Sources of finance

1. Chapter 12 Sources of finance

2. Contents 1 Sources of finance 2 Debt finance 3 Venture capital 4 Equity finance

3. Overview – sources of finance Maximisation of shareholder wealth Investment decision Financing decision Dividend decision Short-term finance Long-term finance

4. Sources of finance • Range of short-term sources – overdrafts: quickly and flexibility – short-term loans – trade credit – lease finance – factoring • Range of long-term sources – debt finance – leasing – venture capital – equity finance

5. Overdrafts Sources of finance Definition: Where payments from a current account exceed income to the account for a temporary period, the bank finances the deficit by means of an overdraft.

6. Sources of finance • Overdrafts

7. Sources of finance

8. Sources of finance • Overdrafts an short-term loans compared: (a) In most cases, when a customers wants finance to help with ‘day to day’ trading and cash flow needs, an overdraft would be the appropriate method of financing. (b) When a customer wants to borrow from a bank for only a short period of time, even for the purchase for a major fixed asset, an overdraft facility might be more suitable than a loan, because the customer will stop paying interest as soon as his account goes into credit.

9. Sources of finance • Advantages of an overdraft over a loan • The customer only pays interest when he is overdrawn. • The bank has the flexibility to review the customer’s overdraft facility periodically, and perhaps agree to additional facilities, or insist on a reduction in the facility. • An overdraft can do the same job as a loan; a facility can simply be renewed every time it comes up for review.

10. Sources of finance • Advantages of a loan for longer term lending • Both the customer and the bank know exactly what the repayments of the loan will be and how much interest is payable, and when. This makes planning(budgeting) simpler. • The customer does not have to worry about the bank deciding to reduce or withdraw an overdraft facility before he is in a position to repay what is owed. There is an element of ‘security’ or ‘peace of mind’ in being able to arrange a loan for an agreed term. • Loans normally carry a facility letter setting out the precise terms of the agreement.

11. Sources of finance • Trade credit: -

12. Sources of finance

13. Sources of finance A company would raise more cash from a sale and leaseback arrangements than from a mortgage. Disadvantages:

14. Debt finance Factors to choose debt finance

15. Debt finance

16. Debt finance Fixed rate debenture Debentures with floating rate of interest Deep discount bonds – issued at a large discount and redeemable at par (or above par) in maturity – no or very low interest – taxed in lump sum rather than annual interest income Zero coupon bonds – raise cash immediately – advantage for lenders is restricted

17. Debt finance

18. Debt finance • Zero coupon bonds: -are bonds that are issued at a discount to their redemption value, but no interest is paid on them. • Advantages:

19. Bonds Evaluation of long term debt finance from company • Disadvantage • interest paid regardless of profit • raise gearing and risk • with fixed maturity dates, provision must be made in advance • Advantage • cheap, as less risky • cost is limited to interest • no dilution of control • interest cost tax deductible

20. Advantages of long term debt finance Bonds (debentures/loan notes) Bank loans • Available to most companies • Supported by the loan guarantee scheme for small businesses • Quick to arrange • Often cheaper because avoid bank fees & liquid investment • Can be convertible • Can be zero coupon • Can be in foreign currency (Eurobond)

21. Bonds Evaluation of long term debt from investor Disadvantage no voting right Vs. Advantages priority in interest payment and liquidation fixed interest whatever profit is

22. Convertibles • Convertibles – are bonds that give the holders the right to convert to other securities, normally ordinary shares, at a pre-determined price/rate and time.

23. Convertibles • Convertibles – fixed return security and may be converted into ordinary shares – conversion value value of share to be converted by 1 loan stock – conversion premium difference between the market value of the stock and conversion value at issue date

24. Convertibles • Characteristics of convertible debentures • convertibles can provide immediate finance at lower cost since the conversion option effectively reduces the interest rates payable. • convertibles represent attractive investments to investors since they are effectively debts risks for future equity benefits. Hence, finance is relatively easy raised. • convertibles allow for higher gearing levels than would • otherwise be the case with straight debt, because costs are • potentially lower with convertibles. • where company wish to raise equity finance, but share prices are currently depressed, convertibles offer a safeguard share issue method. • where convertibles are converted into shares, the problem of repayment disappears.

