Introduction to Corporate Finance

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