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  • Transcript

    • 1. Chapter 14 - Raising Capital in the Financial Markets  2005, Pearson Prentice Hall
    • 2. Q: What are SECURITIES?
      • A: Financial Assets that Investors purchase hoping to earn a high rate of return.
    • 3. Types of Securities
      • Treasury Bills and Treasury Bonds
      • Municipal Bonds
      • Corporate Bonds
      • Preferred Stocks
      • Common Stocks
      • Which of these are RISKY ?
      • Which promise HIGH RETURNS ?
      • Is there a relationship between RISK and RETURN ?
    • 4. Corporate Financing Sources
      • From 1999 through 2001, capital has been raised through the following sources:
      • Corporate Bonds and Notes 76.9%
      • Equities 23.1%
    • 5. Movement of Savings
      • Direct Transfer of Funds
    • 6. Movement of Savings
      • Direct Transfer of Funds
      saver
    • 7. Movement of Savings
      • Direct Transfer of Funds
      saver firm
    • 8. Movement of Savings
      • Direct Transfer of Funds
      firm cash saver
    • 9. Movement of Savings
      • Direct Transfer of Funds
      firm cash securities saver
    • 10. Movement of Savings
      • Indirect Transfer using Investment Banker
    • 11. Movement of Savings
      • Indirect Transfer using Investment Banker
      investment banker
    • 12. Movement of Savings
      • Indirect Transfer using Investment Banker
      investment banker firm
    • 13. Movement of Savings
      • Indirect Transfer using Investment Banker
      funds investment banker firm
    • 14. Movement of Savings
      • Indirect Transfer using Investment Banker
      funds securities investment banker firm
    • 15. Movement of Savings
      • Indirect Transfer using Investment Banker
      funds securities saver investment banker firm
    • 16. Movement of Savings
      • Indirect Transfer using Investment Banker
      funds funds securities saver investment banker firm
    • 17. Movement of Savings
      • Indirect Transfer using Investment Banker
      securities funds funds securities saver investment banker firm
    • 18. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
    • 19. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
      financial intermediary
    • 20. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
      financial intermediary firm
    • 21. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
      funds financial intermediary firm
    • 22. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
      funds firm securities financial intermediary firm
    • 23. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
      funds firm securities financial intermediary firm saver
    • 24. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
      funds funds firm securities financial intermediary firm saver
    • 25. Movement of Savings
      • Indirect Transfer using a Financial Intermediary
      funds intermediary securities funds firm securities financial intermediary firm saver
    • 26. Financial Market Components
      • Public Offering
    • 27. Financial Market Components
      • Public Offering
        • Firm issues securities, which are made available to both individual and institutional investors.
    • 28. Financial Market Components
      • Public Offering
        • Firm issues securities, which are made available to both individual and institutional investors.
      • Private Placement
    • 29. Financial Market Components
      • Public Offering
        • Firm issues securities, which are made available to both individual and institutional investors.
      • Private Placement
        • Securities are offered and sold to a limited number of investors.
    • 30. Financial Market Components
      • Primary Market
    • 31. Financial Market Components
      • Primary Market
        • Market in which new issues of a security are sold to initial buyers.
    • 32. Financial Market Components
      • Primary Market
        • Market in which new issues of a security are sold to initial buyers.
      • Secondary Market
    • 33. Financial Market Components
      • Primary Market
        • Market in which new issues of a security are sold to initial buyers.
      • Secondary Market
        • Market in which previously issued securities are traded.
    • 34. Financial Market Components
      • Money Market
    • 35. Financial Market Components
      • Money Market
        • Market for short-term debt instruments (maturity periods of one year or less).
    • 36. Financial Market Components
      • Money Market
        • Market for short-term debt instruments (maturity periods of one year or less).
      • Capital Market
    • 37. Financial Market Components
      • Money Market
        • Market for short-term debt instruments (maturity periods of one year or less).
      • Capital Market
        • Market for long-term securities (maturity greater than one year).
    • 38. Financial Market Components
      • Organized Exchanges
    • 39. Financial Market Components
      • Organized Exchanges
        • Buyers and sellers meet in one central location to conduct trades.
    • 40. Financial Market Components
      • Organized Exchanges
        • Buyers and sellers meet in one central location to conduct trades.
      • Over-the-Counter (OTC)
    • 41. Financial Market Components
      • Organized Exchanges
        • Buyers and sellers meet in one central location to conduct trades.
      • Over-the-Counter (OTC)
        • Securities dealers operate at many different locations across the country.
    • 42. Financial Market Components
      • Organized Exchanges
        • Buyers and sellers meet in one central location to conduct trades.
