equity financing

(noun)

funding obtained through the sale of ownership interests in the company

Related Terms

Examples of equity financing in the following topics:

  • Equity Finance

    • Companies can use equity financing to raise money and/or increase shareholder liquidity (through an IPO).
    • Financing a company through the sale of stock in a company is known as equity financing.
    • Unofficial financing known as trade financing usually provides the major part of a company's working capital (day-to-day operational needs).
    • In finance, the cost of equity is the return, often expressed as a rate of return, a firm theoretically pays to its equity investors, (i.e., shareholders) to compensate for the risk they undertake by investing their capital.
    • Firms obtain capital from two kinds of sources: lenders and equity investors.

  • Financing Company Operations

    • A company can be self-financed or financed through the solicitation and participation of outside investors.
    • Examples of bootstrapping include: Owner financing, sweat equity, minimization of the accounts receivable, joint utilization, delaying payment, minimizing inventory, subsidy finance, and personal debt.
    • Examples of Bootstrapping: Owner financing Sweat equity Minimization of the accounts receivable Joint utilization Delaying payment Minimizing inventory Subsidy finance Personal Debt
    • A company can be self-financed or financed through the solicitation and participation of outside investors .
    • In many cases, these services are in return for an equity stake.

  • Financial Plan and Forecast

    • Achieving the goals of corporate finance requires that any corporate investment be financed appropriately.
    • The sources of financing are capital self-generated by the firm and capital from external sources, obtained by issuing new debt and equity.
    • Management must identify the "optimal mix" of financing—the capital structure that results in maximum value.
    • Equity financing is less risky with respect to cash flow commitments, but results in a dilution of share ownership, control and earnings.
    • Management must attempt to match the long-term financing mix to the assets being financed as closely as possible, in terms of both timing and cash flows.

  • Owners' Equity

    • In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid.
    • If liability exceeds assets, negative equity exists.
    • At the start of a business, owners put some funding into the business to finance operations.
    • Ownership equity is also known as risk capital or liable capital.
    • Accounts listed under ownership equity include (for example):

  • Short-Term Loans

    • For smaller businesses, financing via credit card is an easy and viable option.
    • It is interim financing for an individual or business until permanent or next-stage financing can be obtained.
    • Bridge loans are used in venture capital and other corporate finance for several purposes:
    • To inject small amounts of cash to carry a company so that it does not run out of cash between successive major private equity financing.
    • To carry distressed companies while searching for an acquirer or larger investor (in which case the lender often obtains a substantial equity position in connection with the loan).

  • Defining the Balance Sheet

    • Assets, liabilities, and ownership equity are listed as of a specific date, such as the end of the company's financial year.
    • A standard company balance sheet has three parts: assets, liabilities, and ownership equity.
    • Another way to look at the same equation is that assets equals liabilities plus owner's equity.
    • Looking at the equation in this way shows how assets were financed: either by borrowing money (liability) or by using the owner's money (owner's equity).
    • This balance sheet shows the company's assets, liabilities, and shareholder equity.

  • The Importance of Finance

    • Managerial finance concerns itself with the managerial significance of finance.
    • Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make those decisions.
    • The primary goal of corporate finance is to maximize shareholder value.
    • Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders.
    • The terms corporate finance and corporate financier are also associated with investment banking.

  • Alternate Sources of Funds

    • The cash flow statement, which shows cash inflows and outflows for a specific reporting period and distinguishes between three types of activities that generate or use cash: operating, investing, and financing.
    • Receipts for the sale of loans, debt, or equity instruments in a trading portfolio
    • Financing activities include the inflow of cash from investors, such as banks and shareholders.
    • Other activities which impact long-term liabilities and equity of the company are also listed under financing activities, such as:
    • The cash flow statement shows cash inflows and outflows for a specific reporting period and distinguishes between three types of activities that generate or use cash: operating, investing, and financing.

  • Sample Evaluation

    • ROE (Return on Equity) = Net Income / Shareholder Equity = 1,057/7,340 = 14.4 percent
    • The ROE measures the firm's ability to generate profits from every unit of shareholder equity. 0.144 (or 14 percent) is not a bad figure, but by no means a very good once, since ROE's between 15 to 20 percent are generally considered good.
    • This shows the relative proportion of shareholders' equity and debt used to finance a company's assets.

  • Financial Leverage

    • Financial leverage is a technique used to multiply gains and losses by obtaining funds through debt instead of equity.
    • A public corporation may leverage its equity (stocks outstanding) by borrowing money.
    • The term "leverage" is used differently in investments and corporate finance, and has multiple definitions in each field.
    • The concept of financial leverage is much more utilized and understood in the realm of corporate finance.
    • In finance, the general practice is to borrow money to buy an asset with a higher return than the cost of borrowing.