Topic Flow Chart Goal of Finance = Maximize Value of Firm HOW? Get the most cash Steps 1. Methods to evaluate projects cash flow (NPV, IRR, etc) 2. Develop risk adjusted discount rates for use in NPV 3. Apply NPV, IRR, Decision Trees, PVI, etc to capital budgeting decisions 4. Changes in capital structure influence discount rates 5. Financial Distress can result form changes in capital structure

Efficient Capital Markets Switches gears Past lectures decided how to spend money (invest) Today’s lecture deal with raising money (financing decisions) Fisher Separation Theorem

Market Efficiency Theory sez Capital markets reflect all relevant information. You can not consistently earn excess profits. Efficient Capital Markets

D S R Qty Cost of Capital = Price of Money

Type of Market Efficiency Weak Form Efficiency Semistrong Form Efficiency Strong Form Efficiency

Efficient Market Theory Announcement Date

Efficient Market Theory Average Annual Return on 1493 Mutual Funds and the Market Index

Efficient Market Theory IPO Non-Excess Returns Year After Offering

Efficient Market Theory Strong-Form Efficiency Test Historical performance

Random Walk Theory

Efficient Market Theory Fundamental Analysts –Research the value of stocks using NPV and other measurements of cash flow

Efficient Market Theory Technical Analysts wiggle watchers –Forecast stock prices based on the watching the fluctuations in historical prices (thus “wiggle watchers”)

Market Efficiency Theory Conflicts in Theory Stock market crash of 1987 Daily fluctuations Culprits? Arbitrage Computers Institutions

Efficient Market Theory 1987 Stock Market Crash

Efficient Market Theory 1987 Stock Market Crash

Efficient Market Theory 2000 Dot.Com Boom

Lessons of Market Efficiency  Markets have no memory  Trust market prices  Read the entrails  There are no financial illusions  The do it yourself alternative  Seen one stock, seen them all

Corporate Financing Types of Financing 1 - Equity 2 - Debt 3 - Hybrids

Corporate Financing READ TEXT FOR TERMINOLOGY

Initial Offering Initial Public Offering (IPO) - First offering of stock to the general public. Underwriter - Firm that buys an issue of securities from a company and resells it to the public. Spread - Difference between public offer price and price paid by underwriter. Prospectus - Formal summary that provides information on an issue of securities. Underpricing - Issuing securities at an offering price set below the true value of the security.

General Cash Offers Seasoned Offering - Sale of securities by a firm that is already publicly traded. General Cash Offer - Sale of securities open to all investors by an already public company. Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security. Private Placement - Sale of securities to a limited number of investors without a public offering.

Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example - Lafarge Corp needs to raise € 1.28billion of new equity. The market price is € 60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right?

Rights Issue  Current Market Value = 17 x €60 = €1,020  Total Shares = = 21  Amount of funds = 1,020 + (4x41) = €1,184  New Share Price = (1,184) / 21 = €56.38  Value of a Right = – 41 = €15.38 Example - Lafarge Corp needs to raise €1.28billion of new equity. The market price is €60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right?

Rights Issue - example YRU Corp currently has 9 million shares outstanding. The market price is $15/sh. YRU decides to raise additional funds via a 1 for 3 rights offer at $12 per share. If we assume 100% subscription, what is the value of each right? «Current Market Value = 9 mil x $15 = $135 mil «Total Shares = 9 mil + 3 mil = 12 mil «Amount of new funds = 3 mil x $12 = $36 mil «New Share Price = ( ) / 12 = $14.25/sh «Value of a Right = = $0.75