This is a topic about cross border valuation. If you are making a valuation of a company in a country, but want to discount the cash flows using a WACC in your own currency, you need to convert the forecasted cash flows to your own currency, and for that you need to forecast the evolution of the exchange rate. Why does it make sense to discount the cash flows using a WACC in your own currency? It makes sense when you have a more developed capital market and can best assume it is an efficient market. This premise is very important to me, so even if I'm not making a cross border valuation, but I'm in an emergent country, I prefer to convert all the cash flows forecast to US Dollars.
So... the point is: How to best forecast the evolution of exchange rates? Well... many authors suggest us to consider the purchansing power parity theory and that the real intrest rate i the same around the world. With this assumptions, the exchange rate varies according to the differential of inflation between countries. In this case we should add the country risk to the CAPM cost of equity.
But I argue something: If we assume that currency forward contracts are the best market estimation for the exchange rate in the future, we should consider the differential of nominal rates between countries, and not only the inflation. Remember thar F = S x (1+r1) / (1+r2), where r1 and r2 are nominal rates. We know that consistently the real interest rates paid by emerging countries is higher than by developed countries, so this premises doesn't fit. We can say that this extra yield paid is the country risk and it is being considered on the CAPM cost of equity. However I'll show later that going to some real data usign this methodology we are creating some anomalies. If we have a good cash flow forecast in local currency, if we hedge our cashflows to our currency with forward contracts, we are assuming that the evolution of exchange rates is based on differential of nominal rates. In this case we shouldn't use the country risk factor on the CAPM cost of equity as we will see next.
Consider the following data taken from the market on 01/12/2009 (approximate figures):
1o year yields:
Brazilian Real:
Nominal rate 13.5%
Expected Inflation 5%
Risk Free rate 8.1% (from the other 2 numbers)
US Dollar:
Nominal Rate 3.2%
Expected Infation 2%
Risk Free rate 1.18% (from the other 2 numbers)
Present excange rate: 1.7 BRL/USD
Brazilian Global Bond 4.2%
Country Risk 0.97% (taken from the difference between US Treasury and US Dollar denominated Brazilian Global Bond)
If we consider that the evolution of the exchange rate is based on differential of inflation, in 10 years it would be 2.27 BRL/USD. If we have one dollar to invest in Brazil, we convert today to 1.7 BRL, invest yielding 13.5% and in the end of 10 years I get back my dollar converting using the 2.27 exchange rate. It yelds a return of 10.26%, much higher than the yield paid by the US Treasuries plus the Country Risk. We created arbitrage opportunities.
However, if we consider the forward contracts premise, we would convert back my dollars using an exchange rat of 4.4 BRL/USD, after hedging my cash flows. This yields 3.2%, exactly the yield paid by the US Treasuries. In this case we don't have to add the Country Risk premium to the CAPM cost of equiy, as it was already incorporated in the differential of real interest rates considered before.
So, my advice is... Exchange rates based on currency forward contracts and no countyr risk premium.
Wednesday, December 2, 2009
Sunday, November 22, 2009
Shares buy back: What's behind the pursue of a better EPS?
Shares buy back is when the company buys back part of its free float. This is a good strategy when shareholders are interested in EPS (earnings per share) indicator. But, does it really increases the company value? The answer for me is NO! Look at the example:
A company has annual earning of 6,000, a market cap of 50,000 and 1,000 shares, thus, its shares worth 50 per share.
Imagine the following balance sheet in market values:
TOTAL ASSETS 70,000
Extra cash 2,500
Other assets 67,500
TOTAL LIABILITIES 70,000
Liabilities 20,000
Equity 50,000
If the company buys back shares at market value, it can us its 2,500 extra cash to buy 50 shares. So, it spends 2,500 cash and replace it to 2,500 worthen assets (its own shares), and then, using an accountant measure zero its assets with 2,500 on its equity, reducing the outstanding shares to 1,000 - 50 = 950 shares. So its assets worth 50,000 - 2,500 = 67,500 and its equity worth 47,500.