      • Over-the-Counter (OTC)
        • Securities dealers operate at many different locations across the country.
        • Connected by Nasdaq system (National Association of Securities Dealers Automated Quotation system).
    • 43. Investment Banking
      • How do investment bankers help firms issue securities?
      • Underwriting the issue.
      • Distributing the issue.
      • Advising the firm.
    • 44. Distribution Methods
      • Negotiated Purchase
    • 45. Distribution Methods
      • Negotiated Purchase
        • Issuing firm selects an investment banker to underwrite the issue.
    • 46. Distribution Methods
      • Negotiated Purchase
        • Issuing firm selects an investment banker to underwrite the issue.
        • The firm and the investment banker negotiate the terms of the offer.
    • 47. Distribution Methods
      • Negotiated Purchase
        • Issuing firm selects an investment banker to underwrite the issue.
        • The firm and the investment banker negotiate the terms of the offer.
      • Competitive Bid
    • 48. Distribution Methods
      • Negotiated Purchase
        • Issuing firm selects an investment banker to underwrite the issue.
        • The firm and the investment banker negotiate the terms of the offer.
      • Competitive Bid
        • Several investment bankers bid for the right to underwrite the firm’s issue.
    • 49. Distribution Methods
      • Negotiated Purchase
        • Issuing firm selects an investment banker to underwrite the issue.
        • The firm and the investment banker negotiate the terms of the offer.
      • Competitive Bid
        • Several investment bankers bid for the right to underwrite the firm’s issue.
        • The firm selects the banker offering the highest price.
    • 50. Distribution Methods
      • Best Efforts
    • 51. Distribution Methods
      • Best Efforts
        • Issue is not underwritten.
    • 52. Distribution Methods
      • Best Efforts
        • Issue is not underwritten.
        • Investment bank attempts to sell the issue for a commission.
    • 53. Distribution Methods
      • Best Efforts
        • Issue is not underwritten.
        • Investment bank attempts to sell the issue for a commission.
      • Privileged Subscription
    • 54. Distribution Methods
      • Best Efforts
        • Issue is not underwritten.
        • Investment bank attempts to sell the issue for a commission.
      • Privileged Subscription
        • Investment banker helps market the new issue to a select group of investors.
    • 55. Distribution Methods
      • Best Efforts
        • Issue is not underwritten.
        • Investment bank attempts to sell the issue for a commission.
      • Privileged Subscription
        • Investment banker helps market the new issue to a select group of investors.
        • Usually targeted to current stockholders, employees, or customers.
    • 56. Distribution Methods
      • Direct Sale
    • 57. Distribution Methods
      • Direct Sale
        • Issuing firm sells the securities directly to the investing public.
    • 58. Distribution Methods
      • Direct Sale
        • Issuing firm sells the securities directly to the investing public.
        • No investment banker is involved.
    • 59. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • What type of issue is this?
      • It’s a negotiated purchase .
    • 60. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • How many shares will be sold?
    • 61. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • How many shares will be sold?
      • $100,000,000 / $20 = 5 million new shares of common stock.
    • 62. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • What are the flotation costs?
    • 63. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • What are the flotation costs?
      • Underwriting spread : 2% of $100 million = $2 million.
    • 64. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • What are the flotation costs?
      • Underwriting spread : 2% of $100 million = $2 million.
      • Issuing costs : printing and engraving costs; legal, accounting, and trustee fees.
    • 65. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • What are the risks?
    • 66. Stock Issue Example:
      • Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread.
      • What are the risks?
      • The investment bank accepts the risk of being able to sell the new stock issue for $20 per share. If the stock price falls, the investment bank could lose money.
    • 67. Regulations: The Primary Market
      • The Securities Act of 1933
      • Firms register with the Securities Exchange Commission (SEC).
      • SEC has 20 days to review.
    • 68. Regulations: The Primary Market
      • The Securities Act of 1933
      • Firms register with the Securities Exchange Commission (SEC).
      • SEC has 20 days to review.
        • SEC may ask for more information.
    • 69. Regulations: The Primary Market
      • The Securities Act of 1933
      • Firms register with the Securities Exchange Commission (SEC).
      • SEC has 20 days to review.
        • SEC may ask for more information.
        • The firm cannot solicit buyers during the review period but can advertise.
    • 70. Regulations: The Secondary Market
      • The Securities Exchange Act of 1934
      • Established the SEC.
      • Exchanges must register with SEC.
      • Company information must be available to the public.
      • Insider trading is regulated .
    • 71. Regulations: Recent Developments
      • Securities Acts Amendments of 1975
      • Created National Market System.
      • Eliminated fixed brokerage commissions.
      • SEC Rule 415
      • Allows Shelf Registration

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