Hopefully this isn’t too stupid:
I’m modeling a drybulk shipper. The company is burning cash, but has minimal debt, good assets, and will likely generate substantial cash if shipping rates rebound. (Lets just assume that for now)
At some point, I assume this company will try to raise cash. How can I estimate the size of the equity offering? Is there a typical rule?
If its just to fund their cash burn then it’ll be enough to cover their anticipated cash outflow for < year max 2. Not the best market for raising capital via an equity offering.
Just curious, what kind of cost of equity are you anticipating?
The size of the equity offering would be in tandem with the scenario you are trying to build.
Typically, you would create different scenarios and take the probability weighted average of them. Like for example, the cash burn slows down and the company raises a small amount of equity, the cash burn doesn’t slow down and raises a large amount of equity enough to cover the shortage of operating cash for some time in the future untill operating performance picks up, the company raises short term debt to cover the temporary backlog, the company raises long term debt and changes it’s capital structure permenantly.
In each of these scenarios, the cost of debt and equity, which would be based on the market’s perception of the company at that point in time, would determine the interest rate, and the number of shares issued (dilution).
Do a scenario for each possibility, and take weights. Or go for one that you think is most appropriate.