Chapter 14.ppt


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  • Chapter 14.ppt

    1. 1. Chapter 14 Fundamentals of Corporate Finance Fourth Edition How Corporations Issue Securities PRESENTED BY D-R EVGENI ZOGRAFSKI Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
    2. 2. Topics Covered <ul><li>Venture Capital </li></ul><ul><li>The Initial Public Offering </li></ul><ul><li>The Underwriters </li></ul><ul><li>General Cash Offers </li></ul><ul><li>The Private Placement </li></ul>
    3. 3. Venture Capital <ul><li>Infant companies raise venture capital to set up a new firm. Venture capital firms (VC) have the same interest as managers-to increase the value of firm. Success of a new firm is highly dependent on the effort of the managers, so restrictions are placed on management by the VC and funds are usually dispersed in stages, after a certain level of success is achieved. VC are usually represented in Board. They help company to bring their products to the market. Usually VC leaves the project in 3-5 years, with average rate of return of 33%. </li></ul>Venture Capital Money invested to finance a new firm
    4. 4. Venture Capital <ul><li>First – stage Market value </li></ul><ul><li>Balance sheet $.M. </li></ul><ul><li>Assets Liabilities and Equity </li></ul><ul><li>Cash $0.5 New equity (VC) $0.5 </li></ul><ul><li>Other assets $0.5 Original equity $0.5 </li></ul><ul><li>Value $1.0 $1.0 </li></ul>
    5. 5. Venture Capital
    6. 6. Initial Offering <ul><li>A Firm is said to go public when it sells its first issue in a general offering to investors or IPO or primary offering </li></ul><ul><li>Initial Public Offering (IPO) - First offering of stock to the general public. </li></ul><ul><li>Underwriter – Firm (investment bank) that buys an issue of securities from a company and resells it to the public. </li></ul><ul><li>They play triple role: 1)procedural and financial advice; </li></ul><ul><li>2) buying stocks; 3)reselling stocks to the public </li></ul><ul><li>For big issues syndicate of underwriters needed (Microsoft IPO needs 114 underwriters) </li></ul><ul><li>Spread – Underwriter receive payments in the form of spread = Difference between public offer price and price paid by underwriter. </li></ul>
    7. 7. Initial Offering <ul><li>Prospectus - Formal summary (a document) that provides information on an issue of securities. It is approved by SEC and SE and distributed to the public </li></ul><ul><li>How to set the issuing price? Using Discounted Cash Flow (DCF) methods- the true value per share </li></ul><ul><li>Road-shows- marketing the new issue of shares to talk with potential investors </li></ul><ul><li>Under-pricing – Underwriters usually try to under-price the new issue, issuing securities at an offering price set below the true value of the security. It represents a cost to the existing shareholders since the new investors are allowed to buy shares in the firm at a favorable price </li></ul>
    8. 8. Initial Public Offering Expenses
    9. 9. The Underwriters
    10. 10. General Cash Offers <ul><li>Seasoned Offering - Sale of securities by a firm that is already publicly traded (new issue of securities). </li></ul><ul><li>General Cash Offer - Sale of securities open to all investors by an already public company (public offering). </li></ul><ul><li>Private Placement - Sale of securities to a limited number of investors without a public offering. Less costly compared to other forms of new issues of securities and well suited for small and risky firms </li></ul>
    11. 11. Rights Issue <ul><li>Current Market Value = 9 mil x $15 = $135 mil </li></ul><ul><li>Total Shares = 9 mil + 3 mil = 12 mil </li></ul><ul><li>Amount of new funds = 3 mil x $12 = $36 mil </li></ul><ul><li>New Share Price = (136 + 36) / 12 = $14.25/sh </li></ul><ul><li>Value of a Right = 15 - 14.25 = $0.75 </li></ul>Rights Issue - Issue of securities offered only to current stockholders. 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?
    12. 12. Market reaction <ul><li>New issue of common stocks result in decline of stock price </li></ul><ul><li>Additional supply depressed the stock price </li></ul><ul><li>But it depends on valuation </li></ul><ul><ul><li>if the issue price is under valued, is not the case, </li></ul></ul><ul><ul><li>if the issue price is over valued stock price will decrease </li></ul></ul>
    13. 13. Web Resources Web Links