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Current time:0:00Total duration:13:54

Video transcript

everything we've talked about so far with this you know startup company selling socks and all that has been raising money from an equity we raised private money we when the company was private it went to VCS and it went to and it went to angel investors and you know maybe you go to your your friends and family to raise money and then the company could go public and raise money from the public markets there's actually two ways that a company can raise capital so raise cap one so this is why this playlist is called capital markets or it's part of it the name of the raise capital capital is just essentially I mean the easy way to think about it is you're raising cash to put that you want to invest in some way to grow your business or to sustain your business or start your business so everything we talked about so far was equity and that's a sell essentially selling shares in your company to raise money right and so that's all of those VC examples and the equity investor so when you sell equity you're essentially selling you know you're kind of making that person who's buying the stock you know and equity is the same thing as stock you're making the person who's buying a stock kind of a partner in the company so if the company let's say there's two situation if the company goes bankrupt and I'll talk a lot more about what bankruptcy even means but if the company goes bankrupt all the shareholders end up with nothing they end up with nil right but if the stock if the company has a lot of upside the stock gets a lot of upside right because they're their partners in it if if this was a company you know that startup that we talked about if it turns into amazon.com and becomes a billion-dollar company everyone is going to do really well everyone's going to share in that upside but there's another way to raise money and actually this is probably something that's more familiar to to kind of at the household level I mean at the household level you never raise equity you never say you know what well you can but you're not gonna say hey I need to buy a house why don't I go to my rich friend and offer to sell him 10% of the stake in my house to him and you know and and he'll be kind of a partner in my house that could happen but for the most part it doesn't usually when you do it something on a personal level you raise money through debt through debt and that's interesting so debt debt it what's good about debt is it so let's think about it from the from the point of view of the person who's lending the money to you right that is just borrowing money borrowing money borrowing money and this is you know I think all of us know what borrowing money is I go to my my rich friend and I say hey you know could I borrow a dollar and I'll give you a dollar 25 in a year and he says okay you know you're good for it but I'm essentially promising I'm going to give the money back at some future date if I sell equity I'm not promising anything I'm like hey I got a great business why don't you give a dollar and then you get a 20% cut at my business if my business does awesome you get 20% of all of the profits of my business if my business does horrible well you took a risk you get nothing and I get nothing that says you know what even regardless of how my business does if it does awesome all you're going to get is the interest so all you get is interest that's kind of the upside so the upside is limited right if if I borrow money at 9% interest all that person's going to get is 9% even if my company becomes the next Google or or you know or Microsoft or whatever else that person's just going to get 9% on their money while this person might have gotten you know 100 times their money because they made a bet on the other hand this downside is much lower so limited downside because they're going to get their money back at a certain you know there's a certain payment schedule and they're going to get their money back before the stockholders so let's say in a situation where the company's going into difficulty and well it will do a whole playlist on bankruptcy the people who lend money to the company will see their money before the stockholders see anything so how does all of this come out from the balance sheet so let's say we have a public company and this is really you know if you wonder what a CFO at a company does this is really the main decision that they're always making do we raise money well how do we raise money if we need it and we raise money from the equity markets or from the debt markets so let's come up with a company again let's say that that's its current assets not current I don't want to say current assets it's the assets that it currently has current assets means something different and we'll talk about that in the future but let's say so that's its assets assets you know it might have some cash here some cash and well we'll go into more detail we'll actually look at real company balance sheets and decipher what all the terms of the balance sheet means but that's its assets for now and let's say right now it's all of its money its raised so far have been from has have been equity and let's say it's a publicly listed company it doesn't have to be but let's say that's all of its equity and let's say it has let's say it has I don't know 10 million shares 10 million shares and the other interesting thing about when a company is public remember every time when a company was private and it took an investor when it took equity investors they have to sit and have a negotiation saying what is this worth right what are these assets worth but what's cool is is when you have a publicly traded company these shares are traded on an exchange right these shares are on an you know let's say it's on the New York Stock Exchange New York Stock Exchange so every day you could go to Yahoo Finance or wherever you know and and you can look at a chart let me draw a chart you can draw a chart let me so let's say so and we've all seen stock charts I think so let's say that this is you know this could have been as IPO date or it could just be the start that we're looking at let's say the stock right after you die pio went up and then you know the whole market went down a little bit but the stock you know maybe it's it's there right but on any given really almost any given second there's a price that somebody traded that stock at and it might not be the best price but it is a price we'll talk about why that happens right because you might have 10 million shares and if only I don't know a hundred shares get traded at any at any second or let's say only a hundred shares get traded in the day is that an indicative price because that's not a huge percentage of all of the shares but anyway well we'll talk more about about what volume means relative to the total float and all of that but let's say at this split-second the company shares traded at $15 a share this is $15 right at this second in time this was like right now traded $15 a share and you can look it up on on your Bloomberg or whatever else so essentially the market is providing us a value for this company the market is saying wow you know the market is willing to trade the share at fifteen dollars there was a willing buyer and a willing seller at exactly fifteen dollars a share so that