25300 Lecture Notes - Lecture 6: Initial Public Offering, Investment Banking, Private Placement
Dividends
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Voting entitlements
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Residual claim to assets (liquidation)
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Limited liability
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Owners rank behind everybody else (get paid lastly)
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Directors decide how much dividends to pay shareholders
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Ordinary shares:
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Publicly listed companies trade on the ASX
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Have a face value
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Preferential dividends
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Preferential liquidation
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Fixed dividends
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Similar features to debt finance (regular payments and redeemable)
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Expected return on preference shares lower than return on ordinary shares (Lower
return amount because get paid first with a certain rate, the amount left is distributed to
ordinary shareholders)
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Preference shares:
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Equity
A distribution of profit
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One form of shareholder return
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Payment is at discretion of directors
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NOT TAX DEDUCTIBLE (paid from profit after tax)
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Dividends:
The first sale of ordinary shares
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Requires the services of an investment bank (marketing and valuation)
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Requires purchase of unsold shares
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Ensures firm obtains required finance
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Underwriting agreement:
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Investment bank will sell the share for the company
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The public know the investment bank (Comm bank…) not the company
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Investment bank will buy any unsold shares
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Investment bank: advises to sell below the market price.
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Why company need investment bank?
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Access to capital markets
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Raise the firm's profile
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Align manager's goal with shareholders'
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Market valuation
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Advantages:
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Dilute control of existing owners
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Greater demand for disclosure of information
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Increased costs
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Disadvantages:
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Initial Public Offering (IPO)
Quicker to implement and for smaller amounts
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Greater certainty in pricing
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Placed in friendly hands
Advantages:
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Private placement
Lec 6 Equity and Valuation
F Page 12
Document Summary
Owners rank behind everybody else (get paid lastly) Directors decide how much dividends to pay shareholders. Similar features to debt finance (regular payments and redeemable) Expected return on preference shares lower than return on ordinary shares (lower return amount because get paid first with a certain rate, the amount left is distributed to ordinary shareholders) Not tax deductible (paid from profit after tax) Requires the services of an investment bank (marketing and valuation) Investment bank will sell the share for the company. The pu(cid:271)li(cid:272) k(cid:374)o(cid:449) the i(cid:374)(cid:448)est(cid:373)e(cid:374)t (cid:271)a(cid:374)k (cid:894)co(cid:373)(cid:373) (cid:271)a(cid:374)k (cid:895) (cid:374)ot the (cid:272)o(cid:373)pa(cid:374)y. Investment bank: advises to sell below the market price. Number of new shares based in proportion to the current number owned. 2-for-7: for every 7 shares you own, you will get offer of 2 shares; if you own 6 shares -> get nothing; if you own 13 shares -> still get offer 2 shares. New shares issued at a discount to market price.
