chapter 15 principles of corporate finance tenth edition how corporations issue securities slides by...
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Chapter 15Principles of
Corporate FinanceTenth Edition
How Corporations Issue Securities
Slides by
Matthew Will
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
15-2
Topics Covered
Venture CapitalThe Initial Public OfferingAlternative Issue Procedures for IPOsSecurity Sales by Public Companies
– Rights Issue
Private Placements and Public Issues
15-3
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
15-4
Venture Capital
2.0Value2.0Value
1.0equity originalYour 1.0assetsOther
1.0capital venturefromequity New 1.0equitynew from Cash
Equityand sLiabilitieAssets
($mil)Sheet BalanceValue Market StageFirst
15-5
Venture Capital
14.0Value14.0Value
5.0equity originalYour 9.0assetsOther
5.0stage1st fromEquity 1.0assets Fixed
4.0stage 2nd fromequity New4.0equity new fromCash
Equity and sLiabilitieAssets
($mil)Sheet Balance ValueMarket Stage Second
15-6
U.S. Venture Capital Investments
7.910.8
14.620.7
53.5
104.4
40.5
21.7 19.6 21.8 22.426.7
30.9 28.3
0
20
40
60
80
100
120$
Mil
lion
s
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
15-7
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.
15-8
Motives For An IPO
Percent of CFOs who strongly agree with the reason for an IPO
15-9
The Top Managing Underwriters
UnderwriterValue of Issues
($billion) Number of issues
J.P.Morgan $455 1210Barclays Capital 401 1041Citi 309 986Deutsche Bank 309 807Merrill Lynch 241 852Goldman Sachs 228 584Morgan Stanley 220 661RBS 214 712Credit Suisse 205 682UBS 204 867
January – December 2008
15-10
Average Initial IPO Returns
0 20 40 60 80 100
return (percent)
RussiaArgentinaAustriaCanadaDenmarkChileNorwayNetherlandsFranceTurkeySpainPortugalNigeriaBelgiumIsraelHong KongNexicoUKUSAFinlandItalyAustraliaNew ZealandIndonesiaPhilippinesIranPolandCyprusIrelandGreeceGermanySwedenSingaporeSwitzerlandS. AfricaBulgariaThailandTaiwanJapanBrazilSri LankaKoreaMalaysiaIndiaChina
165 %
15-11
Initial Offering
Average Expenses on 1767 IPOs from 1990-1994Value of Issues
($mil)
Direct
Costs (%)
Avg First Day
Return (%)
Total
Costs (%)
2 - 9.99 16.96 16.36
10 - 19.99 11.63 9.65
20 - 39.99 9.7 12.48
40 - 59.99 8.72 13.65
60 - 79.99 8.2 11.31
80 - 99.99 7.91 8.91
100 - 199.99 7.06 7.16
200 - 499.99 6.53 5.70
500 and up 5.72 7.53
All Issues 11.00 12.05
25 16
18 15
18 18
17 95
16 35
14 14
12 78
11 10
10 36
18 69
.
.
.
.
.
.
.
.
.
.
15-12
IPO Proceeds
IPO Proceeds and First Day Returns
15-13
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.
15-14
Underwriting Spreads (2008)
15-15
Total Direct Costs of Raising Capital
15-16
Rights Issue
Rights Issue - Issue of securities offered only to current stockholders.
Example – Xstrata needs to raise £ billion of new equity. The market price is £6.23/sh. Xstrata decides to raise additional funds via a 2 for 1 rights offer at £per share. If we assume 100% subscription, what is the value of each right?
15-17
Rights Issue
Current Market Value = 1 x £6.23 = £6.23 Total Shares = 2+ 1 = 3 Amount of new funds = 2 x £2.10 = £4.20 New Share Price = (6.23+4.20) / 3 = £3.48 Value of a Right = 3.48 – 2.10 = £1.38
Example - Xstrata needs to raise £ billion of new equity. The market price is £6.23/sh. Xstrata decides to raise additional funds via a 2 for 1 rights offer at £per share. If we assume 100% subscription, what is the value of each right?
15-18
Rights Issue
Slightly More Difficult Example
Lafarge Corp needs to raise €1.28billion of new equity. The market price is €60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right?
15-19
Rights Issue
Current Market Value = 17 x €60 = €1,020 Total Shares = 17 + 4 = 21 Amount of funds = 1,020 + (4x41) = €1,184 New Share Price = (1,184) / 21 = €56.38 Value of a Right = 56.38 – 41 = €15.38
Example - Lafarge Corp needs to raise €1.28billion of new equity. The market price is €60/sh. Lafarge decides to raise additional funds via a 4 for 17 rights offer at €41 per share. If we assume 100% subscription, what is the value of each right?
15-20
Web Resources
Click to access web sitesClick to access web sites
Internet connection requiredInternet connection required
www.nvca.org
www.evca.com
www.asianfn.com
www.pwcmoneytree.com
www.v1.com
www.vnpartners.com/primer.htm
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