Issuing Shares to Raise Money
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Questions and Answers

What are the two main expectations of people who buy shares?

  • Interest payments and fixed dividends
  • Capital growth and dividends (correct)
  • Buybacks and public offerings
  • Stock options and equity stakes

Which type of shares pays a fixed dividend before ordinary shareholders receive any dividends?

  • Preference shares (correct)
  • Warrants
  • Ordinary shares
  • Convertible shares

Which statement is true regarding ordinary shareholders' rights to dividends?

  • They have an automatic right to dividends every year.
  • Preference shareholders receive dividends first.
  • They must be paid before creditors like banks.
  • Dividends are paid out after all creditors have been paid. (correct)

What does 'nominal (par) value' refer to?

<p>The face value of a share when issued (B)</p> Signup and view all the answers

What is a 'share premium'?

<p>The amount received over the nominal value when selling shares (C)</p> Signup and view all the answers

What is the 'spread' in the context of share trading?

<p>The difference between the bid price and the offer price (C)</p> Signup and view all the answers

Which type of shares generally lacks voting rights except in major company matters?

<p>Preference shares (B)</p> Signup and view all the answers

What does 'capital growth' refer to for an investor?

<p>Increase in the share price over time (C)</p> Signup and view all the answers

What is an Initial Public Offering (IPO)?

<p>The process of selling shares on the stock market for the first time. (B)</p> Signup and view all the answers

Which of the following best describes angel investors?

<p>Wealthy individuals who invest in early-stage companies and provide valuable support. (B)</p> Signup and view all the answers

What is one advantage of private equity compared to public equity?

<p>Owners and managers have more control over decisions. (D)</p> Signup and view all the answers

What are hedge funds primarily known for?

<p>Using aggressive strategies to achieve high returns. (A)</p> Signup and view all the answers

Which type of funding is NOT typically associated with private equity?

<p>Investments from publicly traded corporations. (C)</p> Signup and view all the answers

What can companies expect in return when issuing shares?

<p>Returns through dividends or capital growth. (A)</p> Signup and view all the answers

Why might a company prefer private funding over going public?

<p>To avoid the complexity and regulations of public markets. (A)</p> Signup and view all the answers

In the context of private equity, who are typically the investors?

<p>Venture capitalists, private equity firms, or wealthy individuals. (C)</p> Signup and view all the answers

What is one common method for private equity investors to exit their investment?

<p>Selling their stake to private investors (A)</p> Signup and view all the answers

Which type of investors primarily participate in public equity markets?

<p>Retail investors and institutional investors (A)</p> Signup and view all the answers

Why do companies often pursue public equity through an IPO?

<p>To raise funds for growth, acquisitions, or debt repayment (A)</p> Signup and view all the answers

What is a significant disadvantage for companies that choose to go public instead of utilizing private equity?

<p>Higher regulatory compliance costs (B)</p> Signup and view all the answers

What typically characterizes the types of companies that utilize public equity?

<p>Mature companies looking for additional capital (A)</p> Signup and view all the answers

What is a requirement for a company that has gone public regarding shareholder control?

<p>Voting rights for public shareholders on major decisions (B)</p> Signup and view all the answers

What does private equity typically allow companies to avoid compared to going public?

<p>Stricter financial reporting requirements (B)</p> Signup and view all the answers

What is a notable benefit of investing in public equity for investors?

<p>High levels of regulatory disclosure (D)</p> Signup and view all the answers

What are some costs associated with listing on a stock exchange?

<p>Legal fees and ongoing compliance expenses (C)</p> Signup and view all the answers

What is a key advantage of raising money through private equity compared to public equity?

<p>More flexibility and quicker fundraising process (A)</p> Signup and view all the answers

How does going public affect a company's management decisions?

<p>Creates pressure to prioritize short-term gains (D)</p> Signup and view all the answers

What does raising funds privately help a company avoid?

<p>Being vulnerable to hostile takeovers (B)</p> Signup and view all the answers

Which statement correctly contrasts private and public equity?

<p>Public equity involves more public scrutiny than private equity (C)</p> Signup and view all the answers

What disadvantage might a company face after going public?

<p>Pressure from numerous public shareholders (B)</p> Signup and view all the answers

What is a potential burden for companies that choose to go public?

