# How does raising capital affect share price?



## GundamZeta (3 December 2008)

can someone explain it to me pls?

thx


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## So_Cynical (3 December 2008)

GundamZeta said:


> can someone explain it to me pls?
> 
> thx




XYZ needs money to do whatever XYZ do...the cheapest way for XYZ to get 
money is to ask there shareholders to give them some money (capital raising)
this is usually done by some sort of share issue, which dilutes existing shares 
in XYZ.

So after new share issue XYZ has more shares, that in general are worth slightly 
less than before...the upside is that XYZ now have cash to help them do what they 
do, and there's no ongoing cost for it.

Is that what u meant?


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## skc (4 December 2008)

So_Cynical said:


> XYZ needs money to do whatever XYZ do...the cheapest way for XYZ to get
> money is to ask there shareholders to give them some money (capital raising)
> this is usually done by some sort of share issue, which dilutes existing shares
> in XYZ.
> ...




In fact capital raising in the form of equity is the MOST EXPENSIVE form of cash that a company can raise. One of the most important element in corporate finance is achieving an optimal WACC - weighted average cost of capital. Depending on the type of industry and market condition, potential investors place a risk premium to the firm's free cash flow in deciding what price they are willing to pay. As such, the cost of equity (i.e. the return demanded by shareholders) will always be higher than debt. 

This is corporate finance 101... see http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital#Effect_on_valuation if you wish to learn more.


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## bluey (30 January 2009)

Would like to know more about this as well.. Given the current market climate and that companies are going to the market to raise capital, is it a 'given' that the share price will drop to the level of the capital raising?

For example the current share price of WES is 15.82 and the company will have seeking to raise $2.8b - part institutional/part retail (offer price of $13.50 a share).

Will the WES share price drop to $13.50 or thereabouts? And if so why would anyone think of buying into WES now rather than at ~13.50??

Am I missing something?

Any insights would be much appreciated..


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## Stormin_Norman (30 January 2009)

if the listed price of 1000 shares is 1.20

and they issue 1000 shares at 1.00

then the new price will probably settle around 1.10 (i think that was the point being made above).


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## So_Cynical (30 January 2009)

Stormin_Norman said:


> then the new price will probably settle around 1.10 (i think that was the point being made above).




And then proceed to fall under the issue price a few weeks after that....as has
been the case in every capital raising ive seen in the last 6 months.



skc said:


> In fact capital raising in the form of equity is the MOST EXPENSIVE form
> of cash that a company can raise.




Well it mite work like that in the text books...but i don't think it works like that at the moment.

Just look at the number of company's raising money via share issues compared to borrowing, 
share issue is the weapon of choice at the moment.


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