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    Raising Capital 1

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    Nazmul Hossain
    The document discusses how companies raise capital through borrowing, equity financing, or both, with the method depending on factors like firm size, life cycle stage, and growth prospects. It also covers venture capital financing for new companies, explaining that venture capitalists provide funding and support in exchange for equity, and invest in stages as companies reach milestones. Finally, it discusses the different stages of venture capital financing for startups, from seed money to bridge financing as companies approach an IPO.

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    Raising Capital 1

    Uploaded by

    Nazmul Hossain
    37 views21 pages
    The document discusses how companies raise capital through borrowing, equity financing, or both, with the method depending on factors like firm size, life cycle stage, and growth prospects. It also covers venture capital financing for new companies, explaining that venture capitalists provide funding and support in exchange for equity, and invest in stages as companies reach milestones. Finally, it discusses the different stages of venture capital financing for startups, from seed money to bridge financing as companies approach an IPO.

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    The document discusses how companies raise capital through borrowing, equity financing, or both, with the method depending on factors like firm size, life cycle stage, and growth prospects. It also covers venture capital financing for new companies, explaining that venture capitalists provide funding and support in exchange for equity, and invest in stages as companies reach milestones. Finally, it discusses the different stages of venture capital financing for startups, from seed money to bridge financing as companies approach an IPO.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    37 views21 pages

    Raising Capital 1

    Uploaded by

    Nazmul Hossain
    The document discusses how companies raise capital through borrowing, equity financing, or both, with the method depending on factors like firm size, life cycle stage, and growth prospects. It also covers venture capital financing for new companies, explaining that venture capitalists provide funding and support in exchange for equity, and invest in stages as companies reach milestones. Finally, it discusses the different stages of venture capital financing for startups, from seed money to bridge financing as companies approach an IPO.

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    © All Rights Reserved
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    Download as ppt, pdf, or txt
    of 21

    Raising Capital:

    All firms must obtain capital. To do so a firm must either borrow or


    sell the proportion of the firm (equity financing) or both. how a firm
    raises capital depends a great deal on size of the firm, its life cycle
    stage, and its growth prospects.
    To borrow a firm may take loan from a bank. Float bond or
    commercial paper.
    The Financing Life Cycle of a firm: Early- stage
    Financing and Venture Capital
    Venture capital generally means financing for new ,often
    high-risk ventures. Individual venture capital investors invest their
    own money, but they tend to specialize in smaller deals.
    Venture capital firms recognize that many or most new firms will
    Not fly, but the occasional will fly. The potential profits are
    Enormous.
    The name of famous venture capital firms are Acacia,
    Benchmark Capital, Kleiner Perkins, Chase Capital, Draper
    Fisher Jurvetson, Sevin Rosen. Soft Bank.

    Mainly technology/biotechnology /IT based companies are VC backed


    Companies. In addition to providing financing ,venture capitalists often
    Actively participate in running the firm sharing their experience.VC

    About 21% of the GDP of US comes from VC backed companies


    revenue.

    Venture capital is incredibly expensive. In a typical deal VC demand 40%


    of the equity in the company, or voting preferred stock, some priorities
    In the event of liquidation. They may demand some seats in the
    Company’s board of directors and often demand to appoint some
    senior Management post.
    Choosing a Venture Capitalists:

    Some start-up companies , particularly headed by previously


    Experienced successful entrpreneurs,will look beyond money
    In choosing a venture capitalist. The key considerations are

    1.Financial strength is important:

    2. Style is important: involvement in day to day operations,


    decision making VS. With monthly report. Depends on
    entrepreneurs skills. Large VC are less flexible.

    3. Reference is important: Has the VC been successful with


    similar firms. How has the VC dealt with the situation when the
    project didn't work?
    4. Contacts are important: Beside providing financing and
    Management they may introduce the entrepreneur with
    Potential customer, suppliers and other industry contacts.

    5. Exit Strategy is important: Venture capitalists are not long


    time investors. How and under what circumstances the VC’s
    will “cash out” of the business should be carefully evaluated.
    Stages of Financing

    Venture capital is an important part of private equity market

    To limit the risk venture capitalist generally provide financing in


    stages. At each stage money is invested to reach the next
    Milestone.

    (i)Seed money stage: a small amount of financing needed to


    Prove a concept or develop a product prototype.Marketing is
    Not included in this stage.

    (ii)Start up :Financing for firms that started within the past year.
    Funds are likely to pay for marketing and product development
    Expenditure.
    (iii)First round financing: Additional money to begin sales and
    Manufacturing after a firm has spent its start up funds.

    (iv) Second round financing: funds earmarked for working capital


    That is currently selling its product but still losing money.

    (v)Third round financing: Financing for a company that is at least


    At break-even and is contemplating an expansion. This is also
    known as mezzanine financing.