It's price per share keeps with a value of 47,500 / 950 = 50, but its EPS now is 6,000 / 950 = 6.32.
So the EPS increased. But so does the value to the shareholder? Of course not and the price per share reflects that. Each shareholder will now receive a higher share of the earning, but the 2,500 extra cash that could be immediately distributed as dividends are not available anymore.
Imagine the company has to pay a premium for buying back the shares and make it a 52 per share.
With the same 2,500 extra cash, the company can only buy now 48 shares, reporting a loss of (52 - 50) * 48 = 96 on its equity. Automatically the company replaces 2,500 extra cash with assets worthing 50 x 48 = 2,404 and its equity value decreases from 50,000 to 49,904.
After zeroing the treasury shares, its total assets worth now 67,500 and its equity 49,904 - 2,404 = 47,500 . The outstanding shares now are only 1,000 - 48 = 952 shares, worthing 47,500 / 952 = 49.90 per share.
It's earning per share are now 6.30, but, again, it doesn't mean the company created value to the shareholder. Actually, as we can see through the share value, the company destroyed value to the shareholder buying shares over its market price.
To conclude, what we have to understand is that, in the very first moment, before buying back shares, the equity value was the expected earning discounted to present value (6,000/ 12.63%), plus the cash value of 2,500. The discount rate was obtained doing th reverse calculation : 6,000 / (50,000 - 2,500). If we make the calculation for all the examples before, we see that the discounted rate, that is the profitability expected by the shareholder and associated with the business risk, keeps the same in all the cases, 12.63%.
But if your bonuses are based on EPS indicator, don't try to explain this to your boss.
A company has annual earning of 6,000, a market cap of 50,000 and 1,000 shares, thus, its shares worth 50 per share.
Imagine the following balance sheet in market values:
TOTAL ASSETS 70,000
Extra cash 2,500
Other assets 67,500
TOTAL LIABILITIES 70,000
Liabilities 20,000
Equity 50,000
If the company buys back shares at market value, it can us its 2,500 extra cash to buy 50 shares. So, it spends 2,500 cash and replace it to 2,500 worthen assets (its own shares), and then, using an accountant measure zero its assets with 2,500 on its equity, reducing the outstanding shares to 1,000 - 50 = 950 shares. So its assets worth 50,000 - 2,500 = 67,500 and its equity worth 47,500.
It's price per share keeps with a value of 47,500 / 950 = 50, but its EPS now is 6,000 / 950 = 6.32.
So the EPS increased. But so does the value to the shareholder? Of course not and the price per share reflects that. Each shareholder will now receive a higher share of the earning, but the 2,500 extra cash that could be immediately distributed as dividends are not available anymore.
Imagine the company has to pay a premium for buying back the shares and make it a 52 per share.
With the same 2,500 extra cash, the company can only buy now 48 shares, reporting a loss of (52 - 50) * 48 = 96 on its equity. Automatically the company replaces 2,500 extra cash with assets worthing 50 x 48 = 2,404 and its equity value decreases from 50,000 to 49,904.
After zeroing the treasury shares, its total assets worth now 67,500 and its equity 49,904 - 2,404 = 47,500 . The outstanding shares now are only 1,000 - 48 = 952 shares, worthing 47,500 / 952 = 49.90 per share.
It's earning per share are now 6.30, but, again, it doesn't mean the company created value to the shareholder. Actually, as we can see through the share value, the company destroyed value to the shareholder buying shares over its market price.
To conclude, what we have to understand is that, in the very first moment, before buying back shares, the equity value was the expected earning discounted to present value (6,000/ 12.63%), plus the cash value of 2,500. The discount rate was obtained doing th reverse calculation : 6,000 / (50,000 - 2,500). If we make the calculation for all the examples before, we see that the discounted rate, that is the profitability expected by the shareholder and associated with the business risk, keeps the same in all the cases, 12.63%.
But if your bonuses are based on EPS indicator, don't try to explain this to your boss.
The effect of paying with shares for acquisitions on the deal's NPV
To understand the effect of different forms of payment in an acquisition, is better to follow an example.
