Chapters15,20,21_Spring2010

Chapters15,20,21_Spring2010 - Longtermfinancing*...

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  Long-term financing *   * Some materials courtesy of Pearson Education Canada
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2 Common shares Common Shareholders are firm owners and residual claimants face limited liability in theory, have control over corporate operations have a right to transfer ownership Common Stock book value vs. market value classes of common stock Different voting rights for insiders and outsiders Different voting rights for foreigners
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3 Common shares: Dual class shares Dual class share structures separate cash flow rights from  voting rights Allow tightly held firms to raise funds without diluting  control Deter corporate raiders from gaining control of a firm BUT… If insiders hold shares with better voting rights, they have  an incentive to undertake actions that maximize their own  welfare and not firm value
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4 Preferred shares Senior to common stock, junior to debt Usually, have cumulative dividends May or may not be voting May be convertible May pay adjustable rate dividends From the firm’s point of view: Preferred shares do not dilute control and do not increase the  likelihood of bankruptcy Relatively high cost, as they do not provide a tax shield Relatively low cost, as they are not taxable for corporate holders
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Methods of securing financing 5 Internally Generated External Public Equity:  IPO/SEO Private Equity Cash Offer Rights Offer  (SEOs only; are rare in  North America)
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Private equity: Sources of funds I 6 Angel investors Venture capital firms usually organized as limited partnerships, with institutional investors  as limited partners general partners – professional venture capitalists – usually charge  2/20-type fees usually control at least 1/3 of all board seats and represent the largest  voting block
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Private equity: Sources of funds II 7 Institutional investors (outside of venture capital firms) account for ~32% (~$24 billion) of private equity investments  in Canada Sovereign wealth funds countries with the largest SWFs: Abu Dhabi, China (3),  Singapore (2), Norway, Saudi Arabia, Kuwait, and Russia Corporate investors in addition to return on the investment, often look for synergies  and strategic acquisitions
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Example 1: How entrepreneurs get rich Two years ago, you used your inheritance of $100,000 to  start your own business  You received 1.5M shares of stock for your investment Since then, you have sold an additional 0.5M shares to  angel investors You are now considering raising even more capital from a  venture capitalist firm.  The firm would invest $6M and 
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Chapters15,20,21_Spring2010 - Longtermfinancing*...

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