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Slides by Matthew Will

Principles of Corporate Finance Brealey and Myers Sixth Edition. How Corporations Issue Securities. Slides by Matthew Will. Chapter 15. Irwin/McGraw Hill. The McGraw-Hill Companies, Inc., 2000. Topics Covered. Venture Capital The Initial Public Offering The Underwriters

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Slides by Matthew Will

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  1. Principles of Corporate Finance Brealey and Myers Sixth Edition • How Corporations Issue Securities Slides by Matthew Will Chapter 15 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000

  2. Topics Covered • Venture Capital • The Initial Public Offering • The Underwriters • General Cash Offers • Rights Issue

  3. Venture Capital Venture Capital Money invested to finance a new firm

  4. 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

  5. Venture Capital

  6. Venture Capital

  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.

  8. The Underwriters

  9. The Underwriters

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

  11. Tombstone

  12. 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.

  13. Underwriting Spreads

  14. Rights Issue Rights Issue - Issue of securities offered only to current stockholders.

  15. Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example - AEP Corp currently has 11 million shares outstanding. The market price is $24/sh. AEP decides to raise additional funds via a 1 for 11 rights offer at $22 per share. If we assume 100% subscription, what is the value of each right?

  16. Rights Issue Example - AEP Corp currently has 11 million shares outstanding. The market price is $24/sh. AEP decides to raise additional funds via a 1 for 11 rights offer at $22 per share. If we assume 100% subscription, what is the value of each right? • Current Market Value = 2mil x $24 = $264 mil • Total Shares = 11 mil + 1 mil = 12 mil • Amount of new funds = 1 mil x $22 = $22 mil • New Share Price = (264 + 22) / 12 = $23.83/sh • Value of a Right = 24 - 23.83 = $0.17

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