Company Buyer (B):
# Shares = 1,000
Market price p/ share = 50
Market Capitalization = 50,000
Company Seller (S):
# Shares = 600
Market price p/ share = 15
Market Capitalization = 9,000
Value of S to B = 14,000 (synergy = 5,000)
1) If B buy S with cash based in a price of 20 per share the NPV to B would be:
14,000 - 20 x 600 = 2,000
2) If B buy S with stocks based on market prices the NPV to B would be:
Shares needed to be issued to buy S: 600 x 15 / 50 = 180 shares
Total # of shares after the acquisition = 1,000 + 180 = 1,180
Total market cap after the acquisition = 50,000 + 14,000 = 64,000
Price per share = 64,000 / 1,180 = 54.24
NPV = 14,000 - 180 x 54.24 = 4,237
3) If B buy S with stock based in a price per share of S of 20:
Shares needed to be issued to buy S: 600 x 20 / 50 = 240
Total # of shares after the acquisition = 1,000 + 240 = 1,240
Total market cap after the acquisition = 64,000
Price per share = 64,000 / 1,240 = 51.61
NPV = 14,000 - 240 x 51.61 = 1,613
So buying with stock at market price seems to be a good deal in this case, huh?
Company Buyer (B):
# Shares = 1,000
Market price p/ share = 50
Market Capitalization = 50,000
Company Seller (S):
# Shares = 600
Market price p/ share = 15
Market Capitalization = 9,000
Value of S to B = 14,000 (synergy = 5,000)
1) If B buy S with cash based in a price of 20 per share the NPV to B would be:
14,000 - 20 x 600 = 2,000
2) If B buy S with stocks based on market prices the NPV to B would be:
Shares needed to be issued to buy S: 600 x 15 / 50 = 180 shares
Total # of shares after the acquisition = 1,000 + 180 = 1,180
Total market cap after the acquisition = 50,000 + 14,000 = 64,000
Price per share = 64,000 / 1,180 = 54.24
NPV = 14,000 - 180 x 54.24 = 4,237
3) If B buy S with stock based in a price per share of S of 20:
Shares needed to be issued to buy S: 600 x 20 / 50 = 240
Total # of shares after the acquisition = 1,000 + 240 = 1,240
Total market cap after the acquisition = 64,000
Price per share = 64,000 / 1,240 = 51.61
NPV = 14,000 - 240 x 51.61 = 1,613
So buying with stock at market price seems to be a good deal in this case, huh?
Monday, November 16, 2009
Comparable valuation (Multiples) Working Post
What is the rational behind the utilization of each one of the multiples? How to relate them to the company's main value drivers?
Multiples that use EBITDA: Don't consider the continuity of the company, as the depreciation and the amortization is not included.
Multiples that use EBIT: Consider the continuity of the company.
Multiples that use SALES: Important when the volume is the most important thing to the company. Is related to the brand value and the cost of creating and positioning a brand. It is also important when the business depend on the points of sales.
Multiples that use Number of stores: Can be compared to the cost of setting the new stores, and this is the most important asset.
Multiples that use EBITDA: Don't consider the continuity of the company, as the depreciation and the amortization is not included.
Multiples that use EBIT: Consider the continuity of the company.
Multiples that use SALES: Important when the volume is the most important thing to the company. Is related to the brand value and the cost of creating and positioning a brand. It is also important when the business depend on the points of sales.
Multiples that use Number of stores: Can be compared to the cost of setting the new stores, and this is the most important asset.
Step-by-step to find the correct Free Cashflow (Working Post)
This one is easy, but some weird lines on the Income Statement and in the Balance Sheet can create some doubts. I'll write down here the basic steps. When we find out the problems in real life we can discuss in this topic.
The free cash flow to the firm is composed of 3 components: operational cash flow, investments in working capital, capital expenses (CAPEX).
1) Operational Cash Flow
The Operational Cash Flow can be easily assessed from the Income Statement. However no all the lines of this statement are used. We will check later what was missing!
