equity finance - new share issues to the public: introduction
Introduction
There are three main ways of raising equity finance:
- Retaining profits in the business (rather than distributing them to equity shareholders);
- Selling new shares to existing shareholders (a "rights issue")
- Selling new shares to the general public and investing institutions
This revision note outlines the process involved in the third method above.
How significant are new issues of shares in the UK?
Issues of new shares to the public account for around 10% of new equity finance in the UK.
Whilst not significant in the overall context of UK equity financing, when new issues do occur, they are often large in terms of the amount raised.
New issues are usually used at the time a business first obtains a listing on the Stock Exchange. This process is called an Initial Public Offering (“IPO”) or a “flotation”.
Methods
The process of a stock market flotation can apply both to private and nationalised share issues. There are also several methods that can be used. These methods are:
• An introduction
• Issue by tender
• Offer for sale
• Placing, and
• A public issue
In practice the “offer for sale” method is the most common method of flotation. There is no restriction on the amount of capital raised by this method.
The general procedures followed by the various methods of flotation are broadly the same. These include
- Advertising, e.g. in newspapers
- Following legal requirements, and Stock Exchange regulations in terms of the large volumes of information which must be provided. Great expense is incurred in providing this information, e.g. lawyers, accountants, other advisors.
Why issue new shares on a stock exchange?
The following are reasons why a company may seek a stock market listing:
(1) Access to a wider pool of finance
A stock market listing widens the number of potential investors. It may also improve the company's credit rating, making debt finance easier and cheaper to obtain.
(2) Improved marketability of shares
Shares that are traded on the stock market can be bought and sold in relatively small quantities at any time. Existing investors can easily realise a part of their holding.
(3) Transfer of capital to other uses
Founder owners may wish to liquidate the major part of their holding either for personal reasons or for investment in other new business opportunities.
(4) Enhancement of company image
Quoted companies are commonly believed to be more financially stable. A stock exchange listing may improve the image of the company with its customers and suppliers, allowing it to gain additional business and to improve its buying power.
(5) Facilitation of growth by acquisition
A listed company is in a better position to make a paper offer for a target company than an unlisted one.
However, the owners of a private company which becomes a listed plc (public company) must accept that the change is likely to involve a significant loss of control to a wider circle of investors. The risk of the company being taken over will also increase following listing.
3/07/2008
Market supply
Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.
Normally as the market price of a commodity rises, producers will expand their supply onto the market.
There are three main reasons why supply curves for most products slope upwards from left to right giving a positive relationship between the market price and quantity supplied
When the market price rises (for example following an increase in consumer demand), it becomes more profitable for businesses to increase their output.
Higher prices send signals to firms that they can increase their profits by satisfying demand in the market. When output rises, a firm's costs may rise, therefore a higher price is needed to justify the extra output and cover these extra costs of production
Higher prices makes it more profitable for other firms to start producing that product so we may see new firms entering the market leading to an increase in supply available for consumers to buy For these reasons we find that more is supplied at a higher price than at a lower price.
The supply curve shows a relationship between the price of a good or service and the quantity a producer is willing and able to sell in the market.
What causes a shift in the supply curve?
i) Costs of production
A fall in the costs of production leads to an increase in the supply of a good because the supply curve shifts downwards and to the right. Lower costs mean that a business can supply more at each price. For example a firm might benefit from a reduction in the cost of imported raw materials.
If production costs increase, a business will not be able to supply as much at the same price - this will cause an inward shift of the supply curve. An example of this would be an inward shift of supply due to an increase in wage costs.
ii) Changes in production technology
Technology can change very quickly and in industries where the pace of technological change is rapid we expect to see increases in supply (and therefore lower prices for the consumer)
iii) Government taxes and subsidies
Government intervention in a market can have a major effect on supply. A tax on producers causes an increase in costs and will cause the supply curve to shift upwards. Less will be supplied after the tax is introduced.
A subsidy has the opposite effect as a tax cut. A subsidy will increase supply because a guaranteed payment from the Government reduces a firm's costs allowing them to produce more output at a given price. The supply curve shifts downwards and to the right depending on the size of the subsidy.
iv) Climatic conditions
For agricultural commodities such as coffee, fruit and wheat the climate can exert a great influence on supply. Favourable weather will produce a bumper harvest and will increase supply. Unfavourable weather conditions such as a drought will lead to a poor harvest and decrease supply. These unpredictable changes in climate can have a dramatic effect on market prices for many agricultural goods.
v) Change in the price of a substitute
A substitute in production is a product that could have been produced using the same resources. Take the example of barley. An increase in the price of wheat makes wheat growing more attractive. This may cause farmers to use land to grow wheat and less to grow barley. The supply of barley will shift to the left.
vi) The number of producers in the market
The number of sellers in a market will affect total market supply. When new firms enter a market, supply increases and causes downward pressure on the market price. Sometimes producers may decide to deliberately limit supply by controlling production through the use of quotas. This is designed to reduce market supply and force the price upwards.
The entry of new firms into a market causes an increase in market supply and normally leads to a fall in the market price paid by consumers. More firms increases market supply and expands the range of choice available.
