Equity markets 1

Company: Basic concepts and financing
choices
Equity financing
Company: basic concepts
Funding (basic decision is between equity and debt)
Choose depending on stage of the cycle of the company, investment project
Investment (acquire assets exepected to generate satisfactory cash flows)
Hurdle rate funding cost : minium rate of return that project
must satisfy
aim:
Maximise value of the company (discounted profits)
If markets are efficient, maximising value is tantomount to maximising stock price
Due to separation of ownership and management control
accompanied by imperfect and asymetric information on management decisions, other, management-oriented goals may
be pursued
Company: basic concepts
Fisher Separation Theorem
Firm's investment decision is independent of the preferences (riskaversion) of the owner, The investment decision is independent of the financing decision
Assumption: Investor can lend and borrow at risk-free rate
Modigliani-Miller Theorem
The value of the firm is unnafected by how it is financed
Assumptions: no bunkrupcy costs, no asymetric information, information efficient market
While these concepts provide influential background for thinking
about corporate finance, the reality is often at odds with their
implciations:
People spend a lot of time thinking about the right financing mix
Ongoing research in this area:
Agency models, Asymetric information, Strategic default
Private Equity
Angel Investors
(minority share, start-up/very early stage)
Venture Capital (control, early stage)
Growth capital
(minority share, mature companies, transition phase)
Leveraged buyouts
(majority share, mature companies)
(+hybrids i.e. mezzanine)
Public Offering
Initial
Secondary
Rights offering
Private equity: shareholders agreement
Core business / Strategy of the Company and majority needed to change it
Management and its appointment
Supervisory Board composition
Scope of decisions made at Shareholders and Supervisory Board Meetings
(and majority needed)
Anti dilution - decisions on capital increases
EXIT (usually after 5-7 years; selling the bussiness to other investors or IPO)
Put option
Call option
Right of First Refusal
Drag-along rights
Tag-along rights
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