+ Revenues
- Cost of Sales
= Gross Profit
- Overhead
= EBITDA
- Depreciation and Amortization
= EBIT
- Taxes
= Operational Cash Flow
It's missing XXXXX??????????????
2) Investment in Working Capital
The Investment in Working Capital is based mainly on assumptions over the cash conversion periods (inventory, receivables and payables). After this assumptions are made, almost all the work is done.
The debate here is about the operational cash needed and the short term debt. The premises for them can be made based on a percentage of sales, for the former and cost of sales, for the latter, as an example. After knowing the cash and the short term debt needed, the result of the extra cash and debt (non-operational cash and short term debt) should be netted and added / subtracted to the needed working capital on the period 0, consequently, increasing / decreasing, the value of the company exactly in that amount.
3) CAPEX
The investments plan must be carefully analysed as it can have a big impact, principally in companies with a high operational leverage. If there is a forecast of growing revenues, the capex mut, a least, cover the depreciation expenses.
It should be excluded from the valuation the investments in future projects. Future project shouldn't take part on the valuation, either the costs as well as the revenues. The value os these future projects is equal the value of the options manager have of realizing or not these projects. They should be included on the final value of the company, but now mixed together with the DCF valuation. A solution is real options valuation.
This makes us remind that companies with investment cycles in development and marketing of new projects should have their cash flows forecast up to the life of the actual cycle. (Why? More comments here...)
x----------------------------------------------------
General rules:
1) Years to be forecasted: related to one cycle of investments or up to the stabilization of the cash flows.
2) Terminal value: This is a new topic for this blog.
Anything else???
The free cash flow to the firm is composed of 3 components: operational cash flow, investments in working capital, capital expenses (CAPEX).
1) Operational Cash Flow
The Operational Cash Flow can be easily assessed from the Income Statement. However no all the lines of this statement are used. We will check later what was missing!
+ Revenues
- Cost of Sales
= Gross Profit
- Overhead
= EBITDA
- Depreciation and Amortization
= EBIT
- Taxes
= Operational Cash Flow
It's missing XXXXX??????????????
2) Investment in Working Capital
The Investment in Working Capital is based mainly on assumptions over the cash conversion periods (inventory, receivables and payables). After this assumptions are made, almost all the work is done.
The debate here is about the operational cash needed and the short term debt. The premises for them can be made based on a percentage of sales, for the former and cost of sales, for the latter, as an example. After knowing the cash and the short term debt needed, the result of the extra cash and debt (non-operational cash and short term debt) should be netted and added / subtracted to the needed working capital on the period 0, consequently, increasing / decreasing, the value of the company exactly in that amount.
3) CAPEX
The investments plan must be carefully analysed as it can have a big impact, principally in companies with a high operational leverage. If there is a forecast of growing revenues, the capex mut, a least, cover the depreciation expenses.
It should be excluded from the valuation the investments in future projects. Future project shouldn't take part on the valuation, either the costs as well as the revenues. The value os these future projects is equal the value of the options manager have of realizing or not these projects. They should be included on the final value of the company, but now mixed together with the DCF valuation. A solution is real options valuation.
This makes us remind that companies with investment cycles in development and marketing of new projects should have their cash flows forecast up to the life of the actual cycle. (Why? More comments here...)
x----------------------------------------------------
General rules:
1) Years to be forecasted: related to one cycle of investments or up to the stabilization of the cash flows.
2) Terminal value: This is a new topic for this blog.
Anything else???
Monday, October 5, 2009
International Valuation (Working Post)
How to value a company abroad? There is a lot of discussion about the topic, so I'll try to give my point of view, based on what I have been reading. I'll start with a simple example and will complicating it so more questions will come out.
1.1) First of all, we start with a diversified investor from the Unitade States (US) valuing a US company. The example is about US because is our best proxy of an efficient market, where all the theory we find in corporate finance books apply.
This looks as a simple question. We will use WACC method and for that we will need to assess the cost of equity (re) and debt (rd), the leverage ratio (D/E) and the corporate tax rate. For cost of equity we use CAPM and have to asses the risk-free rate (rf), the market premium (mp) and the company's beta. Here we start having to accept some controversial premises.
