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A company is necessary by law to offer an issue of new equity finance on a pro-rata basis to its existing shareholders. This makes sure that the existing pattern of ownership and control will not be affected if all shareholders take up the new shares offered. For the reason that the right to be offered new equity is a legal one such an issue is called a rights issue.
If an unlisted company make a decision that it needs to raise a large amount of equity finance and provided existing shareholders have agreed it can offer ordinary shares to new investors (the public at large) via an offer for sale. Such an propose is usually part of the process of seeking a stock exchange listing as it leads to the wider spread of ownership that is needed to meet stock exchange listing regulations. An offer for sale perhaps either at fixed price where the offer price is set in advance by the issuing company or by tender where investors are invited to submit bids for shares. An offer for sale will result in an important change to the shareholder structure of the company for example by bringing in institutional investors. In order to makes sure that the required amount of finance is raised offers for sale are underwritten by institutional investors who guarantee to buy any unwanted shares.
A placing is cheaper in comparison of an offer for sale. In a placing huge blocks of shares are placed with institutional investors so that the spread of new ownership is not as wide as with an offer for sale. While a placing may be part of looking for a listing on a stock exchange (for example it is very popular with companies wanting to float on markets for smaller companies such as the Alternative Investment Market in the UK) it can as well provide equity finance for a company that wishes to remain unlisted.
New shares can as well be sold by an unlisted company to individual investors by private negotiation. While the amount of equity finance increased by this method is small it has been supported in recent years by government initiatives such as the Enterprise Investment Scheme and Venture Capital Trusts in the UK.
The cost of debt must be based upon the current market cost of debt. Where different kinds of debt are used estimates of more than one debt cost may be necessary and these costs we
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