Chapter 15 Principles PrinciplesofCorporateFinance Tenth Edition How Corporations Issue Securities Slides by Matthew Will Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Topics Covered Venture Capital The Initial Public Offering Other New-Issue Procedures Security Sales by Public Companies –Rights Issue Private Placements and Public Issues
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Venture Capital Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved. Venture Capital Money invested to finance a new firm
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Venture Capital
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Venture Capital
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin U.S. Venture Capital Investments
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin 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.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Motives For An IPO Percent of CFOs who strongly agree with the reason for an IPO
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin The Top Managing Underwriters
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Average Initial IPO Returns
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Initial Offering Average Expenses on 1767 IPOs from
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin IPO Proceeds IPO Proceeds and First Day Returns
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin 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.
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Underwriting Spreads (2006)
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example – BNP Paribas Bank needs to raise €5.50 billion of new equity. The market price is € 77.40/sh. Lafarge decides to raise additional funds via a 1 for 10 rights offer at €65.40 per share. If we assume 100% subscription, what is the value of each right?
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Rights Issue Current Market Value = 10 x €77.40 = € Total Shares = = 11 Amount of funds = = € New Share Price = (839.40) / 11 = €76.31 Value of a Right = – = €10.91 Example - BNP Paribas Bank needs to raise €5.50 billion of new equity. The market price is €77.40/sh. Lafarge decides to raise additional funds via a 1 for 10 rights offer at €65.40 per share. If we assume 100% subscription, what is the value of each right?
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin Rights Issue Slightly More Difficult 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?
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved McGraw Hill/Irwin 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?
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