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Corporate Financial Strategy 4th edition Dr Ruth Bender. Chapter 8 Growth companies. Growth companies: contents. Learning objectives Financial strategy for a growth business Growth companies require a marketing focus Growth equity carries different risks to start-up equity

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Presentation Transcript
growth companies contents
Growth companies: contents
  • Learning objectives
  • Financial strategy for a growth business
  • Growth companies require a marketing focus
  • Growth equity carries different risks to start-up equity
  • Capital asset pricing model
  • Dividend growth model
  • Project risk and return
  • Foregone low-risk opportunities
  • Rights issue
  • Bonus issue
learning objectives
Learning objectives
  • Explain how the life cycle model relates to a company in the growth stages of its life.
  • Critique the financial strategy adopted by a growth company, making a decision as to which aspects of the life cycle model are relevant to its circumstances, and why.
  • Appreciate some of the assumptions behind the Capital Asset Pricing Model, and their flaws.
  • Calculate the theoretical impact of rights issues, bonus issues and share splits, and understand their likely effect on corporate value.
growth companies require a marketing focus

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Time

Growth companies require a marketing focus

Focus on building market share in order to be a major player by the time it starts to mature

growth equity carries different risks to start up equity
Growth equity carries different risks to start-up equity

Required return

Start-up equity, provided by venture capital

Growth equity, often provided by IPO

Perceived risk

dividend growth model
Dividend growth model

Ke is the shareholders’ required return

D1 is the next dividend to be paid

P is the current share price

G is the future compound growth in dividends

project risk and return
Project risk and return

Project A should be accepted, as it generates more return than its cost of capital.

Project B should be rejected, as it generates less return than its cost of capital

Project expected return

B

A

Company overall risk factor

Project risk

foregone low risk opportunities
Foregone low-risk opportunities

Minimum return

Foregone low-risk opportunities

Company overall risk factor

Project risk

rights issue
Rights issue
  • In a rights issue, existing shareholder have the right to subscribe for new shares in proportion to their existing holding
  • For example, a 1 for 4 issue at 45p means that for every 4 shares held, the shareholder has the right to buy one extra share at 45p
  • If the shareholder chooses not to take up the rights, they are sold by the company in the market, and the shareholder receives the net proceeds
  • The theoretical post-rights price can be calculated. The actual post-rights price will differ from this due to investors’ views on the information released at the time of the issue

Theoretical post-rights price

Market capitalisation before the rights issue

+ Proceeds of rights issue

÷ Total number of shares in issue post-rights

bonus issue
Bonus issue
  • In a bonus issue, retained profits are capitalised to give new shares to the shareholders, in proportion to their existing holdings
  • The par value of the shares remains the same
  • No new cash is received by the company
  • The theoretical price after the bonus issue can be calculated. The actual price will differ from this due to investors’ views on the information released at the time of the issue

Theoretical price after the bonus issue

Market capitalisation before the issue

÷ Total number of shares in issue after the bonus issue