1. Raising Capital
Chapter 15

2. Introduction Definition of capital: borrowed sums or equity with
which the firm's assets are acquired and its operations are funded.
When does a firm need capital?
New or start up companies
Finance expansion
Rapid growth
Opening new market lines
Mergers and acquisitions

3. Introduction How can a firm raise money??
Equity: the value of an ownership interest in property or interest in a corporation in the form of common stock or preferred stocks
2. Debt: An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and interest
requirements.

4. Capital for new firms
Can new start-up firms rely on bank loans for capital?
Venture capital: general term for financing startup, early stage, and "turn around" type businesses
Sources of VC
New business will be risky
What does Venture capitalist do to avoid this risk?
Why might Venture capitalist be willing to take this risk?

5. Capital for existing firms
How can a company finance its investments?
Selling securities to the public
Public
Private
General cash offer
Rights offer
Initial public offering (IPO)
Seasoned equity offering (SEO)
Refer to table 15.1

6. Underwriters
Definition: investment firms that act as intermediaries between a company selling securities and the investing capital
Services provided by underwriters
Formulate method used to issue securities
Price the securities
Sell the securities
Price stabilization by lead underwriter

7. Underwriters
Syndicate – group of investment bankers that market the securities and share the risk associated with selling the issue
Spread – difference between what the syndicate pays the company and what the security sells for initially in the market

8. Types of underwriter Firm Commitment Underwriting
Issuer sells entire issue to underwriting syndicate
The syndicate then resells the issue to the public
The underwriter makes money on the spread between the price paid to the issuer and the price received from investors when the stock is sold
The syndicate bears the risk of not being able to sell the entire issue for more than the cost

9. Types of underwriter Best efforts underwriting
Underwriter must make their “best effort” to sell the securities at an agreed-upon offering price
The company bears the risk of the issue not being sold
Not as common as it used to be

10. Types of underwriter Dutch auction underwriting:
Underwriter accepts a series of bids that include number of shares and price per share
Google was the first large Dutch auction IPO

11. IPOs & under pricing Initial Public Offering – IPO
May be difficult to price an IPO because there isn’t a current market price available
Under pricing causes the issuer to “leave money on the table”

12. Why does under pricing exist?
To attract investors for young firms
To act as an Insurance for the investment bank
A way that a bank can reward investors for reveling what they think the stock worth and the numbers of shares they would like to buy

13. The costs of issuing securities
Gross spread
Other direct expenses
Indirect expenses
Abnormal returns
Under pricing

14. Rights
Definition: an issue of common stock offered to existing stockholders
“Rights” are given to the shareholders
Specify number of shares that can be purchased
Specify purchase price
Specify time frame
Why do companies offer Rights? (Advantages)
Rights may be traded OTC or on an exchange

15. Rights The mechanics of a rights offering
Number of rights needed to purchase a share

16. The value of a right Example:
National Power current share price is 20$, there is 1,000,000 shares outstanding. Suppose they want to raise 5,000,000$ in new equity using a right offering (1 right for each 1 share) with a subscription price of 10$. Calculate the following:
Number of new shares to be issued
Number of rights needed to buy a new share
The value of the right
Show in calculations the effects of the rights offering on shareholders

17. Effects on share holders
The case of buying a new share using rights
The case of selling rights

18. The value of a right Results
The price specified in a rights offering is generally less than the current market price
The share price will adjust based on the number of new shares issued
The value of the right is the difference between the old share price and the “new” share price

19. Rights Offering Example
Suppose a company wants to raise $10 million. The subscription price is $20 and the current stock price is $25. The firm currently has 5,000,000 shares outstanding.
How many shares have to be issued?
How many rights will it take to purchase one share?
What is the value of a right?

20. Dilution
Dilution is a loss in value for existing shareholders that occurs through the issuance of additional stocks
Dilution kinds:
Percentage ownership – shares sold to the general public without a rights offering
Market value – firm accepts negative NPV projects
Book value and EPS – occurs when market-to-book value is less than one

21. Issuing Long-term Debt
Types of Long-term Debt
Public issue of long-term debt are usually in the form of bonds
Private issues
Long-Term loans usually bank loans or could be from private firm which has a history with the company
Easier to renegotiate than public issues
If bonds were issued to private investors costs would be lower than public issues
MORE THAN 50% OF ALL DEBT ARE ISSUED PRIVATELY
Interest rates are higher in private issues when compared to public issues

22. Ex 1 Page 505
Big Time, Inc., is proposing a rights offering. Presently there are 500,000 shares outstanding at 81$ each. There will be 60,000 new shares offered at 70$ each.
What is the new market value of the firm
How many rights are associated with one of the new shares?
What is the value of a right?
Why might a company have a rights offering rather than a general cash offer?