Normally as the market price of a commodity rises, producers will expand their supply onto the market.
There are three main reasons why supply curves for most products slope upwards from left to right giving a positive relationship between the market price and quantity supplied
When the market price rises (for example following an increase in consumer demand), it becomes more profitable for businesses to increase their output.
Higher prices send signals to firms that they can increase their profits by satisfying demand in the market. When output rises, a firm's costs may rise, therefore a higher price is needed to justify the extra output and cover these extra costs of production
Higher prices makes it more profitable for other firms to start producing that product so we may see new firms entering the market leading to an increase in supply available for consumers to buy For these reasons we find that more is supplied at a higher price than at a lower price.
The supply curve shows a relationship between the price of a good or service and the quantity a producer is willing and able to sell in the market.
What causes a shift in the supply curve?
i) Costs of production
A fall in the costs of production leads to an increase in the supply of a good because the supply curve shifts downwards and to the right. Lower costs mean that a business can supply more at each price. For example a firm might benefit from a reduction in the cost of imported raw materials.
If production costs increase, a business will not be able to supply as much at the same price - this will cause an inward shift of the supply curve. An example of this would be an inward shift of supply due to an increase in wage costs.
ii) Changes in production technology
Technology can change very quickly and in industries where the pace of technological change is rapid we expect to see increases in supply (and therefore lower prices for the consumer)
iii) Government taxes and subsidies
Government intervention in a market can have a major effect on supply. A tax on producers causes an increase in costs and will cause the supply curve to shift upwards. Less will be supplied after the tax is introduced.
A subsidy has the opposite effect as a tax cut. A subsidy will increase supply because a guaranteed payment from the Government reduces a firm's costs allowing them to produce more output at a given price. The supply curve shifts downwards and to the right depending on the size of the subsidy.
iv) Climatic conditions
For agricultural commodities such as coffee, fruit and wheat the climate can exert a great influence on supply. Favourable weather will produce a bumper harvest and will increase supply. Unfavourable weather conditions such as a drought will lead to a poor harvest and decrease supply. These unpredictable changes in climate can have a dramatic effect on market prices for many agricultural goods.
v) Change in the price of a substitute
A substitute in production is a product that could have been produced using the same resources. Take the example of barley. An increase in the price of wheat makes wheat growing more attractive. This may cause farmers to use land to grow wheat and less to grow barley. The supply of barley will shift to the left.
vi) The number of producers in the market
The number of sellers in a market will affect total market supply. When new firms enter a market, supply increases and causes downward pressure on the market price. Sometimes producers may decide to deliberately limit supply by controlling production through the use of quotas. This is designed to reduce market supply and force the price upwards.
The entry of new firms into a market causes an increase in market supply and normally leads to a fall in the market price paid by consumers. More firms increases market supply and expands the range of choice available.
3/05/2008
Financial
accelerated depreciation industrial and commercial equipment
account book intangible assets accounting - book-keeping
interests earned accounting criteria - accounting standards interests paid
accounts payable inventories - stock accrual accrued liability - accrued expense
inventory accounting - stock accounting accrued revenue - accrued income
inventory book actual cost inventory records - stock records added value
inventory turnover index adjustment inventory value
administrative expenses advances invoicing - billing affiliated company
land and buildings allocation of the dividend legal reserve
amortization - depreciation liabilities to amortize - to depreciate
liabilities side annual general meeting (AGM) limited liability company
to approve a balance limited partner - sleeping partner articles of association
limited partnership asset liquid assets assets liquidity
assets and liabilities long-term financing assets side loss assets value
loss on credits associated companies major shareholder auditing - audit
majority interest auditors' certificate majority shareholder balance sheet
to make a list of inventory balance-sheet analysis to manage a company
balance-sheet consolidation management buy-out balance-sheet items
memorandum of association balance-sheet ratios minority interest
board of directors the minutes of a meeting book profit net assets
book value net margin Book Keeping loss net profit break even point (BEP) non-taxable income break-up value on first call budget
one-man business buildings tax opening balance sheet
business consultant - expert in commercial law opening stock - opening inventory
to call a general meeting operating loss capital operating profit
capital goods ordinary partnership capital increase outstanding credits
capital loss overhead costs - overheads to capitalize owner
cash cow product owner's equity cash flow partner - shareholder
chairman of the board of directors patent chart of accounts periodical report
clean factoring personnel costs closing balance plant and equipment
closing stock plant and machinery company - firm to post a contra-entry
company merger pre-tax profit company profitability production costs
consolidated statement production value controlling company professional accountant corporate books profit and loss account (GB) - income statement (US)
corporate purpose profit distribution corporate tax provision cost centre
provision for doubtful accounts cost of goods sold proxy vote costs and revenues to put into liquidation credit quorum to credit an amount
to quote a company credit column - credit side raw materials inventories
credit note real estate current assets - floating assets records
day book - journal book registered office debit and credit