<p>They must disclose financial details (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of private equity fundraising?

<p>Requires extensive public disclosure (B)</p> Signup and view all the answers

What is one of the primary reasons a company might choose to go public?

<p>To access larger amounts of capital (B)</p> Signup and view all the answers

What is a consequence of being a public company?

<p>Higher regulatory requirements (D)</p> Signup and view all the answers

What advantage does public equity provide to investors compared to private equity?

<p>Greater liquidity in transactions (C)</p> Signup and view all the answers

Why might a company prefer private equity over going public?

<p>It provides quicker access to funds (A)</p> Signup and view all the answers

What might be a negative impact of a company going public?

<p>Higher costs and more regulations (C)</p> Signup and view all the answers

What can going public potentially help a company achieve in terms of employee attraction?

<p>Attraction through stock options (D)</p> Signup and view all the answers

What risk do public companies face that private companies typically do not?

<p>Challenges in maintaining control (C)</p> Signup and view all the answers

What is a disadvantage of private equity funding?

<p>It typically limits investment to a small group (D)</p> Signup and view all the answers

What is a defining characteristic of private equity investments?

<p>They target companies that aren’t publicly listed. (C)</p> Signup and view all the answers

Why might a venture capitalist choose to invest in a startup?

<p>They provide funding for early-stage businesses with high growth potential. (D)</p> Signup and view all the answers

What is a common criticism of hedge funds?

<p>They can cause stock prices to decline through short-selling. (A)</p> Signup and view all the answers

Which of the following is NOT a benefit of private equity over public offerings?

<p>The ability to invest only in high-profile companies. (A)</p> Signup and view all the answers

How did the Global Financial Crisis affect venture capital investment in the UK?

<p>Investment decreased after 2008. (B)</p> Signup and view all the answers

What is the purpose of short-selling in hedge funds?

<p>To profit when a company's stock price drops. (D)</p> Signup and view all the answers

What distinguishes venture capital from traditional private equity?

<p>Venture capital targets early-stage businesses. (C)</p> Signup and view all the answers

Why might companies prefer private equity funding?

<p>It is less expensive and faster compared to public offerings. (B)</p> Signup and view all the answers

Flashcards

Company Shares

A way for companies to raise money by selling ownership portions to investors.

Dividend

A portion of a company's profit paid to shareholders.

Ordinary Shares

Common shares giving ownership and voting rights, but no guarantee of dividends.

Preference Shares

Shares with guaranteed, fixed dividends, paid before ordinary shares but usually without voting rights.

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Nominal Value (Par Value)

The face value of a share, the minimum price at which the company can sell it.

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Market Value

The price at which shares are traded based on demand and supply.

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Bid Price

The price at which someone is willing to buy a share.

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Offer Price

The price at which someone is willing to sell a share.

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No Par Value Shares

Company shares issued without a predetermined minimum price, offering more flexibility in pricing.

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Private Equity

Investment in privately held companies, aiming for high returns but with higher risk.

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Venture Capital

Type of private equity funding early-stage or small businesses with significant growth potential.

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Hedge Funds

Investment funds employing various strategies, often riskier than regular funds, aiming for high returns.

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Short-Selling

Selling shares not yet owned, betting on a price drop to buy back cheaper and profit.

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Private Equity vs. Public Offerings

A comparison between raising capital through private investment and selling shares to the public.

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Reasons for Private Equity

Companies may choose private equity to raise capital because it is faster, less regulated and because some companies may not meet requirements for public financing.

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Global Financial Crisis

A significant economic downturn that caused a decrease in UK venture capital investment after 2008.

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Public Offerings

When a company sells shares of ownership to the public for the first time on a stock exchange.

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Angel Investors

Wealthy individuals who invest in early-stage companies, offering money, experience, and connections.

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IPO (Initial Public Offering)

The first time a company offers its shares to the public, making it a publicly traded company.

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Going Public

The process of a company transitioning from private ownership to public ownership through an IPO.

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Private Equity Control

Private companies have more control over decisions because they have fewer investors and less public pressure.

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Private Equity Exit Strategy

Investors in private equity aim to sell their stake in a company after a certain time period. They typically do this through selling the company, taking it public in an Initial Public Offering (IPO), or selling to another private investor.

