smaller firms.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-21

• A company undertaking a float may be a new company or an existing private company.
• Two reasons for a private company to float:
– Better access to capital markets.
– Allows private owners to cash in on the success of their business (creates a market for otherwise non-traded shares).
• Costs of going public include loss of control, listing fees, shareholder servicing costs, and information disclosure requirements.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-22

• Difficult if there is no historic earnings record .
• Consider P/E ratios of existing companies in the same industry.
• Fixed price offer vs open pricing . Alternative approach is a book build .
• Reveal — investors willingness to pay for new shares.
• Open pricing mechanisms are less likely to generate abnormal returns to investors; constrained open pricing is preferred to attract investors — set a lower and upper bound on issue price.
• Available evidence suggests underpricing of IPOs on average.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-23

• Service provided by a stockbroker or investment bank.
• For a fee, the underwriter contracts to purchase all shares for which applications have not been received by the closing date of the issue.
• If book building process is used to issue shares, there is no need for underwriting, but an institution needs to manage the issue.
• Underwriter can limit exposure by sub-underwriting.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-24

• If a stockbroker is an underwriter or lead manager, he/she will usually act as selling agent for the issue.
• Promotion reduces the need to purchase underwritten shares and will generate brokerage fees.
• Even without underwriting, a broker is engaged to assist in the distribution of shares.
• Brokerage depends on size of issue, but usually ranges between 1% and 2% of funds raised.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-25

• Costs fall into three main categories:
– ASX listing fees, prospectus costs (legal, accounting, expert opinions and printing and distribution).
– Underwriters’ fees and brokers’ commissions (for
194 floats on ASX during 2007 –09, listing costs averaged 5.8% of funds raised).
 These costs depend on size of float and whether it is underwritten — depends on market conditions, size and quality of the broker engaged, and underlying business.
– Shares sold in an IPO are usually underpriced — on average, there is an immediate abnormal return to IPOs.
 This represents a cost to owners of business
— they are selling for less than it is really worth.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-26

• Possible reasons for underpricing:
– Winner’s curse — attract investors who have difficulty estimating the future market price of the shares being offered.
– Potential investors will be influenced by the action of other investors and will subscribe to popular IPOs.
– Underpricing provides benefits gain from greater liquidity.
– Underpricing leaves a good taste with investors, raising the price at which subsequent share issues by the company can be sold.
– Empirical finding suggests — greater returns on IPOs reflect investors rational behaviour then these returns should be related to information availability to investors and benefits drive from underpricing.
• Underpricing of IPOs is a phenomenon that is yet to be fully explained.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-27

• Long-term performance of IPOs (LTPIPOs):
– Several studies have found that shares of newly listed companies tend to under perform during the first few years after listing.
– Market model — CAPM not ideal to estimate the betas of the securities because pre-listing return data does not exist for
IPOs — this makes it difficult to accurately assess LTPIPOs.
– Researchers have used two approaches to tackle LTPIPOs:
 Compare post-listing returns on IPO companies to one or more market indices, without risk adjustment.
 Compare IPOs companies’ return with a control sample of other listed companies matched on the basis of one or more characteristics such as size and industry.
– In summary, there is mixed empirical evidence of LTPIPOs, and the significance of the ‘new issues puzzle’ still remains controversial.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-28

• An issue of new shares to existing shareholders in proportion to their current shareholding.
• It requires a prospectus.
• Existing shareholders’ right to take up new shares sold to another party via stock exchange trading renounceable issues.
• Where the right is exercisable only by the existing shareholders, the issue is non-renounceable.
• Subscription price — must pay price to obtain new shares.
• Ex-rights date — the date on which a share begins trading ex-rights.
• Cum-rights — when shares are traded cum-rights, the buyer is entitled to participate in the forthcoming rights issue.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-29

• The ex-rights price should fall by the value of the right attached to each share. The theoretical value of a right
( R ) is given by:
R


N


1
S

• The theoretical value of a share ex-rights ( X ) is given by:
X

NM
N


1
S
• Theoretically, a rights issue has no value to shareholders.
• However, the announcement can have an impact on shareholders’ wealth — information content, rights issues are usually bad news, with information about expected future cash flows.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-30

• Directly place equity — without the need of disclosure document.
• Placements can be underwritten and they can be a very inexpensive way of accessing equity.
• Book build is a popular mechanism for private placement.
•
Advantages:
– Can be quickly arranged and finalised, lower issue costs than a rights issue, and board can direct the placement.
• Disadvantages:
– Dilution of proportion of the ownership of the company for nonparticipating investors.
– Placements at a discount to market will reduce the value of existing shareholders’ investments, contrary to premium at market.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-31

• Shares on which only part of the issue price has been paid.
• The issuing company can call up the unpaid part (reserve capital) of the issue price in one or more instalments.
• Instalment receipts are issued when existing fully paid shares are offered to the public, with the sale price to be paid in two instalments.
• The instalment receipts differ from partly issued shares due to the following factors:
– Timing of instalment is specified at the time of original sale.
– Instalments are payable to the vendor of the shares.
– Holders of instalment receipts are entitled to the same dividends as holders of fully paid shares.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-32

