n. Describe some ways other than an IPO that companies can use to raise funds from the capital markets.
Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions:
Companies can raise funds from capital markets other than initial public offer (IPO) through the following ways:
Private placement: Private placement is the offer of company's securities to a specified group of individuals through financial institutions rather than inviting the public at large.
Shelf registration: Shelf registration is a process under which a company registers its new stock with securities and exchange commission (SEC) but does not issue all of the registered stock immediately to the public. Rather. the company prefers to hold some of the stocks to issue at a future date within a period of two years from registration to avoid the problem of overstocking and also take advantage of favourable market conditions in the future.
Securitization: Securitization is a process of converting financial assets or debts into financial securities, that is, different financial assets or debts of a company are pooled into a single financial instrument. This financial instrument is then issued to the investors to raise capital and enhance liquidity of the company.