1. How Corporations Issue Securities
Principles of
Corporate Finance
Tenth Edition
Chapter 15
How Corporations Issue Securities
Slides by
Matthew Will
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 1 1 1 1 1 2

2. Topics Covered Venture Capital The Initial Public Offering
Alternative Issue Procedures for IPOs
Security Sales by Public Companies
Rights Issue
Private Placements and Public Issues 2 2 2 2 3 2

3. 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

4. Venture Capital 5

5. Venture Capital 6

6. U.S. Venture Capital Investments

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. Percent of CFOs who strongly agree with the reason for an IPO
Motives For An IPO
Percent of CFOs who strongly agree with the reason for an IPO

9. The Top Managing Underwriters
January – December 2008

10. Average Initial IPO Returns9

11. Initial Offering
Average Expenses on 1767 IPOs from 8

12. IPO Proceeds
IPO Proceeds and First Day Returns

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. 11

14. Underwriting Spreads (2008)

15. Total Direct Costs of Raising Capital

16. Rights Issue
Rights Issue - Issue of securities offered only to current stockholders. Example – Xstrata needs to raise £4.1 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 £2.10per share. If we assume 100% subscription, what is the value of each right? 13

17. Rights Issue Current Market Value = 1 x £6.23 = £6.23
Example - Xstrata needs to raise £4.1 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 £2.10per share. If we assume 100% subscription, what is the value of each right?
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 = ( ) / 3 = £3.48
Value of a Right = 3.48 – 2.10 = £1.38 14

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? 13

19. Rights Issue Current Market Value = 17 x €60 = €1,020
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?
Current Market Value = 17 x €60 = €1,020
Total Shares = = 21
Amount of funds = 1,020 + (4x41) = €1,184
New Share Price = (1,184) / 21 = €56.38
Value of a Right = – 41 = €15.38 14

20. Web Resources Click to access web sites Internet connection required