9.1 Emerging businessesVenture capital: Equity capital supplied to new emerging businesses.Venture capital is equity invested by patient risk-taking nesters in aspiring growth businesses.Two groups of suppliers of funds:Business angels, - an equity investor in an emerging firm who takes an active part in the firm’s management.and venture capital fund managers, who raise and pool funds from investors to make equity investments in unlisted firms. Venture capital fund managers are themselves small firms, trusts or corporations, which makes the investment decisions and earn fees part of which would be a share of the investor’s profits.Superannuation funds are the largest investors […] other investors include life insurance offices, banks and wealthy individuals.The chart below shows the flow of this function.

Venture capital fund managers will frequently specialise in funding businesses within a particular industry (such as bio-technology, information and communications tech, winemaking)Exit strategy for business angels and fund managers: once the business is investment-ready and able to list on stock market, they sell their shares to new investors or, trade sale, meaning the business is sold to another company.

9.2 Equity securitiesOrdinary shares are the securities issued to the owners of a company in return for equity. They entitle the holder to participate […] to vote in elections […] have no maturity date and their ownership can be transferred.Limited liability - it means that each shareholder’s maximum loss is limited to the fully-paid price of the number of shares they hold. (Partly paid shares - shares that have been issued for part of their paid-up amount only and the balance is payable at a later date)Dividends are usually paid semi-annually (with an interim dividend and final dividend).

Preference Shares (Prf), They provide their holders with a promised dividend, the payment of which has priority over the payment of dividends to the holders of ordinary shares. […] restricted voting rightsFeatures of a prf.

‘Non-participating’ preference shares. The shareholders would not receive bonuses such as special dividends or issues of bonus shares.When the company promises to subsequently make up any missed dividend payments

(should subsequent profits permit), they are known as ‘cumulative’ preference shares. (??)‘Converting’ prf will convert to ordinary shares on a specified date at a specified ratio.Should the preference shares also be ‘redeemable’ (meaning that the company has the right to buy them from their holders), they are similar to an unsecured debt instrument because the holders of such preference shares would potentially received regular (dividend) payments and a redemption payment.

9.3 Assessing share value

Technical analysisThe basic focus of tech. analysis is on the patterns displayed by a company’s share price up to the present […] attempts to interpret these patterns in the expatiation of being able to identify a future trend.

Fundamental analysisFund. analysis attempts to estimate a company’s future earnings as well as the riskiness of these earnings.According to Yang, fund. analysis ‘examines a company’s prospects in terms of the economy, industry prospects and the company’s position in the industry together with the firm’s own financial forecasts. It uses pricing models that are compatible with the security price formula.’ ‘Top-down’ and ‘bottom-up’ approaches.‘Top-down’ approaches: start with assessment of global economy’s future prospects and risks, and the industry’s future.‘Bottom-up’ approach: start with assessment of a firm’s financial position from its financial statements such as its balance sheet and income statement.Price/Earnings ratio (P/E) = the ratio of a firm’s share price to its earnings per share.

~9.3.1(a) P/E analysis[…] is its share price divided by its latest EPS.A high P/E would result when the market expects the firm’s earnings to grow rapidly, whereas as low ratio would result when the market believes that the firm’s earnings are risky.

~9.3.2 (b) Gordon’s dividend growth modelThere is no end to the dividend payments from shares […] analysis’s would calculate their present value as perpetuity.Perpetuity (a series of regular cash flows that continue indefinitely)E.g. A prf that pays $1 with a required yield of 12% per period would be P=$1/.12=$8.33

9.4 IPO (Initial public offerings)IPOs are arranged by investment banks and stockbroking firms.

~9.4.1. The decision to go publicPurposes:1. to raise additional equity capital that will finance the company’s planned growth2. to allow some (or all) of the owners to sell all or part of their interest in the companyDilution effect: Where the IPO raises capital for the company through the issue of secondary shares it reduces the proportion of the company ones by its original owners.The disadvantages of an IPO listing includes:1. Expensive process2. Dilution of ownership of previous owners3. Agency costs and the separation of ownership & management4. Short-term bias on decisions in order to achieve short-term profits.

~9.4.2 The issue processA Prospectus to be prepared: A legally required document to support the scale of shares, which provides relevant and reliable information to potential investors. (Also need to meet requirements of ASIC & ASX).~9.4.3 Standby underwriting agreementA type of agreement to sell shares in an IPO in which the underwriting investment bank agrees to purchase whatever shares remain after it has sold all of the shares it can to the public.Large IPOs use book build process […] the price is determined by the bids received from institutional investors during the book build period.Underpricing of IPOs is a general phenomenon experienced in most share markets, over many years and under different issuing processes.

9.5 Raising additional equityRights issues; private placements; dividend reinvestment schemes.

~9.5.1 Rights issue

The issue of rights to existing shareholders, entitling them to purchase more shares in the company so as to raise additional share capital.[…] involves the issue of ‘rights’ to all of a company’s shareholders to buy new shares at a stated (that is, ’subscription’) price on the scheduled subscription date. The subscription price is set at a discount to the current share price to encourage the use of rights. In most cases, the rights are renounceable. Shareholders can exercise their rights by purchasing new shares, let them lapse, or sell them in the share market prior to expiration.A rights issue will specify:- the ex-right date (when the rights are assigned to shareholders)- the terms of the issue (1 for 5 etc)- subscription price and date- whether rights can be traded

cum-rights price (to signify that whoever owns the shares will be entitled to the rights) - following the announcement of a rights issue, shares trade on the basis that their owners will be assigned the rights on the ex-rigths date.The rights can be traded until their expiry date - the subscription date. On the subscription date, the holder of the rights either exercises them by paying for the new shares at the subscription price or allows them to lapse.

~9.5.2 Private placements of new sharesPrivate placements involve the sale of a large parcel to one or more investors […] mostly institutions.Advantages of this issue are:1. Much quicker than that of rights issue2. Price for new shares are generally higher than that of rights issue3. The shares can be placed with institutional investor that supports the current management of the company, so reducing the risk of a takeover.

~9.5.3 Dividend reinvestment plans[…] allows shareholders to take additional shares instead of the dividend.Dividend reinvestment plans are an important source of raising equity capital in Australia. They are equivalent to retained earnings since they enable the company to retain the profits they would have paid out in dividends.

The choice of method of raising additional capital depends on the intended use of the funds. Rights issues and private placements would be used to fund a major investment, where as dividend reinvestment and retained earnings gradually increase a company’s equity capital.