I still have to talk about CAPM parameters...
For the cost of debt we have to remember that we are interested in the tax shield provided by its debt, so we have to find out a number that reflects the cost of the actual debts weighted by the size of each debt issued. This demand some balance sheet research. For the leverage ratio, if the company is around the industry optimal leverage ratio, we can consider this industry leverage ratio in the equation, as in the long run, we expect that this company leverage ration oscilates around the industry ratio. For the corporate tax rate, we need to understand the tax law or to spend somemore time researching the balance sheet.
1.2) When an american company is evaluating a project, with premises we have to change? There is field for more discussion. If the project has the same risk as the company's other projects, we can use the WACC calculated for this firm. This imply some things.
The cost of equity is the same. However, for the cost of debt we should use the best aproximation for the cost of a new debt issue. Sometimes we use the average cost of debt that the company already have. Although, this reflects past events. As WACC should reflect that we are buying a new asset financed with the same leverage ratio of the company, we should try to figure out how much this debt would cost in the market.
If we consider that we can asses ths new cost of debt with a simple market observation. We can get the yield of tradable corporate bonds of companies with same credit rating. If the company hasn't a credit rating, we should look at similar companies in the market. Another option is the company just ask the banks how much they are charging for a new debt issue. An argument against it could be that, depending on the size of the project, even if it is financed with the company accumulated profits (equity), we can consider that part of the old debt is also financing the new project, as the project is not big enough to change the leverage ratio. This will also apply
for leverage ratio. As the risk profile is the same, leverage ratio will be the same, if the project is not big enough to change company's leberage ratio. Tax rate will be the same.
For projects with different risk profile, or big enough to change the leverage ratio, we can have another discussion in the next topic.
There is one flaw in the posed solution. CAPM consider a diversified investor. As we know, companies are not diversified across industries. What the solution?
1.3) When an american company is buying another american company, what premises we have to change? I don't think we should change any premise, if we look at this company as a new project. However, most of the target companies are big enough to change capital structure, if they are all equity financed, and sometimes have a different risk profile. So I suggest to use APV in the case of buying a company. For the cost of equity, we can estimate using CAPM, for that
specific company. The cost of debt would be the cost for a new issued debt. The tax rate can also be assessed for the specific company.
The diversified investor flaw also holds on this solution.
2.1) Now, let's go abroad. When a diversified investor in the US is valuing a company in a developed market, like germany, which changes have to be made?
Well, the difference now is that he is investing in a foreign market and has also foreign exchange exposure. The fact that he is investing in a foreign market changes anything? NO! Imagine a german investor in germany? As he is in a developed market, he would get CAPM parameters from its home country and the other WACC parameters from his homeland company and industry. So the US investor should do the same, but as he is exposed to foreign exchange risk, he has to add up the differential in inflation, which is the expected devaluation one currency will have to the other. This premise is based on purchase power parity and holds on the long run. The cash flows must be in german currency in this case!
But the american investor can make it also in another way. He can use CAPM parameters of it's own country, getting the beta comparing the company returns in dollar to the US market returns. This has to give us the same results, as the german beta times the german market risk will be the same as the american beta times the american market risk.
WHAT ABOUT THE RISK FREE and inflation differential? ARE DIFFERENT?
I consider using this methodology always, as will be usefull in all cases. The cash flows in this case must be in dollars. To convert german currency cash flows to dollar, I should use the forward prices for the currency, for the period I have it, and the differential in interest rates in the two countries for longer maturities, based on purchase power parity. We don't add any extra risk for the currency exchange, because we consider the company is not speculating on foreign exchange market and we suppose in the long run, the profit and losses due to the changes in the foreign exchange will yield zero.
2.2) When an american company is evaluating a project in germany, with same risk profile, we should follow th same methodology exposed before with the currency conversions explanined before.
