Sources of capital v2

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This is a widely-researched paper and it highlights sources of capital used by different companies. The paper also discusses a number of instruments that companies use to enhance their capital growth and its utilization. Moreover, the paper also comes up with a few steps as well as procedures of raising capital. Finally, the paper also suggests the process of allotment when there is over or under-subscribed in the net offer to the public category.

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Sources of capital v2

  1. 1. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 1Corporate Finance – Raising Of CapitalBy ABC StudentABC UniversityMay 29, 2013
  2. 2. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 2AbstractThis is a widely-researched paper and it highlights sources of capital used by differentcompanies. The paper also discusses a number of instruments that companies use to enhancetheir capital growth and its utilization. Moreover, the paper also comes up with a few steps aswell as procedures of raising capital. Finally, the paper also suggests the process of allotmentwhen there is over or under-subscribed in the net offer to the public category.
  3. 3. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 3Table of ContentsList down the types / sources of capital ........................................................................................................4List down the different instruments used by companies to raise capital.......................................................6List down the steps / procedures of raising capital. ......................................................................................7Price ..............................................................................................................................................................8Volume..........................................................................................................................................................8The underwriters of the issue (role of investment banks).............................................................................8In your opinion was the issue rightly priced; was it at the right time; was it a success................................8Did the investors gain?..................................................................................................................................9The process of allotment when there is over-subscribed or under-subscribed .............................................9The price on trading during the first 7 days of trading after the issue (if the instrument was commonstock) (List down the price and write down your inference / comment).....................................................9Advantages of listing ..................................................................................................................................10
  4. 4. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 4List down the types / sources of capitalSources of capitalFollowing are the main sources of the capital for a companyBanksBanks are one of the most popular sources of financing. They provide long-term and short-term financing,and they finance all asset needs, including working capital, equipment and real estate. This assumes, ofcourse, that you can generate enough cash flow to cover the interest payments (which are tax deductible)and return the principal. (PH.D, Dileep Rao, 2013)There are many advantages of getting finance from the banks. Companies get many tax reliefs due togetting funds from the bank and they also provide business loans on very concessional rates as comparedto the credit cards loans etc. Another advantage is that they only charge fixed rate of interest, but angelinvestors and venture capitalists want return according to the profit of the business, which increases costof the business.EquityCompanies can also generate finance through selling their company shares to the general public and thistype of financing is called equity financing.There are lot advantages attached with the Equity financing. The most important advantage of equityfinancing is that company has very limited liabilities. Company share risk and liabilities with its shareholders. Company also don’t have to pay interest on the fund generated through issuing shares, so you caneasily use that money in other areas of the company. This is why most of the large companies preferequity financing over the debt financing and is the most used type of financing in all over the world.
  5. 5. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 5Venture Capital“A venture capitalist is a person who provides finance to entrepreneurs or small companies on pretext ofgetting higher rate of interest or return, than the conventional business investors. Mostly venturecapitalists provide funds for startups”Angel InvestingAngel investor is an investor who offers finance for small businesses and companies. Entrepreneurs caneasily locate angel investors amid their family and friends. They can provide companies lump sumfinance, in small installments or finance according to the needs of the business. (INVESTOPEDIA,2013)
  6. 6. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 6List down the different instruments used by companies to raise capitalFollowing are the most important ways to raise capital in large companiesBondIt is debt instrument that a company uses to raise the capital and in return pay interest to the investors asper the terms of the contract. Bonds are redeemable; it means that after a period of time the companyreturns the money to the investors and liquidates its liability.According to financial experts there are many advantages of investment in bond as compared toinvestment in equity. They think that, investment in bonds is very safe, as in case of bankruptcy bondholders get most of the payment back and they are given priority over the equity stock holders.Common stockCommon stock is the most popular means of raising capital in large corporations. Commonstock hasvoting rights in the corporate decisions matters. Company has to pay investors dividends on yearly andquarterly basis according to different rates.Preferred StockIn Preferred fixed dividends are paid to the investors, just like the bonds. Dividends paid to thestockholders must be paid to preferred shares before being paid to common stock shareholders.Preferred stock holders also get preference over the common stock holders in case of bankruptcy; theyhave rights just like a bond investor.
