Equity finance is another way for business to receive capital other than loans or debt. Company sells their stocks to investors to raise capital and in return the shareholders receive ownership interest. Small or startup business used debt finance to start their business since they do not have sufficient revenues, cash flow or hard assets to act as collateral. Equity finance can attract capital and make early stage investors to willingly take risk with the business because investors are interested in acquiring ownership interests. For investors, equity financing is an important method of acquiring ownership interests in companies. Investors are always wary that subsequent rounds of equity financing usually require them to dilute some portion of their ownership as well.
Multinational company like Facebook Inc and Chief Executive Mark Zuckerberg sells stocks at $55.05 each for 70 million shares. Sound like a good share deal for investors. This make the largest stock offering for U.S public company since a sale of $7.6 billion in American International Group Inc shares in Decemver 2012. With that Facebook make a comback to S&P 500 cements after its stock plunged in the wake of its IPO but this will make the company trigger demand from index funds and other institutions to own a company’s stock.
The offer price give a 0.1% discounts to Facebook closing share price at Friday. The market participants expected the deal to price just below where the stock finsihed the week. Facebook's shares have increased to 107% in 2013. The deal include rally of consumer and mobile-oriented internet business.
The company explained it will use the profits from the sale for working capital and other corporate purposes. But currently the company does not have specific purpose of the net proceeds planned. Zuckerberg's will take $2.3 billion to pay his incurred taxes as a result from exercising an option to buy 60 million Facebook shares of Class B common stock. Facebook sells 27 million shares while company baord member Mark Andreessen sells 1.6 million shares. Mr. Zuckerberg will give 18 million shares to Silicon Valley Community Foundation and this able to reduce his taxable income by $990 million. So this make Zuckerberg owe taxes about $1.2 billion and the remaining $1.1 billion he can keep.
This might be a good decision to increase company's performances and financial health because if Facebook used debt finance then the company will faces a lot of interest loans and this decision can give higher return rate for shareholders and investors since they are the source of funds for the company. Also using banks can make the amount of debts higher than its assets which is not a good sign for multionational and big company like Facebook. So overall, Facebook using equity finance to find sources of finances and increase its financial performance is a good choice in my opinion.
In addition, Facebook can create opportunity to improve their social business such as invest in new products and acquire other companies to increase competition. Facebook also can used to bost popularity of its own mobile messenger app.
i agree with your opinion because rasing money from stock market normally mean higher return to investors and shareholders, and if the management financed money by banks, it could largely reduce the cost of capital. But the disaadvantage is that borrowing money from bank needs a fixed output in cash flow, which damage a company's cash flow. hence, for a big company like Facebook, rasing money from stock market is a good choice.
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