2.3) An american company buying another company in germany with operation in germany
5) An american company buying another company in germany with international operations
6) A diversified investor valuing a company in an emerging economy like Brazil - currency risk
7) A diversified investor valuing a company in an unstable economy like... political risk etc
1.1) First of all, we start with a diversified investor from the Unitade States (US) valuing a US company. The example is about US because is our best proxy of an efficient market, where all the theory we find in corporate finance books apply.
This looks as a simple question. We will use WACC method and for that we will need to assess the cost of equity (re) and debt (rd), the leverage ratio (D/E) and the corporate tax rate. For cost of equity we use CAPM and have to asses the risk-free rate (rf), the market premium (mp) and the company's beta. Here we start having to accept some controversial premises.
I still have to talk about CAPM parameters...
For the cost of debt we have to remember that we are interested in the tax shield provided by its debt, so we have to find out a number that reflects the cost of the actual debts weighted by the size of each debt issued. This demand some balance sheet research. For the leverage ratio, if the company is around the industry optimal leverage ratio, we can consider this industry leverage ratio in the equation, as in the long run, we expect that this company leverage ration oscilates around the industry ratio. For the corporate tax rate, we need to understand the tax law or to spend somemore time researching the balance sheet.
1.2) When an american company is evaluating a project, with premises we have to change? There is field for more discussion. If the project has the same risk as the company's other projects, we can use the WACC calculated for this firm. This imply some things.
The cost of equity is the same. However, for the cost of debt we should use the best aproximation for the cost of a new debt issue. Sometimes we use the average cost of debt that the company already have. Although, this reflects past events. As WACC should reflect that we are buying a new asset financed with the same leverage ratio of the company, we should try to figure out how much this debt would cost in the market.
If we consider that we can asses ths new cost of debt with a simple market observation. We can get the yield of tradable corporate bonds of companies with same credit rating. If the company hasn't a credit rating, we should look at similar companies in the market. Another option is the company just ask the banks how much they are charging for a new debt issue. An argument against it could be that, depending on the size of the project, even if it is financed with the company accumulated profits (equity), we can consider that part of the old debt is also financing the new project, as the project is not big enough to change the leverage ratio. This will also apply
for leverage ratio. As the risk profile is the same, leverage ratio will be the same, if the project is not big enough to change company's leberage ratio. Tax rate will be the same.
For projects with different risk profile, or big enough to change the leverage ratio, we can have another discussion in the next topic.
There is one flaw in the posed solution. CAPM consider a diversified investor. As we know, companies are not diversified across industries. What the solution?
1.3) When an american company is buying another american company, what premises we have to change? I don't think we should change any premise, if we look at this company as a new project. However, most of the target companies are big enough to change capital structure, if they are all equity financed, and sometimes have a different risk profile. So I suggest to use APV in the case of buying a company. For the cost of equity, we can estimate using CAPM, for that
specific company. The cost of debt would be the cost for a new issued debt. The tax rate can also be assessed for the specific company.
The diversified investor flaw also holds on this solution.
2.1) Now, let's go abroad. When a diversified investor in the US is valuing a company in a developed market, like germany, which changes have to be made?
Well, the difference now is that he is investing in a foreign market and has also foreign exchange exposure. The fact that he is investing in a foreign market changes anything? NO! Imagine a german investor in germany? As he is in a developed market, he would get CAPM parameters from its home country and the other WACC parameters from his homeland company and industry. So the US investor should do the same, but as he is exposed to foreign exchange risk, he has to add up the differential in inflation, which is the expected devaluation one currency will have to the other. This premise is based on purchase power parity and holds on the long run. The cash flows must be in german currency in this case!
But the american investor can make it also in another way. He can use CAPM parameters of it's own country, getting the beta comparing the company returns in dollar to the US market returns. This has to give us the same results, as the german beta times the german market risk will be the same as the american beta times the american market risk.
WHAT ABOUT THE RISK FREE and inflation differential? ARE DIFFERENT?
I consider using this methodology always, as will be usefull in all cases. The cash flows in this case must be in dollars. To convert german currency cash flows to dollar, I should use the forward prices for the currency, for the period I have it, and the differential in interest rates in the two countries for longer maturities, based on purchase power parity. We don't add any extra risk for the currency exchange, because we consider the company is not speculating on foreign exchange market and we suppose in the long run, the profit and losses due to the changes in the foreign exchange will yield zero.
