External equity sources of finance
Sources of finance p Equity contributions, shares (external) - self-financing (internal) p Debt provisions (internal) - loans (external) - other external (government support etc.)
Sources of finance p External sources of finance - require agreement of someone beyond the directors and managers of the business p Internal sources of finance - do not require agreement from other parties, arise from management decisions
External equity sources of finance p Contributions made by the partners - limited companies (s.r.o.), special limited partnerships (k.s.), public trading companies (v.o.s.) p Share financing - joint-stock companies (a.s.) Other special forms of external equity financing: - venture capital - silent partnership
Shareholders rights p Shareholders rights p 1. The right to share proportionally in assets of a company p 2. The right to share proportionally in profit p 3. The right to take part and vote in the general meeting p 4. The right to share proportionally in assets remaining after liabilities have been paid in a liquidation p 5. The right to share proportionally in any new shares sold ("pre-emptive right ", "rights issue", "rights offering")
Categories of shares p 1. According to the rights associated with a share p ORDINARY SHARES (COMMON STOCK) p PREFERENCE SHARES (PREFERRED STOCK) p STAFF SHARES
Categories of shares p ORDINARY SHARES - form the backbone of the financial structure of a business, - there is no fixed rate of dividend, ordinary shareholders receive a dividend only if profits available for distribution remain, - are the basic form of ownership in a company, - all above named shareholder s rights are associated with them
Categories of shares p ORDINARY SHARES Advantages of issue: - no fixed dividends, - appropriate for highly leveraged companies, - can be sold more easily compared to preferred shares Disadvantages of issue: - associated with higher risk for the investor, - dividend does not reduce the tax base, - high cost of issue, - dilution of control by the increased number of shareholders
Categories of shares p PREFERENCE SHARES - offer a lower level of risk than ordinary shares - are normally given a fixed rate of dividend and dividends are paid before ordinary dividends are paid - preference shareholders may be given priority over other claims of ordinary shareholders in case a business is closed down
Categories of shares p PREFERENCE SHARES types: cumulative preference shares the company is obliged to pay the dividend if it makes a profit, in case of a loss, the dividend will be accumulated and paid in the following years, non-cumulative preference shares dividend will not be accumulated if it is unpaid, participating preference shares allow the possibility of additional dividend above the stated amount under certain conditions, convertible preference shares carry the option to be converted into ordinary shares at a prescribed price
Categories of shares p PREFERENCE SHARES Advantages of issue: - relative stability of dividends if profit increases - the increase of capital is possible without limiting the influence of shareholders - lower dividend claims Disadvantages of issue: - dividend does not reduce the tax base - the issuer has to pay dividend even when the profit decreases
Categories of shares p 2. According to transferability of a share p REGISTERED SHARE its transfer can be made by endorsement if agreed by other shareholders p BEARER SHARE its transfer is not limited, it is transferable by delivery p SHARE TRANSFERABLE BY ENDORSEMENT (ORDER SHARE) a penetration between registered shares and bearer shares p NOT NEGOTIABLE SHARES transferable only by succession
Issue of shares p A company making an issue must satisfy requirements set out in various legislation and statutes. It is a rather complex procedure which has generally the following steps:
Issue of shares 1. Decision of a particular body of an issuer 2. Assigning an ISIN 3. Prospectus data about the issuer, about securities, the summary of the prospectus 4. Publishing an invitation to underwrite shares 5. Issue of shares vouchers (bearing the same rights as shares) 6. Replacement of shares vouchers by the shares
Rights issue (rights offering, pre-emptive right) p an issue of ordinary shares to existing shareholders, in which each shareholder is issued an option to buy a specified number of new shares from the firm at a specified price within a specified time, after which the rights expire; the terms of the option are evidenced by certificates known as share warrants or rights p such rights are often traded on securities exchanges or over the counter, i.e. they are a normally tradeable security themselves p the price at which the shares are offered (subscription price) is usually at a discount to the current market share price
Rights issue (rights offering, pre-emptive right) p OPERATION BLANCHE p a purchase of new shares without the employment of own capital - a shareholder sells exactly as many subscription rights in a regular capital increase as would be required to exercise the remaining rights issues and pay the issue price using the proceeds from the sale of the rights - after an operation blanche, the relative share of the share capital, however, will decrease
Rights issue (rights offering, pre-emptive right) A. a + B N = a + b PO = A N PO = A B a / b + 1. b
Rights issue (rights offering, pre-emptive right) A... market price of "old" shares a... number of "old" shares B... subscription price of "new" shares b... number of "new" shares N... new (mixed) market price after the issue PO... price of the right issue a/b... the issue ratio