Equity financing

Equity financing means raising money by selling company shares. People who buy these shares
become part-owners of the company.

Example:

A company (like Grameenphone or Robi), they needed more money to expand its mobile
network across Bangladesh, it didn’t just depend on bank loans. Instead, it sold shares of the
company to the public. At that time, people who bought those shares became part- owners
of Grameenphone.

Debt Financing

Debt financing means borrowing money and paying it back with interest. This is often called
Financial leverage. The most common forms are bank loans or bonds.

Example:

Imagine you run a bakery shop. Business is going well, and now you want to buy a new oven to
bake more cakes. But you don’t have enough money right now. So, you go to a bank and take a
loan of 5 lakh taka. The bank agrees, but you must repay the loan with interest over
the next 3 years

Debt vs Equity?

Topic Debt Equity

Meaning Borrowed money with fixed Ownership in the company
interest and fixed repayment through shares or stocks.
time.

Time Span Usually 1–10 years, must be Long-term, as long as the

repaid. company exists.

Security Fixed interest must be paid. Fixed interest must be paid.

 Security Can be secured (with Equity capital is unsecured.
collateral) or unsecured.

Risk Less risky. Riskier

Instruments Loans, bonds, debentures, etc. Shares

Status Lenders Owners

Banks, financial
Providers institutions, general public. General public and organizations

What is IPO?

An Initial Public Offering (IPO) is when a private company sells its shares to the public for the
very first time. By doing this, the company becomes a public company, and anyone can invest in
it by buying shares.

Example: When Facebook (now Meta) went public in 2012, it sold shares to the public for the
first time through an IPO

Why is an IPO launched?

Companies launch an IPO mainly to raise money for their growth and needs. The money
collected can be used in different ways, such as:

• Raising Capital

The main goal is to collect fresh funds from the public to strengthen the company’s financial
position.

• Buying Machinery

Companies may need new equipment or technology to improve their production and efficiency.
IPO money helps buy these
• Plant Expansion Assets

To grow bigger, a company may want to open new factories, branches, or offices. IPO funds
make expansion possible.

• Paying Debt or Loan

If a company has taken loans, IPO money can help reduce or clear the debt, making the business
more financially stable.

The process of raising funds:

1. Determine funding Needs:

Determine funding needs is the essential first Step in the process of raising funds. It involves
a detailed financial analysis to calculate exactly money a business needs. what it will be used
for and for what duration.

2. Choose the Right Financing option:

To choose the right financial option, you first need to decide between debt financing candy
equity

Financing Debt financing: It involves borrowing money that must be repay, usually with
interest, over a set period.

Equity Financing: Its involves selling a portion of ownership in your company to an investor
in exchange for money, with this option, your don't have to repay the money.

3. Prepare a solid Business plan :

Prepare a solid business plan is a grate way to formalize your ideas and secure Funding. There
includes an executive Summary, company description, market analysis, organization and
management Service or product line, marketing and Sales strategy and financial projection.

4. Identify potential Investors:

There are a few ways to identify potential investors. One way is to reach out to people who
share your target market and are interested in investing in your business
5. Negotiate Terms:

Negotiate terms means to discuss and compromise on the specific condition and right of an
agreement to reach a mutual acceptable outcome.

[Link] the Deal:

To close a deal' means to bring negotiations to an end by reaching a final, official agreement on a
transaction, purchase or business arrangement.

[Link] Relationship:

Building a relationship is the process of establishing trust, communication and a meaningful

connection with another party by showing genuine interest in their needs and activists.

What is Hybrid Security & Why Preferred Stock is Called Hybrid Security;

A financial instrument that combines features of both debt and equity

• Provides fixed income like debt

• Offers ownership rights like equity

Examples: Preferred stock, convertible bonds, mezzanine financing

Hybrid Security:

Preferred Stock as Hybrid Security

Preferred stock is a special type of share issued by a company that has features of both equity (
ownership) and debt ( fixed income).
Preferred Stock as Hybrid Security

Preferred stock is a special type of share issued by a company that has features of both equity (
ownership) and debt ( fixed income).

Debt-like features:

• Pays fixed dividend (like interest)

• Has priority over common stock in dividend & liquidation

Equity-like features:

• Represents ownership in company

• Dividend depends on profit

Sometimes has limited voting rights

Why Called Hybrid Security?

Debt nature:

• Provides regular dividend return

• Preference during liquidation

Equity nature:

• Ownership in company

• Possible voting rights Therefore, Preferred Stock is called a Hybrid Security

Choices for Publicly Traded Firms

Equity Financing

Issue new shares (rights issue, follow-on issue).

Attract more investors through stock exchange

Debt Financing

Issue corporate bonds or debentures.

Take long-term loans from banks/financial institutions

Internal Financing

Use retained earnings.

Reinvest profits instead of paying dividends.

Other Choices

Share buybacks (to increase share value)

Mergers & acquisitions for growth.

Financing Choices and the Firm’s Life Cycle (Continued)Introduction A

firm’s financing needs change as it grows.

Different stages of the life cycle → different sources of finance.

1. Start-up Stage: - Personal savings, family & friends, angel investors.

2. Growth Stage: - Venture capital, bank loans, retained earnings

3. Maturity Stage: - IPO (equity markets), bonds, long-term loans.

4. Decline / Renewal Stage: -Restructuring, asset sales, private equity.