Prof. Amitai Aviram Aviram@illinois.edu University

Transcript:Prof. Amitai Aviram Aviram@illinois.edu University:
Prof. Amitai Aviram Aviram@illinois.edu University of Illinois College of Law Copyright © Amitai Aviram. All Rights Reserved S16 Mergers & acquisitions, Chapter 3 (Business Associations, Chapter 6) Financing firms Financing firms (MA3/BA6) Chapter overview Equity Finance Capital markets Capital market terminology Capital market efficiency Investment strategies Types of claims Intra-SH conflicts Debt finance Securities regulation Capital market terminology What is capital? Capital: a set of claims on a firm’s assets & future profits, given in return for the money it raises Capital is used to mean both sides of this deal: the sets of claims (“securities”) & the money that is raised issuing them Corporate finance is a set of practices (and laws that regulate these practices) that have three goals: Raise money for a firm’s business activities Facilitate exit-type “agency solutions” for the firm’s SHs & creditors Set governance balance between the firm’s SHs & creditors Capital market terminology Arch-types of capital The firm receives money in return for a – Claim to the remainder of the firm’s assets, after paying all other obligations (Equity) Claim to a predetermined stream of money, unrelated to the firm’s performance (Debt) Debt can be further divided: Is collateral offered to secure the debt (senior/secured debt), or not (junior/unsecured debt)? Can claim be exercised immediately by the owner? Can claim be easily transferred to a third party? Capital market terminology Primary & secondary markets Capital markets are the primary source of capital Markets in which money is offered in return for securities Capital markets are divided into primary & secondary markets Primary market – transactions in which issuing firm is a party E.g., Acme Corp. issues Acme shares to investor B Secondary market – transactions in which issuing firm is not a party E.g., Investor B sells to investor C shares in Acme Corp. Stock exchanges are a secondary market Primary markets allow firms to raise capital for their operations What good are secondary markets? Capital market terminology Purpose Public benefit Assesses the value of the company More about this benefit later Private benefits Benefit to persons who have money to invest Benefit to SHs who want to sell their securities Benefit to the company Capital market terminology Understanding risk The outcome of most investments is uncertain Stock: Not clear how company will perform Bonds: Debtor might default To evaluate investments, we estimate probabilities of outcomes E.g., 90% likelihood of paying the bond