reserve fund - reserve debit column - debit side return on investment (ROI)
debit note revenue - earnings - incomes debt revenue tax debtor
revenues and expenses deed of association - company statute rounding down
deferred expense - deferred charge rounding up deferred income - deferred revenue running costs - operating costs deferred tax semifinished goods inventories depreciable assets to set up a company depreciation
share capital (GB) - capital stock (US) depreciation allowance - capital allowance
shareholders' meeting depreciation fund - amortization fund shareholders register
double entry shareholders' calling entry stamp duty entry date
state-controlled enterprise equity tax statement of account - account statement
expenditure - outflow - expense statutory balance expense centre stocks and work in progress (GB) - inventories (US) expense receipt
subscribed capital - underwritten capital extraordinary meeting subsidiary
false accounting subsidiary company - controlled company false factoring
substitutive tax fee take-over to fill in a VAT return tax final balance
tax accounting to finance tax assessment financial leasing tax audit - tax inspection financial management tax base financial resources tax credit
financial statement tax exemption - tax allowance financing - funds tax payer
finished products inventories tax rate fiscal year - financial year tax register
fixed assets (GB) - capital assets (US) tax return - income tax return fixed costs
tax revenue fully paid-up capital taxable value - assessment general accounting taxation general partner taxes and dues
general partnership - ordinary partnership temporary balance
goodwill expenses - start-up costs total current assets gross margin trial balance
gross operating margin value added tax (VAT) gross operating profit
variable costs gross profit VAT return - VAT declaration in the black
to veto income tax withholding tax industrial accounting cost year-end inventory
account book intangible assets accounting - book-keeping
interests earned accounting criteria - accounting standards interests paid
accounts payable inventories - stock accrual accrued liability - accrued expense
inventory accounting - stock accounting accrued revenue - accrued income
inventory book actual cost inventory records - stock records added value
inventory turnover index adjustment inventory value
administrative expenses advances invoicing - billing affiliated company
land and buildings allocation of the dividend legal reserve
amortization - depreciation liabilities to amortize - to depreciate
liabilities side annual general meeting (AGM) limited liability company
to approve a balance limited partner - sleeping partner articles of association
limited partnership asset liquid assets assets liquidity
assets and liabilities long-term financing assets side loss assets value
loss on credits associated companies major shareholder auditing - audit
majority interest auditors' certificate majority shareholder balance sheet
to make a list of inventory balance-sheet analysis to manage a company
balance-sheet consolidation management buy-out balance-sheet items
memorandum of association balance-sheet ratios minority interest
board of directors the minutes of a meeting book profit net assets
book value net margin Book Keeping loss net profit break even point (BEP) non-taxable income break-up value on first call budget
one-man business buildings tax opening balance sheet
business consultant - expert in commercial law opening stock - opening inventory
to call a general meeting operating loss capital operating profit
capital goods ordinary partnership capital increase outstanding credits
capital loss overhead costs - overheads to capitalize owner
cash cow product owner's equity cash flow partner - shareholder
chairman of the board of directors patent chart of accounts periodical report
clean factoring personnel costs closing balance plant and equipment
closing stock plant and machinery company - firm to post a contra-entry
company merger pre-tax profit company profitability production costs
consolidated statement production value controlling company professional accountant corporate books profit and loss account (GB) - income statement (US)
corporate purpose profit distribution corporate tax provision cost centre
provision for doubtful accounts cost of goods sold proxy vote costs and revenues to put into liquidation credit quorum to credit an amount
to quote a company credit column - credit side raw materials inventories
credit note real estate current assets - floating assets records
day book - journal book registered office debit and credit
reserve fund - reserve debit column - debit side return on investment (ROI)
debit note revenue - earnings - incomes debt revenue tax debtor
revenues and expenses deed of association - company statute rounding down
deferred expense - deferred charge rounding up deferred income - deferred revenue running costs - operating costs deferred tax semifinished goods inventories depreciable assets to set up a company depreciation
share capital (GB) - capital stock (US) depreciation allowance - capital allowance
shareholders' meeting depreciation fund - amortization fund shareholders register
double entry shareholders' calling entry stamp duty entry date
state-controlled enterprise equity tax statement of account - account statement
expenditure - outflow - expense statutory balance expense centre stocks and work in progress (GB) - inventories (US) expense receipt
subscribed capital - underwritten capital extraordinary meeting subsidiary
false accounting subsidiary company - controlled company false factoring
substitutive tax fee take-over to fill in a VAT return tax final balance
tax accounting to finance tax assessment financial leasing tax audit - tax inspection financial management tax base financial resources tax credit
financial statement tax exemption - tax allowance financing - funds tax payer
finished products inventories tax rate fiscal year - financial year tax register
fixed assets (GB) - capital assets (US) tax return - income tax return fixed costs
tax revenue fully paid-up capital taxable value - assessment general accounting taxation general partner taxes and dues
general partnership - ordinary partnership temporary balance
goodwill expenses - start-up costs total current assets gross margin trial balance
gross operating margin value added tax (VAT) gross operating profit
variable costs gross profit VAT return - VAT declaration in the black
to veto income tax withholding tax industrial accounting cost year-end inventory