This lesson examines equity as a source of permanent capital.
2.1. The Nature of Equity Capital
Equity represents ownership in a company. It is a permanent source of capital that does not have a maturity date and does not require repayment. Unlike debt, equity does not obligate the company to make fixed interest payments, but it does give shareholders a residual claim on assets and profits .
2.2. Equity Issuance and Markets
Companies can raise equity capital through several methods:
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Initial Public Offerings (IPOs): The first sale of shares to the public.
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Seasoned Equity Offerings: Subsequent issues of equity.
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Rights Issues: Offering new shares to existing shareholders.
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Private Placements: The sale of shares to a select group of institutional investors.
The ACT syllabus highlights the importance of “investor relations” and the “importance of managing shareholders” .
2.3. Shareholder Value and Return of Capital
A key responsibility of corporate finance is managing the return of capital to shareholders. This involves dividend policy and share buybacks, which are strategic tools for managing the equity base and shareholder returns. The broader corporate finance context also covers “capital structure theory and funding requirements” and “measures of shareholder value” .