With the European economic and monetary union and the introduction of the Euro, a further step in the globalisation of the markets was made. This means more and more growing stress of competition for nearly every company, because trade and entrance barriers have been elimi-nated. On the other side, this also offers more chances for growth and extending the business. Both aspects of course have one in common: capital requirements and especially staying liquid. In critical economic situations it is more than ever important to stay liquid (having enough pos-sibilities to cover the short-term possibilities). That’s the task of financing and planning the finances.
There are two main sources of assessing capital: equity financing and outside or credit capital. It should be a strategic and well calculated decision, what the capital structure of a company should look like. The “leverage effect” plays an important role in this context. But it is often not easy to create this structure like it is wished. There are many factors which influence the “price” and the efforts for getting liquidity out of certain capital sources. One big example therefore is the “Basle 2” decision, which makes it more exertive for companies to gain loans of banks. This can also mean worse conditions of the loans. These circumstances make it inescapable to seek better alternatives – like for example getting equity.
Not only because of tougher times for gaining credit capital, but also because of the continuous intensification of competition, has equity financing become more and more important. One cause for that is the long-term oriented affiliation of equity capital to the firm. There are normally no “stressing” dates when it has to be paid back like is the case with loans from a bank.
This elaboration will give a brief overview about the topic of equity financing. The most important and common possibilities will be presented and evaluated. But we will also have a look at some special forms and more or less unknown facts about this topic.
Table of Contents
- Introduction
- General Aspects about Equity Financing
- Equity financing in context with the legal form
- Several possibilities in provision of equity
- External Financing
- Private Equity
- Venture Capital
- Going Public
- Further Possibilities and Variants
- Business Angels
- Trade Sales
- Tracking Stocks
- Management Buy Out
- Industrial Obligations / convertible bonds
- State Financing
- Internal Financing (Retained Earnings)
- Self-Financing
- Open Self-Financing
- Financing through Hidden Reserves
- Financing through accruals
- Financing from Depreciation and Amortization
- Factoring
- Self-Financing
- External Financing
- Valuation of the different Equity Financing Instruments
- External Financing
- Internal Financing
- Trends and Forecast about getting Equity
Objectives and Key Themes
This elaboration provides an overview of equity financing, focusing on its growing importance in a globalized market with increased competition and stricter lending regulations like “Basle 2”. The text examines various equity financing methods, evaluating their advantages and disadvantages in different contexts. * The importance of equity financing in competitive markets. * Different methods of equity financing (both internal and external). * The relationship between a company's stage of development and its financing options. * The valuation of various equity financing instruments. * Current trends and future forecasts regarding equity financing.Chapter Summaries
Introduction: This chapter sets the stage by discussing the increased global competition and capital requirements faced by companies in the wake of the European economic and monetary union and the Euro's introduction. It highlights the crucial role of maintaining liquidity, especially during economic downturns. The chapter introduces equity financing and credit capital as the two main sources of capital and emphasizes the strategic importance of a well-calculated capital structure, impacted by factors like the "Basle 2" decision. The introduction underscores the growing importance of equity financing due to tougher credit conditions and intense competition, emphasizing its long-term orientation and the lack of stressful payback dates compared to bank loans. The chapter concludes by stating the elaboration's aim to provide an overview of equity financing, exploring common and less-known aspects. General Aspects about Equity Financing: This chapter delves into the fundamental aspects of securing sufficient funds for company growth. It explores the diverse financing instruments available in the market, highlighting the crucial relationship between a company's status and maturity and its financing options. The text emphasizes the long-term orientation of equity capital, distinguishing it from credit capital by its lack of a fixed payback date and the association of special rights and power for the equity capital provider. The chapter highlights the inherent security of long-term equity capital for both the company and creditors, discussing the importance of the equity ratio as a credit rating criterion and the recommended minimum 20% equity representation in total capital. It further explains equity's role as a risk cushion, emphasizing the dangers of overextension and the consequences of depleting all equity. Finally, the chapter discusses the two primary ways of utilizing company profits generated through equity: reinvestment for growth or distribution among shareholders.Keywords
Equity financing, external financing, internal financing, venture capital, private equity, going public, self-financing, retained earnings, depreciation, amortization, factoring, capital structure, leverage effect, Basle 2, globalization, competition, liquidity, valuation, risk management.
Frequently Asked Questions: A Comprehensive Guide to Equity Financing
What is the purpose of this document?
This document provides a comprehensive overview of equity financing, covering various methods, their advantages and disadvantages, valuation, and current trends. It's designed to offer a structured understanding of equity financing for academic use, analyzing themes in a professional manner.
What topics are covered in the Table of Contents?
The document covers an introduction to equity financing, general aspects of equity financing, equity financing in relation to legal form, various possibilities for obtaining equity (including external financing such as private equity, venture capital, going public, business angels, trade sales, tracking stocks, management buy-outs, industrial obligations/convertible bonds, and state financing; and internal financing such as retained earnings, self-financing, financing through depreciation and amortization, and factoring), valuation of different equity financing instruments, and trends and forecasts in equity financing.
What are the key objectives and themes explored?
The key themes revolve around the increasing importance of equity financing in competitive global markets, particularly in light of stricter lending regulations like Basel II. The document examines diverse equity financing methods, evaluating their suitability based on a company's stage of development, and considers the valuation of these instruments. Current trends and future forecasts in equity financing are also discussed.
What are the main points discussed in the chapter summaries?
The introduction highlights the crucial role of equity financing amidst increased global competition and stricter lending regulations. The chapter on general aspects of equity financing delves into the fundamental aspects of securing sufficient funds for company growth, emphasizing the long-term nature of equity capital and its importance in maintaining a healthy capital structure. The chapter summaries provide concise overviews of each section's key findings and arguments.
What keywords are associated with this document?
Keywords include equity financing, external financing, internal financing, venture capital, private equity, going public, self-financing, retained earnings, depreciation, amortization, factoring, capital structure, leverage effect, Basel II, globalization, competition, liquidity, valuation, and risk management.
What is the significance of Basel II in the context of this document?
Basel II, referring to the Basel Accords II, is mentioned as a factor influencing the increased importance of equity financing. The stricter lending regulations introduced by Basel II have made securing bank loans more challenging, making equity financing a more attractive alternative for companies.
What types of equity financing are discussed?
The document discusses both internal and external financing options. External financing includes private equity, venture capital, going public, business angels, trade sales, tracking stocks, management buy-outs, industrial obligations/convertible bonds, and state financing. Internal financing includes retained earnings, self-financing (including open self-financing, financing through hidden reserves, and financing through accruals), financing from depreciation and amortization, and factoring.
How is the valuation of equity financing instruments addressed?
The document addresses the valuation of various equity financing instruments, although specific valuation methodologies are not detailed. It indicates that the valuation aspect is considered separately for both external and internal financing methods.
What are the current trends and future forecasts regarding equity financing?
The document mentions current trends and future forecasts regarding equity financing, though specific predictions are not explicitly stated. It suggests that the importance of equity financing will likely continue to grow due to ongoing global competition and regulatory changes.
- Quote paper
- M.Sc. Thomas Bossert (Author), 2003, Methods of Equity Financing (Eigenkapitalfinanzierung), Munich, GRIN Verlag, https://www.grin.com/document/93392
