Financing

1. Financing

2. Financing • Equity financing • Debt financing

3. Equity financing: owned • Stocks: • Claims on assets • Part ownership • Common stock • Preferred stock

4. Common Stocks • With voting rights • Last to get paid in the event of bankruptcy, after preferred stocks, bonds, creditors, etc. • Preemptive rights: retain proportional ownership • Potential earnings in terms of dividends and capital appreciation • Par value: face value, to be retained • Market value: price in the market • Book value: owners equity / shares

5. Preferred Stocks • fixed dividend rate • No voting rights • Priority over common stocks in payment of dividends and upon liquidation (after debt holders) • Prior Preferred stock: highest priority; lower yield • Preference preferred stock: ranked by seniority • Convertible preferred stock: exchange for common stock • Participating preferred stock: opportunity for extra dividend

6. Equity Financing • Less risky in terms of cash flow • Dilution of ownership, control and earnings • Higher cost than debt

7. Venture Capital: private equity • For early-stage, high potential growth companies • Cash for share • High tech industries (biotech / ICT) • From institutional investors and high net worth individuals pooled by investment firms • Core skill: ability to identify novel technologies with high commercial return potential

8. Venture Capitalist • A person or investment firm • Adding capital, managerial skills and technical expertise for high returns • Pooled investment of capital from third party • For projects that are too risky for standard capital markets or bank loans • Most attractive for new, small, high potential, innovative, rapid growth, business model, management team • Significant control, significant portion of ownership, significant share of value

9. Debt Financing: owed • Bonds • Loans

10. Bonds: IOU • Promise to pay by a future date, with interests paid regularly • Rated default risks • Government bonds • Municipal bonds • Corporate bonds • Registered bond: checks mailed out based on registration with company • Bearer bond: payment on coupons • Secured bond: backed by assets • Debenture: unsecured

11. Other Classifications • Fixed rate bonds: (coupon) constant through life • Floating rate notes: (coupon) floating with interest rate • Zero coupon bonds: no regular interest payment • Inflation (equity – income - GDP) linked bonds: • Perpetual bonds: annuities • Asset-backed securities (mortgage, collateralized mortgage, collateralized debt): • Lottery bond: random redemption • Serial bond: maturity in installments • Revenue bond: only pay back with revenue generated

12. Loans • Secured: assets as collateral • Mortgage • Auto • Unsecured: monetary loans not backed by assets • Credit card • Personal • Bank overdraft • Line of credit • Demand loans: short term, no fixed dates for repayment, floating interest rate

13. Financing Decision: debt vs. equity • Pecking Order Theory: • avoid external financing when there is internal financing available • Avoid new equity financing when there is debt financing available at reasonably low interest rate • Trade-Off Theory: • Tax benefit of debt • Bankruptcy costs of debt • Market Timing Hypothesis: • Look for cheaper financing regardless of current capital structure

14. Securities Markets • Securities: stocks and bonds • Primary market: for new stocks and bonds • Private placements: sold privately, not in open market • Secondary market: for existing securities • NYSE, …

15. T6: Financing Needs and Plan • Based on your operations, identify the needs for funds and needs for financing • Determine the financing methods and amount to meet the needs • Explain your choice Upload to moodle by 12/26/2010