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Lecture 2 Debt Financing

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Page 1: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Lecture 2

Debt Financing

Page 2: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Debt vs. Equity

Financial Markets and Corporate Strategy, David Hillier

Page 3: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Types of Equity Securities

Financial Markets and Corporate Strategy, David Hillier

Page 4: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Ordinary Shares

Financial Markets and Corporate Strategy, David Hillier

Page 5: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Multiple Class Shares - % Firms with unitary share structures

Financial Markets and Corporate Strategy, David Hillier

Page 6: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Different Types of Multiple Class Equities  Non-Voting

Preference Shares

Multiple Voting Rights

Voting Right

Ceilings

Ownership

Ceilings

Priority Shares

Golden Shares

Depositary

Receipts

UK 20% 1% 3% 5% 4% 3% -

France 2% 64% 19% 2% 5% - -

Germany 24% - 3% - - - -

Switzerland

- 12% 35% - - - -

Spain - - 41% - - - -

Italy 36% - 8% 28% - - -

Netherlands

- 67% - - 29% 10% 24%

Sweden - 75% 6% - - - -

Other 8% 8% 11% 8% - 3% -

Financial Markets and Corporate Strategy, David Hillier

Page 7: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Preference Shares

Financial Markets and Corporate Strategy, David Hillier

Page 8: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Exotic Preference Shares

Financial Markets and Corporate Strategy, David Hillier

Page 9: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Warrants

Financial Markets and Corporate Strategy, David Hillier

Page 10: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Volume of Global Equity Offerings 2010 ($ millions)

Financial Markets and Corporate Strategy, David Hillier

Page 11: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Depositary Receipts

Financial Markets and Corporate Strategy, David Hillier

Page 12: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Secondary Markets for Equity

Financial Markets and Corporate Strategy, David Hillier

Page 13: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Stock Exchange Systems

Financial Markets and Corporate Strategy, David Hillier

Page 14: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Dealer Markets

Financial Markets and Corporate Strategy, David Hillier

Page 15: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Order Driven System

Financial Markets and Corporate Strategy, David Hillier

Page 16: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Market Efficiency

Financial Markets and Corporate Strategy, David Hillier

Page 17: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Limits to Arbitrage

Financial Markets and Corporate Strategy, David Hillier

Page 18: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Noise Traders

Financial Markets and Corporate Strategy, David Hillier

Page 19: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Sentiment Based Risk

Financial Markets and Corporate Strategy, David Hillier

Page 20: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Bubbles and Crashes

Financial Markets and Corporate Strategy, David Hillier

Page 21: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Bubbles in History

Financial Markets and Corporate Strategy, David Hillier

Page 22: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

German Stock Exchange Volatility

Financial Markets and Corporate Strategy, David Hillier

Page 23: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Result 3.1

The stock market plays an important role in allocating capital. Sectors of the economy that experience favourable share price returns can more easily raise new capital for investment. Given this, the stock market is likely to more efficiently allocate capital if market prices accurately reflect the investment opportunities within an industry.

Financial Markets and Corporate Strategy, David Hillier

Page 24: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

The Public Issue

Financial Markets and Corporate Strategy, David Hillier

Page 25: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Alternative Issue Methods

Public Issues

Financial Markets and Corporate Strategy, David Hillier

Page 26: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Public Issues

Financial Markets and Corporate Strategy, David Hillier

Page 27: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

The Cash Offer

Financial Markets and Corporate Strategy, David Hillier

Page 28: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Other Factors in Equity Financing

Financial Markets and Corporate Strategy, David Hillier

Page 29: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

IPO Underpricing

Financial Markets and Corporate Strategy, David Hillier

Page 30: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Underpricing and Firm Size

Financial Markets and Corporate Strategy, David Hillier

Page 31: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

IPO Underpricing around the World

Financial Markets and Corporate Strategy, David Hillier

Page 32: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Number of Offerings and Average Issue Date Return

Financial Markets and Corporate Strategy, David Hillier

Page 33: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

The Announcement of New Equity and the Value of the Firm

Financial Markets and Corporate Strategy, David Hillier

Page 34: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

The Cost of New Issues

Financial Markets and Corporate Strategy, David Hillier

Page 35: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

The Cost of New Issues

Financial Markets and Corporate Strategy, David Hillier

Page 36: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

International Comparison of IPO Underwriting Fees

Financial Markets and Corporate Strategy, David Hillier

Page 37: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Result 3.2

IPOs are observed frequently in some years and not in others. The available evidence suggests that the hot issue periods are characterized by a large supply of available capital. Given this interpretation, firms are better off going public during a hot issue period.

Financial Markets and Corporate Strategy, David Hillier

Page 38: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Result 3.3The advantages and disadvantages of going public are as follows.Advantages:better access to capital marketsshareholders gain liquidityoriginal owners can diversifymonitoring and information are provided by external capital marketsenhances the firm’s credibility with customers, employees and suppliers. Disadvantages:expensivecosts of dealing with shareholdersinformation revealed to competitors public pressure. In general, a firm should go public when the benefits of doing so exceed the costs.

Financial Markets and Corporate Strategy, David Hillier

Page 39: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Rights Issues

Financial Markets and Corporate Strategy, David Hillier

Page 40: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

The Underwriting Arrangements

Financial Markets and Corporate Strategy, David Hillier

Page 41: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

The Private Equity Market

Financial Markets and Corporate Strategy, David Hillier

Page 42: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Private Equity Attractiveness Index

Financial Markets and Corporate Strategy, David Hillier

Page 43: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Sources of Private Equity Financing

Financial Markets and Corporate Strategy, David Hillier

Page 44: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Major Private Equity Fundraisers

Financial Markets and Corporate Strategy, David Hillier

Page 45: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Breakdown of Private Equity Financing, 2002 - 2007

Financial Markets and Corporate Strategy, David Hillier

Page 46: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Stages of Financing

Financial Markets and Corporate Strategy, David Hillier

Page 47: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Private Equity Financing by Funding Stage, 2007

Financial Markets and Corporate Strategy, David Hillier

Page 48: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

IPOs by VC backed Biotech Firms

Financial Markets and Corporate Strategy, David Hillier

Page 49: Lecture 2 Debt Financing. Debt vs. Equity Debt holder claims must be paid in full before the claims of equity holders can be paid. Equity holders elect

Thank You


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