Week 9 - Week 9: Sources of Funds, IPO Cameron Truong...

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1 Week 9: Sources of Funds, IPO Cameron Truong Objectives and learning outcomes of the module • Appreciate how the life cycle of the firm may impact the choice of funds. • Understand how firms raise funds for investment projects. • Understand the roles of financial intermediaries in raising funds for firms. • Understand the characteristics of different types of equity offerings (i.e. Initial Public Offerings, right issues, private placement, dividend reinvestment plans) and underwriting. Life cycle of the firm and the choice of funds Development Exploitation Maturity Decline grow th Internal financing capacity Funding needs
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2 • Firms prefer to issue equity over debt during development and growth stages. Possible reasons are: growth firms have uncertain cash flows; growth firms need to conserve cash to fund its growth; growth firms may have more intangible assets. Life cycle of the firm and the choice of funds Initial equity raising (Unseasoned) Initial public offering (IPO) refers to the first offering of stock to general public . Issuing securities should be a zero-NPV transaction on a risk-adjusted basis for both firm and subscribers. IPO is an exception to this rule. Department of Accounting and Finance Slide 6 Advantages of IPOs 1. Higher profile 2. Lower cost of capital 3. Increase financial/capital base 4. Growth not limited by cash resources 5. Liquidity for current shareholders 6. Others: shifting monitoring cost, share price with historical records ….
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3 Department of Accounting and Finance Slide 7 Disadvantages of IPOs 1. Dilution of control 2. Additional responsibility 3. Greater disclosure of information 4. IPO costs, exchange listing costs 5. Insider trading implications 6. Others:??? IPO IPO is usually issued through investment banks (underwriters) who provide the following services: provide the firm with procedural and financial advice; buy the IPO; and sell the IPO to the public.
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This note was uploaded on 10/08/2011 for the course FINANCE 101 taught by Professor Jannis during the Three '11 term at Monash.

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Week 9 - Week 9: Sources of Funds, IPO Cameron Truong...

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