Sources of funding for corporate sector (Part IV)
Sources of funding available to varied forms of organisations enable them to make cogent investment decisions that can lead to their expansion and growth; and have positive implications for the economy.
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This feature is a continuation of an earlier publication on the foregoing. Discussions in the previous write-up ended on lease financing and its implications on day-to-day operations, expansion and growth in the corporate sector.
Company bonds
A bond is a financial instrument with long-term maturity periods. It is a debt obligation issued by organisations and governments. A company bond is a certificate bearing the company’s promise to make payments to the holder at specific dates.
A bondholder receives premium, not interest and dividend. Premium payments on bonds are often made on semi-annual or annual basis until the bond matures, at which time the principal is also paid.
A company bond is similar to debt of an IOU issued by a firm to its creditors. An organisation may be declared bankrupt if it fails to honour its bond payment at maturity. Bondholders are legally entitled to premium payments before dividends payment to shareholders.
Convertible loan stock
This refers to the type of bond that provides holders with an option to convert it into equity shares at a specific price within a given time period. Loan stock that has a warrant cannot be converted directly into equity shares.
However, the loan stockholder has the right to buy specific numbers of the organisation’s shares at specific future dates at an agreed price.
Comparatively, bonds are less risky than preferred shares; the latter is less risky than ordinary shares. Bondholders are usually paid in inflationary currency. This is because bond prices increase over time.
Equity financing
This describes an organisation’s ability to raise funds for its day-to-day operations through sale or floatation of shares in the primary market (companies issuing the shares directly to investors or shareholders) and secondary market (trading of shares on the stock exchange and other legally sanctioned markets other than the issuing company’s primary market).
Equity financing is believed to be the most significant source of long-term financing for corporations. It involves issuance of two shares: ordinary shares and preferred shares; the former is the most popular form of equity financing. Ordinary shareholders are called true owners of the company; they have voting rights at annual general meetings (AGMs) and they are the last to receive dividends. Raising funds through equity financing includes the following:
A. New issue: This method allows the company to increase the number of its shareholders while raising significant capital for its operations and expansions. New issues safeguard the company against possible future takeovers. A new issue usually includes an offer for sale and placing.
Offer for sale: Here, the firm sells each share at a fixed price to an issuing house. The issuing house in turn sells the shares at a fixed price to the general public through a prospectus. The issuing house often sets a minimum price and invites bids at prices above the minimum when the offer is by a tender.
Placing: Here, the issuing house purchases the company’s shares and sells them directly to its own clients, not to the general public.
B. Rights issue: This explains issuance of new shares to existing shareholders at a discount. This means existing shareholders are allowed to purchase the new shares at an amount below the prevailing price on the stock exchange. The existing shareholder may buy or sell the new number of shares allotted to him or her on the stock exchange.
Should the existing shareholder allow his or her rights to lapse, the firm will sell the shares in the market and pay any profit derived from the sale to the existing shareholder.
Raising capital through rights of issue is simpler and cheaper than new issue. Gains from such an investment accrue to existing shareholders. It allows a company to increase its capital without increasing the number of owners when the new shares are purchased directly by the existing shareholders.
Sources of funding available to varied forms of organisations enable them to make cogent investment decisions that can lead to their expansion and growth; and have positive implications for the economy.
This feature is a continuation of an earlier publication on the foregoing. Discussions in the previous write-up ended on lease financing and its implications on day-to-day operations, expansion and growth in the corporate sector.
Company bonds
A bond is a financial instrument with long-term maturity periods. It is a debt obligation issued by organisations and governments. A company bond is a certificate bearing the company’s promise to make payments to the holder at specific dates.
A bondholder receives premium, not interest and dividend. Premium payments on bonds are often made on semi-annual or annual basis until the bond matures, at which time the principal is also paid.
A company bond is similar to debt of an IOU issued by a firm to its creditors. An organisation may be declared bankrupt if it fails to honour its bond payment at maturity. Bondholders are legally entitled to premium payments before dividends payment to shareholders.
Convertible loan stock
This refers to the type of bond that provides holders with an option to convert it into equity shares at a specific price within a given time period. Loan stock that has a warrant cannot be converted directly into equity shares.
However, the loan stockholder has the right to buy specific numbers of the organisation’s shares at specific future dates at an agreed price.
Comparatively, bonds are less risky than preferred shares; the latter is less risky than ordinary shares. Bondholders are usually paid in inflationary currency. This is because bond prices increase over time.
Equity financing
This describes an organisation’s ability to raise funds for its day-to-day operations through sale or floatation of shares in the primary market (companies issuing the shares directly to investors or shareholders) and secondary market (trading of shares on the stock exchange and other legally sanctioned markets other than the issuing company’s primary market).
Equity financing is believed to be the most significant source of long-term financing for corporations. It involves issuance of two shares: ordinary shares and preferred shares; the former is the most popular form of equity financing. Ordinary shareholders are called true owners of the company; they have voting rights at annual general meetings (AGMs) and they are the last to receive dividends. Raising funds through equity financing includes the following:
A. New issue: This method allows the company to increase the number of its shareholders while raising significant capital for its operations and expansions. New issues safeguard the company against possible future takeovers. A new issue usually includes an offer for sale and placing.
Offer for sale: Here, the firm sells each share at a fixed price to an issuing house. The issuing house in turn sells the shares at a fixed price to the general public through a prospectus. The issuing house often sets a minimum price and invites bids at prices above the minimum when the offer is by a tender.
Placing: Here, the issuing house purchases the company’s shares and sells them directly to its own clients, not to the general public.
B. Rights issue: This explains issuance of new shares to existing shareholders at a discount. This means existing shareholders are allowed to purchase the new shares at an amount below the prevailing price on the stock exchange. The existing shareholder may buy or sell the new number of shares allotted to him or her on the stock exchange.
Should the existing shareholder allow his or her rights to lapse, the firm will sell the shares in the market and pay any profit derived from the sale to the existing shareholder.
Raising capital through rights of issue is simpler and cheaper than new issue. Gains from such an investment accrue to existing shareholders. It allows a company to increase its capital without increasing the number of owners when the new shares are purchased directly by the existing shareholders.
