Long-term financing of companies Essay Example | Topics and Well Written Essays - 1500 words

Long-term financing of companies - Essay Example If a company that has already undergone an IPO needs to raise substantial capital again and it chooses to issue new equity in order to finance it, this is called seasoned equity offering (Butler, Grullon & Wetson 2005). Seasoned equity offerings come in different variations as regards the terms of the offer such as offering the stocks at investors-at-large or through a rights offerings. Under the rights offering, the company can issue rights to the purchasing the new shares to recipient investors on a proportionate basis (Weller 1962). These rights can either be sold or utilised depending on the recipient investors (Weller 1962). In 2008, Tesco Plc has seasoned equity offering that amounted to 130 million pounds; this is consist of 3 million pounds in issue capital, and 127 million pounds in share premium (Tesco Plc 2009). According to Tesco Plc, part of this seasoned equity offering is to issue shares as stock options are exercised. The rest of it is used for additional financing to the company. On the other hand, Marks & Spencer has issued 0.5 million pounds in equity (Marks & Spencer 2009). In contrast to Tesco Plc, this issue of shares by Marks & Spencer is due to exercise of options. However, seasoned equity offerings are used by the two companies in raising funds to finance their operations. One major advantage of this source of long-term funding is the huge amount of capital that large companies such as Tesco and Marks & Spencer have access in the form of the stock market. As regards the size of the capital raised, seasoned offerings in the stock market really provide huge advantages to these companie s. Seasoned equity offerings also have some shortcomings. For one, after an SEO, it is very usual that the stock price of the company gets lower because of the increase in price. There is a period of time before the price of the stocks will incorporate the information about the company, and this