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Public Equity Definition

Public equity refers to companies that raise money from the general public by selling shares on a stock exchange, like the NYSE or LSE.

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Public Equity Funding Stage

Public equity is typically used by established companies looking to raise money for expansion, acquisitions, or debt repayment.

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Public Equity Shareholder Control

When a company goes public, its control is shared with public shareholders, who can vote on major decisions like electing the board of directors.

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Public Equity Exit Strategy

Public investors can sell their shares on the stock market at any time, making it easier to exit their investment compared to private equity.

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Private Equity Over Public Equity?

Companies might choose private equity over going public to raise money because of less regulation and lower costs.

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Private Equity Regulation

Private companies avoid many of the strict regulations and reporting requirements that public companies face, such as quarterly financial reports and audits.

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Public Equity Scrutiny

Public companies face more scrutiny from regulators, investors, and the media due to the transparency and disclosure requirements.

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IPO Costs

Expenses like underwriting fees, legal costs, and ongoing compliance expenses incurred when a company goes public.

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Public Company Obligations

Duties faced by publicly traded companies, such as quarterly earnings calls, investor relations, and public financial disclosures.

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Private Equity Speed

Raising money through private equity usually involves less paperwork and is quicker than going public.

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IPO Length

The process of going public with an IPO can take several months or over a year due to extensive paperwork and regulations.

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Public Company Pressure

Public companies often face pressure from shareholders to prioritize short-term profits over long-term growth, leading to stricter financial disclosures.

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Hostile Takeover Protection

Private companies are less vulnerable to hostile takeovers compared to public companies, where investors can buy enough shares to gain control.

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Public Company Transparency

Going public means disclosing more information about the company's finances and operations, which can lead to increased public scrutiny.

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Hostile Takeover

When an investor, without the company's approval, buys enough shares to take control of a public company.

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Advantages of Going Public

Public companies gain wider access to capital, greater brand recognition, and increased liquidity for investors.

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Disadvantages of Going Public

Public companies experience more regulatory scrutiny, higher costs, and less control over company decisions.

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Why Choose Private Equity?

Companies choose private equity when needing quick access to capital, preferring less regulation, and seeking more control.

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Why Choose Public Equity?

Companies choose public equity when requiring substantial capital, wanting to boost brand visibility, or needing to offer liquidity for investors.

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Private vs. Public Equity: Summary

Private equity offers quick funding and control, while public equity provides access to larger capital, liquidity, and public visibility.

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Public vs. Private: Which is Better?

The best choice depends on the company's specific needs, stage of growth, and goals.

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Study Notes

Issuing Shares to Raise Money

  • Companies issue shares to raise money, both public and private companies can sell shares.
  • Investors expect profit through dividends (a portion of company profits) or capital growth (increase in share price).
  • Dividends are typically paid out once or twice a year, depending on company performance and shareholder approval.

Types of Shares

Ordinary Shares

  • Most common share type.
  • Shareholders own part of the company, receiving a share of profits.
  • Dividend payment is not automatic, but paid out after creditors (like banks).
  • Shareholders have voting rights.

Preference Shares

  • Also grant ownership, but have additional features.
  • Fixed dividends are paid to shareholders before ordinary shareholders.
  • Cumulative dividends are paid out from previous years before ordinary dividends.
  • Preference shareholders usually have no voting rights except in major situations.

Share Value

Nominal (Par) Value

  • The face value of a share, set when first issued. It is the minimum price.
  • Share premium is earned if the selling price is above the nominal value.

Market Value

  • Price at which shares are bought and sold in the market.
  • Determined by supply and demand.
  • Bid price: The price someone is willing to pay for a share.
  • Offer price: The price someone is willing to sell a share for.
  • Spread: The difference between the bid and offer prices.

Private Equity and Venture Capital

  • Private equity is money invested in companies not publicly listed.
  • Higher returns are expected for the higher risk.
  • Venture Capital is a type of private equity for early/small businesses with high potential for growth.

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Description

Explore the fundamental concepts of issuing shares in companies, including ordinary and preference shares. Understand the impact of dividends and shareholder rights on capital growth and company profits. This quiz covers crucial financial principles for investors and corporate entities.

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