    (vi) Fourth-round financing: Money provided for firms that are


    likely to go public within half a year. This is also known as
    bridge financing.
    Alternative Issue methods:

    When a company decides to issue a new security, it can


    sell it as a public or private issue. In the case of public
    issue the firm is Required to register with the SEC.For
    equity sales, there are two kinds of public issues-Initial
    public
    Issue and right offering.

    The first public offering that is made by a company is


    referred to an Initial public issue or unseasoned new
    issue. This issue occurs when a company decides to go
    public.
    With a right offer securities are initially offered to the existing
    owners.
    A seasoned equity offering or secondary offering is a new issue
    of securities by a Company that has previously issued securities
    to the public.

    Underwriters:
    Investment firms that act as intermediaries between a company
    selling securities and the investing public. The underwriters
    Performs the following services

    •Formulating the method used to issue securities


    •Pricing the new securities
    •Selling the new securities.
    What is the difference between Investment and Merchant
    Banking?
    Traditional investment banks only engage in the underwriting of
    shares and issuance of shares, whereas merchant banks involve
    in international financial activities like real estate financing
    While traditional investment banks assist companies in the
    acquisition and merges, merchant banks are not.
     Normally investment banks focus on share issuance of large
    private and public companies, whereas merchant banks look after
    small scale companies.
    merchant banks offer trade financing to their clients, investment
    banks rarely offer this service.
    Typically underwriters buys the securities for less than the
    Offering price and accepts the risk of not being able to sell them.
    As underwriters assumes risk ,underwriters usually combine to
    form an underwriting syndicate to share the risk and to help
    sell the issue.

    In a syndicate one or more managers arrange or comanage the


    Offering.

    The difference between the underwriter’s buying price and


    Offering price is called the gross spread. This is the basic
    Compensation received by the underwriter.

    JP Morgan, Bank of America, Merrill Lynch, Goldman


    Sachs, Morgan Stanley, and Credit Suisse are some of
    the world renowned investment banks.
    Types of underwriting agreement

    Three basic types of underwriting agreement are involved in a


    Cash offer

    •Firm commitment
    •Best effort
    •Dutch Auction

    •Firm Commitment Underwriting: In Firm Commitment


    Underwriting the issuers sells the entire issue to the underwriter,
    Who then attempts to resell it. This just a purchase- resale
    Agreement, and the underwriter’s fee is the spread.

    If the underwriter cannot sell all of the issue at the agreed


    upon price ,it may have to lower the price on the unsold shares
    •Best effort underwriting: In this method the underwriter is legally
    Bound to use the best effort to sell the securities at the agreed
    Upon offering price. Beyond this the underwriter does not
    Guarantee any amount of money to the issuer.

    •Dutch Auction Underwriting: The underwriter does not set a fix


    Price for the shares to be sold. Instead ,the underwriters conduct
    An auction in which investors bid for shares. the offer price is
    Determined based on the submitted bids. A Dutch Auction is also
    Known as uniform price auction.
    An example :
    Suppose a company wants to sell 400 shares to the public.
    The Company receives five bids as follows:

    Bidder Quantity Price


    A 100 shares 16
    B 100 shares 14
    C 200 shares 12
    D 100 shares 12
    E 200 shares 10

    Lockup Agreement: Such agreement specify how long


    Insiders must wait after an IPO before they can sell some or
    All of their stock.
    The cost of issuing securities

    The cost associated with floating a new issue are generically


    Called floatation cost.
    The cost are as follows
    1.Gross spread– The gross spread consist of direct fees paid
    By the issuer to the underwriting syndicate.
    2.Other Direct expenses: These include filling fees, legal fees,
    And taxes—all reported on the prospectus.
    3.Indirect expenses—These costs are not reported on the
    Prospectus and include cost of management time spent working
    On the new issue.
    4. Abnormal return: In a seasoned new issue the price of existing
    Stock drops on announcement of the issue. This drop is called
    Abnormal return.
    5. Underpricing: For IPO losses arise from selling the stock below
    The true value.

    Right offering:

    •It is comparatively cheaper for the issuing firm than


    Seasoned secondary offering.

    •Secondly, a right offering can be done without using an


    Underwriter.
    National Power Company: Balance sheet
    Assets Stock holders equity
    Assets 15,000,000 Common Stock 5,000,000
    Re.earnings 10,000,000
    15,000,000 15,000,000

    Income statement

    Earning before taxes 3030303


    Taxes(34%) 1030303
    Net income 2,000,000
    Shares outstanding 1,000,000
    EPS 2
    Market price per share 20
    Total market value 20,000,000
    Value of a right:

    National power want to raise 5 million in new equity. And the


    Subscription price is set at 10 per share

    Number of new shares=Funds to be raised/subscription price


    5,000,000/10=5,00,000 shares

    Number of rights needed to buy a share of stocks


    Old shares /new shares=1,000,000/5,00,000=2 rights
    The value of right:

    Initial position

    Number of shares 2
    Share price 20
    Value of holding 40

    After offer

    Number of shares 3
    Value of holding 50
    Share price 16.67
    Value of one right 20 -16.67
    =3.33

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