Raising Finance Through the Issue of New Shares

Flashcards covering key concepts, methods, benefits, and drawbacks of raising finance through new shares, including definitions of critical terms.

What is the general process for a company to raise finance by issuing new shares?

A company issues new shares, which shareholders then buy, providing the company with more cash and a broader base of shareholders.

What are the two main methods for public companies to issue new shares?

Flotation and Rights Issue.

What is a 'Flotation' in the context of issuing new shares?

The admission of a public company's shares to a stock exchange for the first time, making them available for trading.

What are some key characteristics and requirements of a 'Flotation'?

It is a costly and time-consuming process, typically aims to raise at least £25-50 million of new capital, and provides an opportunity for existing shareholders to realize profits on their investment.

What is a 'Rights Issue'?

A fresh issue of new shares offered specifically to existing shareholders, who have the 'right' to subscribe for these shares, usually at a significant discount to the current market price.

For what purposes might a company typically undertake a 'Rights Issue'?

To finance a major expansion (e.g., a takeover) or to help refinance a business that is in difficulty.

What are the key benefits for a company raising finance through the issue of new shares?

The ability to raise substantial funds if the business has good prospects, a broader base of shareholders, and a lower-risk finance structure because it's equity rather than debt.

What are the main drawbacks a company might face when raising finance by issuing new shares?

It can be costly and time-consuming (particularly a flotation), existing shareholders' holdings may be diluted, and equity generally has a higher cost of capital than debt.

Define 'Market capitalisation'.

The total market value of a company's issued share capital, calculated based on the latest share price.