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Understanding Corporate Finance: Stocks, Bonds, and IPOs

This informative guide explores key aspects of corporate finance, such as stocks, preferred stock, convertible securities, debt options, start-up financing like angel investors and venture capital, and the process of IPOs. Delve into topics like authorized share capital, treasury stocks, bond ratings, and more. Learn about the different stages of start-ups, the role of venture capital in funding new firms, and the benefits of venture capital incubators. Discover the details of IPOs, underwriters, prospectuses, and the concept of underpricing. Gain insights into seasoned offerings, private placements, and rights issues, including a detailed example calculation. Expand your knowledge of financial instruments and strategies with this comprehensive resource.

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Understanding Corporate Finance: Stocks, Bonds, and IPOs

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  1. Common Stocks • Authorized Share Capital: maximum number of shares that can be issued. • Issued Shares: Total shares that have been issued. • Treasury stocks: shares that have been purchased by the company and held in its treasury. • Outstanding shares: shares that are held by investors.

  2. Preferred Stock. • Preferred Stock: takes priority over common stock in dividends, but has no voting rights. • Floating-rate preferred: pays dividends tied to short-term interest rates.

  3. Corporate Debt • Bonds rated based on default risks. • “Bond Ratings” are issued on debt instruments to help investors assess the default risk of a firm.

  4. Convertible Securities • Warrant- Right to buy shares a fixed price at a fixed date. (similar to call options). • Question: which is more valuable:warrant or call option? • Convertible Bond - bond that the holder may exchange for another security such as common stock. This is both a bond and a warrant.

  5. Choices of Finance. • Internal or External. • External: Debt or Equity. • Statistic of Debt/Equity ratio. • Question: Is a high ratio bad?

  6. Start-up • See book by Jerry Kaplan. • Stages • Angel investors. • Venture Capital • IPO

  7. Angel Investors. • Rich friend or relative. • Some people will help for finder’s fee. • Should be compensated for the risk. • Need to value the firm. For instance, could sell of 10% for 100k. • Usually set up as a partnership.

  8. Venture Capital • Money invested to finance a new firm • 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 • Usually demand a few board seats as well.

  9. Venture Capital

  10. Venture Capital

  11. Incubators • Idea started by Bill Gross: idealabs. • Have all startups in same buildings. • Advantages: • Easy monitoring. • Shared fixed-costs. (connection/accounting/law) • Faster preparation. • Now individual firms provide separate services. Not so diversified.

  12. IPO 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.

  13. IPO • Time to IPO was decreasing. Now… Not so many. • IPOs are underpriced. Possible explanation is the winners curse. • While new issues have high return, you get a smaller fraction of them if the return is high. • On average you get normal returns.

  14. Initial Offering Average Expenses on 1767 IPOs from 1990-1994

  15. The Underwriters

  16. 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.

  17. 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?

  18. Rights Issue 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? • 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 = (135 + 36) / 12 = $14.25/sh • Value of a Right = 15 - 14.25 = $0.75

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