1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012...

Chapter 18Chapter 18 Issuing Capital and the Investment Banking Process

Introduction• Firms finance assets with capital– Retained earnings– Debt– Equity

Sources of Capital for New and Small Firms

• Debt– Borrowing from friends and relatives– Bank loans– Venture capitalists

• Equity– Venture capitalists

Debt Financing

• Bank Loans– New and small firms rely on banks– Availability of small-business loans was heavily

affected by the 2008 financial crisis

Bank Loans

• Small Business Loans

– Risky for commercial banks

– Banks use small-business scoring models

Bank Loans

• Mid-market firms

– Sales between $5 million and $100 million per year

– Rely on banks for funding

Credit Process Flow Chart

Loan Commitments

• Loan commitment agreements specify

– maximum loan amount

– interest rate terms

– length of loan

Fixed versus Floating Rate Loans– Interest rates for variable-rate loans change over

the life of the loan

– Floating rate loans are set at a fixed spread over a prevailing benchmark rate

Small Business Administration• Created to help small businesses

• Basic loan guarantee program– for qualified new firms that cannot get reasonable long-term financing from other financial institutions

Equity Financing and Expertise• New and high-risk firms use venture capital (VC)

for financing– Professionally managed– VC firm takes an equity stake in the firm financed– VC firms are actively involved in the business

Venture Capital Firms

Institutional venture capital firm types:

– Venture capital limited partnerships

– Financial venture capital firms

– Corporate venture capital firms

– Small Business Investment Companies

Angel Venture Capitalists• Majority of VC equity investments from

wealthy individuals (angels), not institutions

• Angel VCs want– High return– Easy exit

The Choice to Go Public• Choice made when firm’s capital needs

exceed its ability to raise capital

• Initial public offering (IPO) of firm’s stock– Equity is publicly traded in stock markets for the

first time

The Choice to Go Public

• Benefits of being a public firm– Access to a larger pool of equity capital– Stock market provides a market value for the

firm’s stock

The Choice to Go Public

Benefits of being a public firm

– Firm’s managers can be rewarded with firm’s stock

– Original owners can diversify their holdings

The Choice to Go PublicDisadvantages of being a public firm– Costs of an IPO– Public disclosure of information required — may

be valuable to competitors– Shareholders demand a great deal of information

Public Firms’ Capital Sources

• Debt Financing– Commercial Paper• Unsecured, short-term promissory note• Used to raise short-term cash, often working capital

Commercial Paper• Trading process– Can be sold directly to investors or through broker

dealer – Firm’s credit rating critical because commercial

paper is unsecured debt

Long-Term DebtCorporate bonds

• Minimum denomination on publicly traded bonds is $1,000

• Most coupon-paying bonds pay interest semiannually

Trading Process for Corporate Bonds

• Initial sale made by public offering or private placement to institutional investors– Large firms use large investment banks– Smaller firms use small regional investment banks

• Investment banks– Firm commitment underwriting

• Entire issue bought by bank at fixed price (discount from par) and resold at higher price

• Issuing firm has price guarantee – investment bank has risk

Firm Commitment Underwriting Corporate Bond Issue

• Competitive sale — highest bid from group of underwriters wins

• Negotiated sale — issuing firm negotiates with single investment bank

Best efforts underwriting – Underwriter does not buy issue but instead acts as

a placing or distribution agent for a fee– Price risk remains with issuing firm

Equity Financing

• Majority of both the board of directors and the firm’s existing stockholders must approve any new stock issue

The Trading Process for Corporate Equity

• Primary market– IPO– Seasoned offering is when the firm already has

publicly-traded shares

Primary Market Stock Transaction

The Securities and Exchange Commission (SEC) must approve any new issues to the public

• Stock issues – Firm commitment underwriting– Best-efforts basis

• Registration statement– Full disclosure of firm information, risks,

management background and securities to be issued

• Prospectus– Red herring prospectus is preliminary version of

the public offering prospectus– Official prospectus describes issue• Shelf registration allows multiple stock issues for two

years under one registration

1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012...

Documents

1 McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Seven McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc.,

McGraw-Hill The McGraw-Hill Companies, Inc., 2004

© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 1 The Sociological Perspective McGraw-Hill © 2005 The McGraw-Hill Companies, Inc

Chapter 10 · Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001 $ Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc.,

McGraw-Hill 6-1. 6 McGraw-Hill Communications, Networks, & Safeguards

McGraw-Hill 10-1. 10 McGraw-Hill Systems Analysis & Programming

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2004

McGraw-Hill © 2000 The McGraw-Hill Companies 1 S M McGraw-Hill © 2000 The McGraw-Hill Companies

Correlated to Macmillan/McGraw-Hill€¦ · Mondo Bookshop - Grade K correlated to Macmillan/McGraw-Hill Treasures. Mondo Bookshop Macmillan/McGraw-Hill Treasures. Mondo Macmillan/McGraw-Hill

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin

© McGraw-Hill Companies, Inc., McGraw-Hill/Irwin

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies

19-0 McGraw-Hill Ryerson © 2003 McGraw–Hill Ryerson Limited Corporate Finance Ross Westerfield Jaffe Sixth Edition 19 Chapter Nineteen Issuing Securities

The Global Capital Market - McGraw Hill Educationhighered.mheducation.com/.../777633/Global_Capital_Market_new.pdf · ventional stocks and bonds.) ... and to raise funds by issuing

Chapter Ten LocalMarketing in Emerging Markets Irwin/McGraw-Hill ©The McGraw-Hill Companies,, Inc., 2000 Irwin/McGraw-Hill ©The McGraw-Hill Companies,,

Irwin/McGraw Hill The McGraw-Hill Companies, Inc., 2000 · Slides by Matthew Will Chapter 2 Irwin/McGraw Hill ©The McGraw-Hill Companies, Inc., 2000. Irwin/McGraw Hill ... " Tools

McGraw-Hill/Irwin McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin ©2005 The McGraw-Hill Companies, All rights reserved ©2005 The McGraw-Hill Companies, All rights reserved McGraw-Hill/Irwin

McGraw-Hill©The McGraw-Hill Companies, Inc., 2000 SUBNETTING