Why stock would generate bigger return on bonds

E what is your cost market investors opinions will put

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Unformatted text preview: issue equity? Fascination by start- ups: start- up owns 100% Every dollar of equity dilutes your ownership of company. Cost if you’re unwilling to give up equity, you’re taking one of the two ways to raise equity off the table. Pragmatic approach: look and compare how much dilution vs. what you’re getting for it. How much risk is an investor willing to tolerate? Debt is first loss, no guaranteed return, no covenants that protect equity investor. If investor is risk- averse, may demand debt (senior debt or some kind of debt, at least preferred stock) If you have good Investment banker, he will take you to good equity sources and vice versa. Match investor risk vs. investment opportunity What is the market pricing debt, equity, and hybrids (i.e. what is your cost?) Market (investor’s opinions) will put a price on company’s debt or equity? They are usually efficient Now that we have preference for debt or equity, we need to see what market tells us is better. Take into account risk tolerance of management team. How much financial leverage are you willing to tolerate given downside of financial distress? I need to generate this much debt What are the uses of proceeds? How risky is the project the money is going into? If it is risky, you might want to have some equity in there because you don’t want to risk running company into ground by financing it entirely by debt Is the capital raise accretive to earnings per share or does it accomplish some other purpose? Need to match type of project you are doing with type of capital you wan to raise Question 2: do you raise money privately or publicly? Private markets: markets where there is no registration statement Publicly trading? Private placement: Registration statement not needed to raise equity and debt All private and some public companies raise their money privately What are advantages vs. disadvantages of private vs. public: Public: securities are immediately tradeable (liquidity), if company registers stock, buyer of stock can turn around 5 seconds later and sell it right there. Not true in private placement. You may never get liquid. No guarantee market will ever be liquid Private companies: (temporary or permanent illiquidity) generally, 6 months then you can sell. Pink sheets or insider, you h...
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