• ASX-listed companies can raise limited funds from existing shareholders through share purchase plans.
• Prospectus not required as long as they comply with ASIC Policy Statement 125.
• Limit of $5000 from each shareholder p.a.
• Attractive because shares are issued at a discount to market price, and there are no brokerage fees.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-33

• Share options give the holder the right, but not the obligation, to purchase an ordinary share at a stated price at a future date.
• Exercise of the option will depend on the exercise price relative to the market price of the share around the exercise date.
• Company options may be issued free with the underlying share or sold at a price set by the issuing company:
– To employees.
– As a sweetener to an equity issue.
– As a sweetener to a private debt issue.
• Company options often restrict the holder from exercising the option for a certain period after it has been granted.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-34

• Several external sources of equity have been considered.
• Most involve long-term arrangements; for a significant one-off equity raising, only rights issues and placements are practical.
• Companies generally prefer placements to rights issues
— bias for placements up to regulatory limits.
• Advantages of placements include speed (days rather than weeks) and lower transaction costs; also shares can be placed with ‘friendly’ shareholders.
• Rights issues are seen as equitable to existing shareholders.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-35

• Combination issues:
– When amount of funds is sought to be above the ceiling, company could make a placement in combination with other equity raising; for example, share purchase plan or nonrenounceable rights issue.
• Different features of combination issues:
– Issue price is determined by book build, which is then used to determine share prices for the second component of the issue. (See p. 262, Macquarie Bank example)
– Three offers of shares: a placement, an institutional entitlement offer, and a retail entitlement offer. (See p. 263,
Alesco Corporation example)
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-36

• Companies raise significant funds through employee share plans.
• Primary purpose of such plans is to motivate senior managers and other employees by giving them an ownership interest in the company.
• Types of employee share plans:
– Fully paid share plans.
– Partly paid share plans.
– Option plans.
– Employee share trusts.
– Replicator plans.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-37

• Internal equity financing refers to the positive net cash flows generated by a company — funds from operations.
• Management can influence the level of retained profits by the dividend policy.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-38

• The above equation might give the impression that depreciation is a source of finance.
• Depreciation reduces profits and, therefore, the funds available for distribution as dividends.
• A profitable company will end up retaining funds at least equivalent to depreciation charges.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-39

• Allows shareholders the choice of reinvesting their dividends in the company (by purchasing additional shares).
• Advantages
– Avoids relatively high transaction costs if shareholders used dividends to acquire additional shares.
– Shares often issued at a discount to current market price.
– If companies achieve a sufficient reinvestment rate, it enables them to pay franked dividends, which transfer tax credits to shareholders and retain cash to fund investments.
• Disadvantages
– Reinvestment of dividends could be dysfunctional if company has few prospects for future profitable investments, and/or if cash position is quite healthy.
– By increasing the company’s equity base, a DRP dilutes key indicators such as EPS.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-40

• ‘Free’ issue of shares made to existing shareholders in proportion to their current investment.
• Equivalent to a rights issue with a subscription price of zero.
• Should have no effect on shareholders’ wealth, but there may be an announcement effect due to the information conveyed.
• A bonus issue may be made :
– To provide the market with information.
– To maintain total dividend payout with management reducing the dividend per share.
– If a company’s shares are thinly traded.
• Bonus issues are treated as dividends for taxation purposes unless made from the share premium reserve
(identified for tax purposes).
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-41

• Made by companies with a ‘thin’ market for their shares.
• Existing shares are replaced by new shares issued at a ratio of greater than 1 for 1. Large Australian companies that have made recent share splits include
Computershare, Patrick Corporation and Toll Holdings.
• Justified as a means to increase liquidity and affordability of shares to retail investors. Theoretically, a share split should have no effect on share price or volume.
• Empirical evidence on benefits is mixed:
– Number of shareholders and transactions both rise after share splits but little evidence of volume increases.
– Splits increase bid-ask spreads and return volatility, signs of lower liquidity.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-42

• A share consolidation or reverse split decreases the number of shares on issue and increases the price per share.
• Reasons for share consolidations:
– Raise share price to a popular trading range and overcome perceptions that the company is not respectable because of its low share price.
– Reduce transaction costs and lower the cost of maintaining the company’s share registry.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-43

• New ventures can seek finance from wealthy individuals and private equity funds.
• New share issues must satisfy disclosure requirements — usually with a prospectus.
• Ordinary shares have a residual claim on a company — lowers financial risk.
• Benefits of equity finance — company is not required to pay dividends or redeem shares, also lowers cost of debt finance.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-44

• Initial public offering of shares is referred to as floating a company. The long-term performance of IPOs still remains controversial.
• Book build is an increasingly popular means of issuing new securities.
• Existing public companies can raise funds through the use of rights issues, private placements, contributing and preference shares, and share options.
• Internal equity — retained earnings is a lowcost and popular source of finance.
Copyright

2009 McGraw-Hill Australia Pty Ltd
PPTs t/a Business Finance 10e by Peirson
Slides prepared by Farida Akhtar and Barry Oliver, Australian National University
9-45