25. Convertibles • Delayed equity and dilute EPS • Market value of convertible – issued at a low conversion value to maximize conversion premium – low coupon rate of interest – price depend on • price of straight debt • current conversion value • length of time before conversion • market’s expectation

26. Example

27. Answer

28. Bonds • Secured and unsecured • fixed charge: specific assets • floating charge: general charge on all assets • unsecured with higher rates • Redemption of loan notes • preference shares • debentures • Tax relief on loan interest

29. Venture capital Very high growth potential V Very significant amounts Very high returns

30. Venture capital • Venture capital: is risk capital, normally provided in return for an equity stake. • Venture capital funds • Finding venture capital – want an equity stake – the company can be successful – have a representative or have an independent director

31. Venture capital • Factors in investment decisions

32. 创业板发行条件 第十条 发行人申请首次公开发行股票应当符合下列条件： （一）发行人是依法设立且持续经营三年以上的股份有限公司。 有限责任公司按原账面净资产值折股整体变更为股份有限公司的，持续经营时间可以从有限责任公司成立之日起计算。 （二）最近两年连续盈利，最近两年净利润累计不少于一千万元，且持续增长；或者最近一年盈利，且净利润不少于五百万元，最近一年营业收入不少于五千万元，最近两年营业收入增长率均不低于百分之三十。净利润以扣除非经常性损益前后孰低者为计算依据。 （三）最近一期末净资产不少于两千万元，且不存在未弥补亏损。 （四）发行后股本总额不少于三千万元。 2009年3月31日中国证监会公布了《首次公开发行股票并在创业板上市管理暂行办法》，该办法就首次公开发行股票并在创业板上市的公司的股票发行条件作出了相应的规定。

33. 创业板上市必要条件 根据深圳证券交易所于2009年6月5日正式发布的《深圳证券交易所创业板股票上市规则》，发行人申请股票在深圳证券交易所创业板上市，应当符合下列条件： (一)股票已公开发行； (二)公司股本总额不少于3000万元； (三)公开发行的股份达到公司股份总数的25%以上；公司股本总额超过四亿元的，公开发行股份的比例为10%以上； (四)公司股东人数不少于200人； (五)公司最近三年无重大违法行为，财务会计报告无虚假记载； (六)本所要求的其他条件。

34. 创业板发行的询价和定价 根据最新修订的《证券发行与承销管理办法》（2010年6月24日通过审议，2010年10月11日施行），首次发行的股票在创业板上市的，其发行定价应遵守以下的规定： 第五条首次公开发行股票，应当通过向特定机构投资者（以下称询价对象）询价的方式确定股票发行价格。 第十四条首次发行的股票在中小企业板、创业板上市的，发行人及其主承销商可以根据初步询价结果确定发行价格，不再进行累计投标询价。

35. Equity finance • Ordinary shares • classification of shares • market value and par value • purposes of new issue of shares raise fund float its shares merge and acquisition • Equity fund • cash from retained earning • new share issues • rights issues

36. Equity finance • Why listing • access to a wider pool of finance • improved marketability of shares • transfer of capital to other uses • enhancement of the company image • facilitation of growth by acquisition • obtain funds for other projects • Disadvantage of listing • loss of control to wider investors • risk of being take over

37. Equity finance • Methods of obtaining a listing – initial public offer (IPO) – a placing – an introduction • Typical costs of a share issue – underwriting costs – listing fee – fees of the issuing house, solicitors, auditors and consultants – charges for printing and distributing the prospectus – advertising

38. Equity finance Initial public offer -is an invitation to apply for shares in a company based on information contained in a prospectus. A placing: -is an arrangement whereby the shares are not all offered to the public, but instead, the sponsoring market maker arranges for most of the issue to be bought by a small number of investors, usually institutional investors such as pension funds and insurance companies.

39. Equity finance • The choice between an IPO and a placing

40. Equity finance • A stock exchange introduction: This will only happen where shares in a large company are already widely held, so that a market can be seen to exist. A company might want an introduction to obtain greater marketability for the shares, a known share valuation for inheritance tax purposes and easier access in the future to additional capital. By this method of obtaining a quotation, no shares are made available to the market, neither existing nor newly created shares; nevertheless, the stock market grants a quotation.

