初次上市 Issuing Securities to the Public

Alternative issue methods General cash offer: sell debt or equity directly to the public. Rights offer: sell equity to the firms ’ existing stockholders. Initial public offering IPO (unseasoned new issue): A company ’ s first equity issue made available to the public. Seasoned new issue: A new equity issue of securities by a company that has previously issued securities to the public.

Investment Banking Investment banking Plays a major role in helping firms raise both debts and equity financing. Investment bankers are financial intermediates who purchase securities from corporate and government for resale to the public.

Functions of an investment banker Underwriting Advising choice of security with probable effects alternative financing arrangements

Organization of investment banking activities Selecting an investment banker Competitive bidding Negotiated offering Conferring with the issuer to determine financing need and financial condition of the firm, also in what form the financing will be raised. Syndicate: A group of underwriters formed to share the risk and to help sell an issue. Forming a selling group, which is a group of brokerage firms, each of which sells a portion of the new security issue on a commission basis.

Underwriter a) Formulating the method used to issue the securities. b) Pricing the new securities. c) Selling the new securities. Oversubscribed Undersubscribed d) Stabilizing the price

Types of underwriting Firm commitment underwriting: underwriter buys the retire issue, assuming full financial responsibility for any unsold shares. Underwriter’s fee is the spread. All the risk associated with selling the issue is borne by the underwriter. Best efforts underwriting: Underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility. Underwriter acts as an agent for the issuer and receives a commission.

Spread Compensation to the underwriter, determined by the difference between the underwriter’s buying price and offering price.

The offering price and underpricing If the issue is priced too high, it may be unsuccessful and have to be withdrawn. If the issue is priced too low, the issuer ’ s existing shareholders will experience an opportunity loss. Underpricing is fairly common. Empirical works show that prices of new issued stocks increased by a dramatic amount right after the offering. Why does underpricing exist? To attract investors.

Costs of issuing securities Spread: Other direct expenses: Indirect expenses. Abnormal return: Underpricing: Green Shoe option: The Green Shoe option gives the underwriters the right to buy additional shares at the offer price to cover overallotments. The total expenses of going public averaged 21.22% for firm commitment and 31.87% for best efforts.

The effect of announcing new equity sales on firm value: Stock prices tend to decline following the announcement of a new equity issue, but they tend to not change much following a debt announcement. 1.Firms may attempt issue new shares of stock when they know the market value exceeds the correct value. Potential investors will learn that a firm ’ s stock price is too high once they hear the firm is going to issue new equity. 2.If the new project is a favorable one, why should the firm let new shareholders in on them? It could just issue debt and let the existing shareholders have all the gain. 3.High issuing costs.

Advantage of going public 1.Facilitate stockholder diversification 2.Increase liquidity 3.Make it easier to raise new corporate cash. 4.Establishes a value for the firm.

Dilution Issuing new equity causes a loss in existing shareholders ’ value, in terms of either ownership, book value, or market value. a) Dilution of ownership: before (5000/50000)=0.1, after (5000/100000)=0.05 b) Dilution of book value: before: EPS=(NI/shares)=1 million/1 million=1, after EPS=(1.2 million/1.4 million)=0.857 Dilution of market value: example: cost of project: 2 million, total market value of the firm increases from 5 million to 6 million. The NPV of the project is - 1 million. The loss per share is 1/1.4=0.71.