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Unformatted text preview: an entity (expensive). SEO- finance special project. Raising capital through issuing shares is very costly.
Issuing new shares also dilutes the existing share base hence changing the ownership percentage and
voting structure as well as diluting earnings per share. Types: 1. Ordinary/Common shares are liquid and
can help bring up the stock price but have voting rights. Dividends may not be paid initially but once paid
the company is expected to maintain the dividend payout. 2. Preference shares do not have voting rights
but have fixed and cumulative dividend payments and ranks higher in claims than the ordinary share. 3.
Other classes of share capital that has specific clauses that regulate voting rights, or are available only to
domestic shareholders (e.g. class A, class B). Warranties: give the right to its holder to purchase new
shares at a fixed exercise price until the warrant’s expiry date. - They are similar to call options with the
key difference that they are dilutive as they issue new shares whereas call options are non-dilutive as
they purchase existing stock. - Also, warrants are usually attached on preference shares or corporate
bonds in order to allow the issuer to reduce the offered dividend or interest rate. Warrants can be
detached and sold as stocks. Stock option: ESO – serve as part of employees’ remuneration package. The ESO is exercised if the share price exceeds the ESO price and the company is required to issue the
required ordinary shares. If the share price does not exceed the ESO price before maturity then the ESO
is not exercised and the contract expires - They aim to retain employees and provide them with
incentives for increasing the value of their employer but when the exercise is followed by an immediate
sale (cash out) then the incentive is eliminated. – Currently described as heaven of loopholes in the US
taxation system. Buybacks: beneficial to shareholders, as the increased share demand brings capital
gains to those who sell, and those who remain enjoy a less diluted share base. - There are opposing
views of what motivates share buybacks: 1. either the management is using excess cash to provide
increased cash return to shareholders. 2. The management has no vision in finding suitable investments.
Splits: share splits multiple numbers of shares and splits the share price downwards so that market
capitalisation is unaffected. Taken by large firms with very high share prices. Lower prices are more
appealing to retail investors, so splits should increase liquidity and reduce volatility › Reverse share splits
are also useful when there are too many shares and their price is very low. By artificially increasing the
price, it may attract institutional investing especially when portfolios are restricted on the basis of price
levels. Foreign capital: cross- border listing. (E.g. ADR) Ad: immediate access to additional equity from
other markets, and international diversification that may alleviate economic crises. Disad: cross-listing
may require translation of financial statements using different accounting standards. Cost of equity: risk
free + premium. Cheap when: 1. The management believes that the share price is overvalued, i.e. raise
equity now before the share price is corrected downwards. 2. The market believes that the share price is
undervalued, i.e. the announcement to raise equity will push price upwards hence make the issue
cheaper. Debt financing: types: short term + long term+ corporate bonds. Short-term: finances day-today working capital and must be repaid using current assets within a year. It is risker because: - Regular
monthly interest payments- Cash repayment of the principal of the loan within one year- Possibly debt
covenant restrictions on how the company should operate or be further financed- Strict matching to
working capital accounts and the operating cycle. Any disruptions or external shocks make the company
very vulnerable. It would be devastating if short-term borrowing is settled with non-current assets.
Other form: trade payable; other payable; bank overdrafts; GST payables; security deposits- free source
of credit. Long-term: characteristics: - It has regular monthly interest payments- It matures in more than ...
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- Spring '10
- Finance, Eso