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Lecture Business finance - Chapter 10: Sources of long-term finance: Equity

Chapter 10 - Sources of long-term finance: Equity. This chapter include objectives: Outline the characteristics of ordinary shares, explain the advantages and disadvantages of equity as a source of finance, outline the main characteristics of preference shares, outline the main sources of private equity in the Australian market, | Chapter 10 Sources of Long-Term Finance: Equity 2 2 2 2 2 2 Learning Objectives Outline the characteristics of ordinary shares. Explain the advantages and disadvantages of equity as a source of finance. Outline the main characteristics of preference shares. Outline the main sources of private equity in the Australian market. 2 2 2 2 2 2 Learning Objectives (cont.) Be familiar with the information that must be disclosed when issuing securities. Outline the process of floating a public company. Discuss alternative explanations for the underpricing of initial public offerings. Explain how companies raise capital through rights issues, placements, share purchase plans and share options. 3 3 3 3 3 3 Learning Objectives (cont.) Outline the different types of employee share plans. Outline the advantages of internal equity as a source of finance. Outline the effects of bonus issues, share splits and share consolidations. 3 3 3 3 3 3 The Characteristics of Ordinary Shares Ordinary . | Chapter 10 Sources of Long-Term Finance: Equity 2 2 2 2 2 2 Learning Objectives Outline the characteristics of ordinary shares. Explain the advantages and disadvantages of equity as a source of finance. Outline the main characteristics of preference shares. Outline the main sources of private equity in the Australian market. 2 2 2 2 2 2 Learning Objectives (cont.) Be familiar with the information that must be disclosed when issuing securities. Outline the process of floating a public company. Discuss alternative explanations for the underpricing of initial public offerings. Explain how companies raise capital through rights issues, placements, share purchase plans and share options. 3 3 3 3 3 3 Learning Objectives (cont.) Outline the different types of employee share plans. Outline the advantages of internal equity as a source of finance. Outline the effects of bonus issues, share splits and share consolidations. 3 3 3 3 3 3 The Characteristics of Ordinary Shares Ordinary shares represent an ownership interest in a business. Residual claim The holder has a claim to the profits of the business (through dividends). In the event of failure, the holder has a claim to the residual value of the assets after claims of all other entitled parties are met. 4 4 4 4 4 4 4 The Characteristics of Ordinary Shares (cont.) Residual claim (cont.) Due to this residual claim, shareholders are more likely to lose their investment if the company fails (shareholders are said to provide the company’s risk capital). To compensate for this risk, shareholders expect a return that is greater than that received by lending. Fully and partly paid shares When new shares are created they will have a stated issue price which may be paid in full at issue. 5 5 5 5 5 The Characteristics of Ordinary Shares (cont.) Fully and partly paid shares (cont.) Alternatively, shares may be issued for part payment, with the balance paid in subsequent instalments, often referred to as ‘calls’. The size