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Chapter 14Fundamentals of
Corporate FinanceFourth Edition
How Corporations Issue Securities
Slides by
Matthew Will
Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
14- 2
Irwin/McGraw Hill
Topics Covered
Venture CapitalThe Initial Public OfferingThe UnderwritersGeneral Cash OffersThe Private Placement
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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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 © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Irwin/McGraw Hill
Venture Capital
062,3$ers UnderwritAll
163America ofBank
224Bank Deutsche
253WarburgUBS
261BrothersLehman
278StanleyMorgan
302SachsGoldman
315MorganJP
347BostonCS/First
433Lynch Merrill
$487BarneySmith Salomon Citigroup/
issues) total of ($bil
2001in rsUnderwrite U.S. Top
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Venture Capital
Second Stage Market Value Balance Sheet ($mil)
Assets Liabilities and Equity
Cash from new equity 1.0 New equity from 2nd stage 1.0
Other assets 2.0 Equity from 1st stage 1.0
Your original equity 1.0
Value 3.0 Value 3.0
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Initial Offering
Initial Public Offering (IPO) - First offering of stock to the general public.
Underwriter - Firm that buys an issue of securities from a company and resells it to the public.
Spread - Difference between public offer price and price paid by underwriter.
Prospectus - Formal summary that provides information on an issue of securities.
Underpricing - Issuing securities at an offering price set below the true value of the security.
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Initial Public Offering
0
2
4
6
8
10
12
14
16
18
Tot
al D
irec
t C
osts
(%
of
issu
e)
Value of Issue ($mil)
2-9.99
10-19.99
20-39.99
40-59.99
60-79.99
80-99.99
100-199.99
200-499.9
500 and up
Expenses
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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The Underwriters
062,3$ers UnderwritAll
163America ofBank
224Bank Deutsche
253WarburgUBS
261BrothersLehman
278StanleyMorgan
302SachsGoldman
315MorganJP
347BostonCS/First
433Lynch Merrill
$487BarneySmith Salomon Citigroup/
issues) total of ($bil
2001in rsUnderwrite U.S. Top
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Irwin/McGraw Hill
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 © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Rights Issue
Rights Issue - Issue of securities offered only to current stockholders.
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Rights Issue
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?
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Rights Issue
Current Market Value = 9 mil x $15 = $135 mil Total Shares = 9 mil + 3 mil = 12 mil Amount of new funds = 3 mil x $12 = $36 mil
New Share Price = (136 + 36) / 12 = $14.25/sh Value of a Right = 15 - 14.25 = $0.75
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?
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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Web Resources
www.ventureeconomics.com
www.vnpartners.com
www.freeedgar.com
www.ipo.com
http://cbs.martketwatch.com
www.tfibcm.com
http://bear.cba.ufl.edu/ritter
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