12: Raising Long-Term Financing
12 What happens to a company’s share price when the firm announces plans for a seasoned equity
offering? What are the long-term returns to investors following an SEO?
13 Why do you think that rights offerings have largely disappeared in the United States?
14 What are the relative advantages and disadvantages of private placements compared to those of
public offerings of stock and bond issues?
CONCEPT REVIEW QUESTIONS 12-4
SUMMARY
FIGURE 12.7 AUSTRALIAN SECONDARY CAPITAL RAISINGS BY OFFER STRUCTURE AND MARKET CAPITALISATION IN 2011
100%
80%
60%
40%
Proportion of funds raised
20%
Scrip acquisitions Dividend reinvestment plans
Market capitalisation
Employee share offers Placements Rights issues and accelerated entitlement
offers
Share purchase plans
0%
<$10m <$10m–$50m <$50m–$100m <$100–$500m <$500m–$1bn >$1bn
Source: Strengthening Australia’s Equity Capital Markets, ASX, April 2012, p. 11.
■ In almost all market economies, internally LO12.2
generated funds (primarily internally
generated earnings) are the dominant source
of funding for corporate investment. External
financing is used only when needed, and
then debt is almost always preferred to equity
financing. The difference between a firm’s total
funding needs and its internally generated
cash flow is referred to as its financial deficit.
■ Financial intermediaries are institutions that
raise funds by selling claims on themselves
(often in the form of demand deposits, which
include cheque or savings accounts) and
then use those funds to lend to borrowers.
Intermediaries thus break, or intermediate,
the direct link between final savers and
borrowers that exists when companies sell
securities directly to investors.
LO12.1