41. Equity finance • Pricing shares for a stock market launch

42. Equity finance • Pricing shares for a stock market launch – price of similar quoted companies – current market conditions – desire for immediate premium – future trading prospects • Underwriting

43. 第八条　发行人应当是依法设立且合法存续的股份有限公司。第八条　发行人应当是依法设立且合法存续的股份有限公司。 经国务院批准，有限责任公司在依法变更为股份有限公司时，可以采取募集设立方式公开发行股票。 第九条　发行人自股份有限公司成立后，持续经营时间应当在3年以上，但经国务院批准的除外。 　有限责任公司按原账面净资产值折股整体变更为股份有限公司的，持续经营时间可以从有限责任公司成立之日起计算。 第三十三条　发行人应当符合下列条件： 　（一）最近3个会计年度净利润均为正数且累计超过人民币3000万元，净利润以扣除非经常性损益前后较低者为计算依据； 　（二）最近3个会计年度经营活动产生的现金流量净额累计超过人民币5000万元；或者最近3个会计年度营业收入累计超过人民币3亿元； 　（三）发行前股本总额不少于人民币3000万元； 　（四）最近一期末无形资产（扣除土地使用权、水面养殖权和采矿权等后）占净资产的比例不高于20%； 　（五）最近一期末不存在未弥补亏损。 我国《证券法》、《公司法》和证监会于2006年5月17日公布的《首次公开发行股票并上市管理办法》，就公司首次公开发行股票规定了相应的条件。这些条件适用于在上海证券交易所主板市场上市的公司和在深圳证券交易所中小板市场上市的公司。 首次公开发行股票（IPO）发行条件

44. 首次公开发行股票（IPO）的询价和定价 询 价 首次发行的股票在中小企业板上市的，发行人及其主承销商可以根据初步询价结果确定法，不再进行累计投标询价。

45. 上市公司增发股票发行条件 2006年5月7日《上市公司证券发行管理办法》 公开 发行

46. 上市公司增发股票发行条件 上市公司增发股票的一般规定 　　第六条　上市公司的组织机构健全、运行良好 　　第七条　上市公司的盈利能力具有可持续性， 　　第八条　上市公司的财务状况良好； 　　第九条　上市公司最近三十六个月内财务会计文件无虚假记载 　　第十条　上市公司募集资金的数额和使用应当符合规定

47. 上市公司增发股票发行条件 配股 增发 第十三条　向不特定对象公开募集股份（简称“增发”），除符合本章第一节规定外，还应当符合下列规定： 　　（一）最近三个会计年度加权平均净资产收益率平均不低于百分之六。扣除非经常性损益后的净利润与扣除前的净利润相比，以低者作为加权平均净资产收益率的计算依据； 　　（二）除金融类企业外，最近一期末不存在持有金额较大的交易性金融资产和可供出售的金融资产、借予他人款项、委托理财等财务性投资的情形； 　　（三）发行价格应不低于公告招股意向书前二十个交易日公司股票均价或前一个交易日的均价。 第十二条　向原股东配售股份（简称“配股”），除符合本章第一节规定外，还应当符合下列规定： (一) 拟配售股份数量不超过本次配售股份前股本总额的百分之三十； (二) 控股股东应当在股东大会召开前公开承诺认配股份的数量； 　　（三）采用证券法规定的代销方式发行。 　　控股股东不履行认配股份的承诺，或者代销期限届满，原股东认购股票的数量未达到拟配售数量百分之七十的，发行人应当按照发行价并加算银行同期存款利息返还已经认购的股东。

48. 配股一般采取网上定价发行的方式。配股价格的确定是在一定个价格区间内由主承销商和发行人协商确定。价格区间通常以股权登记日前20个或30个交易日该股二级市场价格的平均值为上限，下限为上限的一定折扣。配股一般采取网上定价发行的方式。配股价格的确定是在一定个价格区间内由主承销商和发行人协商确定。价格区间通常以股权登记日前20个或30个交易日该股二级市场价格的平均值为上限，下限为上限的一定折扣。 配股 的发行方式 （一）上网定价发行与网下配售相结合 这种方式是往下通过向机构投资者询价确定发行价格配售，同时网上对公众投资者定价发行。 （二）网下网上同时定价发行 在此中发行方式下，对于网上发行部分，既可以按统一配售比例对所有公众投资者进行配售，也可以按一定的中签率以摇号抽签方式确定获赔对象。 增发 的发行方式 上市公司增发股票发行定价

49. Right issue • Key term: – new share offers made to existing shareholders at a lower price • Advantages of a right issue – cheaper than offer for sale – more beneficial to existing shareholders ☆new shares at a discount price – relative voting rights are not affected – reduce gearing

50. Example(1)