means that the market at that moment is valuing this company at fifteen dollars per share times ten million shares so fifteen dollars per share times ten million shares not less than a dollar sign ten million shares so the market is assigning a fifteen times 10 is 100 150 million dollar market cap market capitalization capitalization for the company and when you hear and you know you can look on the kind of I think it's the key statistics tab on Yahoo Finance and you'll see market capitalization for company and it's just the number of shares times the number of shares times the price of the shares and this is essentially what the markets value of the equity is the market is saying that this piece right here is worth a hundred and fifty million dollars and since we have since this piece is the same size as the assets we have nothing else on the right hand side the market is essentially saying that the assets right now are worth 150 million dollars and these aren't always going to be equal we'll see in the probably in a few videos when you start raising debt you have to do a little bit an extra calculation to figure out what the asset value or and I'll throw out a new term here the enterprise value of the firm is and the enterprise value is essentially the asset value - - kind of excess cash cash the company really doesn't need to operate and well we'll go into more detail with Apple almost view it as the assets for now so if I'm the CFO of this company let's say we need to raise another I don't know fifteen million dollars I have two options right I could say okay the company is trading at fifteen dollars per share I need to raise fifteen million dollars so why don't I I could issue another million shares and do not it wouldn't be an initial public offering because I've are I'm already public it would be a follow-on offering or sometimes it's called a secondary offering although the word secondary has kind of two connotations but it would be a follow-on offering where I would you know I would issue I'd go to the board we would essentially create another million shares and then sell them into the markets and hopefully people will buy it at $15 a share or probably a little bit less because we're kind of flooding the market with a ton of shares maybe they buy it at $14 per share and we would raise 14 million dollars and that would be a follow on offering and so we can you always use the public markets as a way to raise more money and we didn't have to go to all this I mean for the most part we didn't have to do this huge valuation exercise and negotiations and do another and do all of this you know hire banks and all that although the banks will still collect fees we actually would have to hire banks to do this but anyway so that's one option or the other option is you know we're an established company we're generating cash we could make interest payments if we want to we could go to a bank and actually there's a lot of different ways to do this but we could essentially borrow money and let's say we do that instead of doing this let's say we do both so let's say we did a million dollar follow-on offering that gave us 14 million dollars now let's say we want another two million dollars but this time instead of selling shares so right now how many shares do we have we sold a million we had 10 min we have 11 million shares 11 million shares let's say you know what like our [ __ ] let's say as a CFO I feel like our shares are going to move up a lot more so we don't like selling them at these at this low price instead and then let's say interest rates are really low instead we're going to borrow money and that's essentially raising debt so let's say we borrow another three million dollars because we need it so this is so actually this would be debt three million dollars of debt three million and we would get three million dollars of cash 3 million 3 million of cash and so now our assets or all of this stuff our assets are all of this stuff on the left-hand side and what are our liabilities now now we didn't have liabilities before because everything we had were equities but now we do now we owe somebody 3 million dollars right here and I'll talk more about all the different ways to kind of borrow money but it's essentially it could just literally be a bank loan it they might have just gone to Bank of America and said hey we're a big company and you know we're good for the money why don't you lend us 3 million dollars and you know maybe would be 3 million dollars at you know low interest rate at maybe 6% per year and Bank of America feels good because you have a high we'll talk more about credit ratings and all of that but they say oh you know you have essentially a good create company credit score and so we'll give it to you a low interest rate and so what happens in the future is these assets are going to generate hopefully some cash and before these guys see it before let me do it before these equity holders this is the equity holders right now before the equity holders see anything these guys have to get paid their interest and well I'll show you all of that on a line by line basis in an income statement everything we've done so far has been a balance sheet but something interesting is happening now now all of a sudden your assets which is that side I know I just keep writing over the same drawing your assets are now larger than your equity right and I think now and this is just kind of a review of the balance sheet video you see that the assets are equal to your equity which is this right here your equity plus your liabilities your liabilities now are three million dollars right plus liabilities so if you wanted to know what your assets are worth right so your assets are equal to your equity so what's your market value of your equity the market value of your equity well we figured that out already we have 11 million shares now and let's say I don't let's say the stock plummets to $10 a share for some strange reason or not strange reason so what's the market cap $10 a share 11 million shares we have a hundred and ten million market cap and we're doing a market value and we'll talk more about the different market and book value but this is a market value of your equity and then what is your liabilities well we owe three million dollars right so plus three million so we could say that for the most part the market value of our assets the market thinks that this entire left-hand side that this entire left-hand side is going to be worth the value of our equity the market cap of the company plus the amount of debt which is equal to 113 million dollars right so 100 the value of these assets 130 million dollars and that for the most part is your the enterprise value of the company what is the company the company's assets worth and we'll talk there's a little bit of a tweak we'll do in the future on on enterprise value but that's essentially what the how you kind of kind of can value what the company is worth a lot of people when they do a market capitalization calculation they say oh that's what the company is worth what no that's what the equity is worth market cap is with the equities worth if you want to know what the company is worth you have to take the market cap and then add the debt right another way well I won't go too complicated because I know I just realized I run out of time again see you in the next video