  7. 7. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 7List down the steps / procedures of raising capital.We have selected the facebook, world’s most popular social networking website. It offered its IPO in2012.There are number of options for the company, who wants to raise capital through equity financing.As face book was not listed on a stock exchange, the company startedfor an initial public offering (IPO)option. Following are the important steps in issuing shares through initial public offeringIn first step you have to prove profitability of your business and complete details of your business shouldbe given and also take advice from a qualified investment banker about the eligibility of your business forIPO.Facebook selected Morgan Stanley as their investment banker.In second step Face book management consulted with their investment banker (Morgan Stanley), whoprovided them you underwriting services for your business. MorganStanley guided them about the price,quantity and amount of shares, they wanted to issue for the company.In third step Face book filed a document called S-1, it contains the details of the company, terms of theissuance of the shares and also details about the final prospectus of the company.In fourth step the investment banker (Morgan Stanley) and upper management of the organizationsarranged a meeting with the all the prospect investors for the IPO.They presented their company in frontof the investors in very detailed manner to give the investors a insight about their company.In fifth and last step investment banker will buy the shares on the decided price and then sell them to theinvestors. Investment banker charges a commission for its underwriting services.If a company is already listed on the stock exchange, then it can go for the SEO (Seasoned equityoffering) for a company that is already listed on an exchange. The process of issuing seasoned equityoffering is same as of Initial public offering (IPO).Companies can also issue additional stocks on discountaccording to their requirements. (LAWYERS, 2013)
  8. 8. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 8PriceThe initial price of the face book IPO was $ 38 per share.VolumeFace book started their initial public offering) IPO with 450 Million shares in the New York stockexchange in the year 2012.The underwriters of the issue (role of investment banks)Morgan Stanley provided the services of underwriting to the face book for their IPO.According to thenews, they played a very important role in the issuance of the face book IPO.Massachueets securitiesregulator fined Morgan Stanley of $5million in December 2012,due to their some financial issuesinvolving face book. (INVESTOPEDIA, 2013)In your opinion was the issue rightly priced; was it at the right time; wasit a successFace book IPO started very well at $ 38 but its price fell very fast to $ 18 in just four months time. Therewas too much before the starting of the face book IPO due to extensive media coverage, but there weremany financial pundits who were of the view that face book share is greatly overvalued in the market.Most of the experts say that face book IPO was overvalued because its future earnings growth estimateswere extremely exaggerated.As far as success or failure of Face book’s IPO is concerned, most of the financial market experts saythat, it was highly successful, as it raised about $10 billion of cash at an excellent price. (KENNON,JOSHUA, 2012)
  9. 9. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 9Did the investors gain?Face book IPO was huge success in the beginning, when it started on $ 38 per share, but after realitychecks by the market and the investors, its price rapidly in next few months. If we talk about the investorsof the face book IPO, they invested in the face book shares due to lot of hype created by the media aboutits shares. But according to lot of sources they lost great deal due to huge fall of face book shares from $38 to about $20 in recent months. (GUSTIN, Sam, 2013)The process of allotment when there is over-subscribed or under-subscribedIn case of under-subscription in the net offer to the public category, spill-over to the extent of under-subscription shall be permitted from the reserved category to the net public offer category (INVESTING,IPO, 2013)The price on trading during the first 7 days of trading after the issue (ifthe instrument was common stock) (List down the price and write downyour inference / comment)The average price for the face book IPO in first week was $35, which was very good beginning for theface book company. (SCHAEFER, Steve, 2012)
  10. 10. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 10Advantages of listingFollowing are the advantages of the listing your company on the stock exchanges.A company that chooses to list on the stock exchange will often get increased company exposure as aresult. Initial public offerings are usually advertised and may be covered in news stories, investmentjournals and financial magazines.Stock exchanges follow a set rule while listing companies on a stock exchange. It helps the company tointroduce transparency, strict regulations and strict accountability in the company. It creates anatmosphere of discipline and accountability in the listed companies, which can very helpful for thecompanies.According to the experts this is the most important benefit of the listing companies on the stockexchanges. Listing on stock exchanges increases the brand value and the goodwill of the company. Itcreates a corporate image of the listed company as compared to other companies not listed on the stockexchanges. Stock market is a good source of money for the company.Organizations can get huge funds from the stock exchanges, if they manage properly the process of theissuing shares. Resources greatly increase with the listing of companies’ shares on the stock exchange.(EHOW, 2013)
  11. 11. Running head: CORPORATE FINANCE – RAISING OF CAPITAL 11BibliographyEHOW. 2013. The Advantages of Listing Companies on the Stock Exchange. [online]. [Accessed 28 May2013]. Available from World Wide Web: <http://www.ehow.com/info_8243576_advantages-listing-companies-stock-exchange.html>GUSTIN, Sam. 2013. Facebook’s IPO One Year Later: Mobile Growth, Legal Headaches, and a StalledStock Price. [online]. [Accessed 28 May 2013]. Available from World Wide Web:<http://business.time.com/2013/05/17/facebooks-ipo-one-year-later-mobile-growth-legal-headaches-and-a-stalled-stock-price/.>INVESTING, IPO. 2013. IPO allotment. [online]. [Accessed 28 May 2013]. Available from World WideWeb: <http://iepf.gov.in/IEPF/Allotments_IPO.html>INVESTOPEDIA. 2013. Angel Investing. [online]. [Accessed 28 May 2013]. Available from World WideWeb: <http://www.investopedia.com/terms/a/angelinvestor.asp>INVESTOPEDIA. 2013. Underwriter. [online]. [Accessed 28 may 2013]. Available from World Wide Web:<http://www.investopedia.com/terms/u/underwriter.asp>KENNON, JOSHUA. 2012. I Think the Facebook IPO Is Overvalued. [online]. [Accessed 28 May 2013].Available from World Wide Web: <http://www.joshuakennon.com/facebook-ipo-overvalued/>LAWYERS. 2013. Steps in the IPO Process. [online]. [Accessed 28 May 2013]. Available from World WideWeb: <http://securities.lawyers.com/initial-public-offerings/Steps-in-the-IPO-Process.html>PH.D, Dileep Rao. 2013. The 12 Best Sources Of Business Financing. [online]. [Accessed 28 May 2013].Available from World Wide Web: <http://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-entrepreneurs-finance-dileep-rao_2.html>SCHAEFER, Steve. 2012. Facebook IPO. [online]. [Accessed 28 May 2013]. Available from World WideWeb: <http://www.forbes.com/sites/steveschaefer/2012/05/25/one-week-later-why-facebooks-ipo-matters/>

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