1. Chapter 15 How Corporations Issue Securities
Principles of Corporate Finance
Sixth Edition
Richard A. Brealey
Stewart C. Myers
Chapter 15
How Corporations Issue Securities
Lu Yurong
McGraw Hill/Irwin

2. Topics Covered Venture Capital The Initial Public Offering
Other New-Issue Procedures
Private Placements and Public Issues
Rights Issue

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

4. Money invested to finance a new firm
Venture Capital
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. 4

5. Venture Capital 5

6. Venture Capital 6

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. 7

8. The Underwriters 9

9. The Underwriters 9

10. Initial Offering
Average Expenses on 1767 IPOs from 8

11. 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. 11

12. Underwriting Spreads

13. Rights Issue
Rights Issue - Issue of securities offered only to current stockholders.
Example - Lafarge Corp needs to raise E1.1billionof new equity. The market price is E99.65/sh. Lafarge decides to raise additional funds via a 1 for 8 rights offer at E80 per share. If we assume 100% subscription, what is the value of each right? 13

14. Rights Issue Current Market Value = 8 x E99.65 = E797.20
Example - Lafarge Corp needs to raise E1.1billionof new equity. The market price is E99.65/sh. Lafarge decides to raise additional funds via a 1 for 8 rights offer at E80 per share. If we assume 100% subscription, what is the value of each right?
Current Market Value = 8 x E99.65 = E797.20
Total Shares = = 9
Amount of funds = =
New Share Price = (877.20) / 9 = E97.47
Value of a Right = = 17.47 14

15. Preparation for Next Class
Please read:
BM Chapter 16 , P