This document discusses various methods for raising capital, including internal financing through retained earnings or external financing through debt or equity markets. It describes different types of debt like bank loans, bonds, and leases, as well as equity options like common stock, preferred stock, and public versus private equity. Financial intermediaries that help allocate capital are also outlined, and the key differences between primary and secondary markets are defined.
This document discusses various methods for raising capital, including internal financing through retained earnings or external financing through debt or equity markets. It describes different types of debt like bank loans, bonds, and leases, as well as equity options like common stock, preferred stock, and public versus private equity. Financial intermediaries that help allocate capital are also outlined, and the key differences between primary and secondary markets are defined.
This document discusses various methods for raising capital, including internal financing through retained earnings or external financing through debt or equity markets. It describes different types of debt like bank loans, bonds, and leases, as well as equity options like common stock, preferred stock, and public versus private equity. Financial intermediaries that help allocate capital are also outlined, and the key differences between primary and secondary markets are defined.
This document discusses various methods for raising capital, including internal financing through retained earnings or external financing through debt or equity markets. It describes different types of debt like bank loans, bonds, and leases, as well as equity options like common stock, preferred stock, and public versus private equity. Financial intermediaries that help allocate capital are also outlined, and the key differences between primary and secondary markets are defined.
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Raising Capital
Knut P. Heen PhD
Associate Professor Molde University College Road Map Based on chapter 1-3 in HGT Process & Players Debt Equity
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The Firm’s Decision How do you finance a new project? Internal capital Retained earnings (equity) External capital Debt market Equity market
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Financial Intermediaries Financial middle-men Commercial bank Investment bank Insurance company Pension fund Mutual fund Hedge fund Venture Capital fund Charities
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Primary vs. Secondary Market Primary market The corporation is the ultimate seller of newly created paper Usually through an investment bank The proceeds goes to the corporation
Secondary market The seller is an investor The buyer pays the money to the investor Usually through a stock exchange or bond exchange The corporation is not involved at all
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Debt Financing Different types of debt Bank loans Leases Commercial paper (short-term rollover) Supplier credit (short-term rollover) Corporate bonds Asset-backed securities
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Debt Financing Common to all types of debt “Fixed” interest payment “Fixed” pay-back schedule
Examples Corporate bonds Fixed coupon payments Pay the principal at maturity Leases Fixed rent Give the asset back to the owner at maturity
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Bond Lingo – The Principal
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Bond Lingo – The Coupons
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Bond Lingo – Other terms Bond covenants – restrictions on the borrower to protect lender Bond options – right to call, put, or convert the bond Bond maturity – time until principal is due Bond price – the market price of the bond (often in percent of principal) Bond rating – default probability Investment grade – almost no default risk (AAA – BBB) Speculative – low default risk (BB – B) Junk – substantial risk of default (CCC – D)
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Equity Financing Different types of equity Common stock Preferred stock Dual-class Public vs. private equity
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Equity Financing Common to all types of equity “Fluctuating” dividends (residual claimant) Voting rights
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Going Public Typical situations Successful entrepreneur wants to cash-in/reduce risk exposure Microsoft Facebook Privatization General Motors Equinor Telenor