2.2) When an american company is evaluating a project in germany, with same risk profile, we should follow th same methodology exposed before with the currency conversions explanined before.
2.3) An american company buying another company in germany with operation in germany
5) An american company buying another company in germany with international operations
6) A diversified investor valuing a company in an emerging economy like Brazil - currency risk
7) A diversified investor valuing a company in an unstable economy like... political risk etc
Thursday, October 1, 2009
Financing Decisions (working post)
The financing options have been growing in the last years, with institutions using different methods for financing their business. Let's try to summarize them and see theirs pros and cons.
VENTURE CAPITAL:
On finding financing, the entrepreneurs should show compromise and optimism,, that can be tangibilized in their remuneration model. It must be clear that the entrepreneurs are taking the risk.
I think we can say that, as Mutual Funds believe in market efficiency and base their investment decisions in a Markovitz approach, companies these other investment companies, that invest in bigger stakes of equity, although they diversify their investments and try to manage their risk, they believe in arbitrage opportunities and that market is not efficient.
Investment Angels
Private investors which high investing capacity.
Venture Capitalists
Normally buy equity stakes in growing firms. Dillute their risk trough diversification, industry and business cycle picking and specific terms on the investment agreement.
Private Equity
Normally buy equity stakes in more mature firms.
Risk Companies
Companies that finance start-ups related to their coe-business.
STOCK MARKET:
Initial Public Offering (IPO)
A discount is offered to make the offering more attractive. New shares are issued.
Secondary Public Offering
The former shareholders sell their own shares. If the former sareholders are essential to the business, it can't be done, as it increase the perception of risk to the investor.
Stock Subscription
The prior shareholders receive a call option, for buying a certain rate of shares (ex.: 3 shares for each 15 hold) for a certain price in a future date.
Avoid the fact that in public offerings the new investors get advantage over the prior shareholders, as the shares are offered with a lower price.
Private Offerings
Sell shares to specific investors. Lower cost, as it has less regulation requirements.
International Offers
The country and stock market choosen can give brand awareness and lower debt cost for new loans.
DEBT:
Commercial Paper
Corporate Bonds
Convertible Bond
Lower interest rates.
Project Finance
Levered Buy-Out (LBO)
VENTURE CAPITAL:
On finding financing, the entrepreneurs should show compromise and optimism,, that can be tangibilized in their remuneration model. It must be clear that the entrepreneurs are taking the risk.
I think we can say that, as Mutual Funds believe in market efficiency and base their investment decisions in a Markovitz approach, companies these other investment companies, that invest in bigger stakes of equity, although they diversify their investments and try to manage their risk, they believe in arbitrage opportunities and that market is not efficient.
Investment Angels
Private investors which high investing capacity.
Venture Capitalists
Normally buy equity stakes in growing firms. Dillute their risk trough diversification, industry and business cycle picking and specific terms on the investment agreement.
Private Equity
Normally buy equity stakes in more mature firms.
Risk Companies
Companies that finance start-ups related to their coe-business.
STOCK MARKET:
Initial Public Offering (IPO)
A discount is offered to make the offering more attractive. New shares are issued.
Secondary Public Offering
The former shareholders sell their own shares. If the former sareholders are essential to the business, it can't be done, as it increase the perception of risk to the investor.
Stock Subscription
The prior shareholders receive a call option, for buying a certain rate of shares (ex.: 3 shares for each 15 hold) for a certain price in a future date.
Avoid the fact that in public offerings the new investors get advantage over the prior shareholders, as the shares are offered with a lower price.
Private Offerings
Sell shares to specific investors. Lower cost, as it has less regulation requirements.
International Offers
The country and stock market choosen can give brand awareness and lower debt cost for new loans.
DEBT:
Commercial Paper
Corporate Bonds
Convertible Bond
Lower interest rates.
Project Finance
Levered Buy-Out (LBO)
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