8/20/2019 Chapter 15 Issue Of Securities

1/14

How Corporations Issue

Securities

 Principles of

Corporate

 Finance

Seventh Edition

Richard A. Brealey

Stewart C. Myers

Slides by

Matthew Will

Chapter 15

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

8/20/2019 Chapter 15 Issue Of Securities

2/14

15- 2

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

Topics Covered

Venture Capital

The Initial Public Offering

Other New-Issue Procedures

Private Placeents and Public Issues

!ights Issue

8/20/2019 Chapter 15 Issue Of Securities

3/14

15- 3

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

Venture Capital

Venture Capital

"one# invested to finance a new fir

8/20/2019 Chapter 15 Issue Of Securities

4/14

15- 4

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

Venture Capital

Since success of a new fir is highl# dependent on

the effort of the anagers$ restrictions are placed on

anageent b# the venture capital copan# andfunds are usuall# dispersed in stages$ after a certain

level of success is achieved%

Venture Capital

"one# invested to finance a new fir

8/20/2019 Chapter 15 Issue Of Securities

5/14

15- 5

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

Venture Capital

&%'Value&%'Value(%'e)uit#original*our(%'assetsOther

(%'capitalventurefroe)uit# New(%'e)uit#newfroCash

 E)uit#ands+iabilitie,ssets

.il/Sheet0alanceValue"ar1etStage2irst

8/20/2019 Chapter 15 Issue Of Securities

6/14

15- 6

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

Venture Capital

(3%'Value(3%'Value

4%'e)uit#original*our5%'assetsOther

4%'stage(stfroE)uit#(%'assets2i6ed

3%'stage&ndfroe)uit# New3%'e)uit#newfroCash

 E)uit#ands+iabilitie,ssets

-.il/Sheet0alanceValue"ar1etStageSecond

8/20/2019 Chapter 15 Issue Of Securities

7/14

15- 7

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

nitial !""erin#

nitial $ublic !""erin# %$!& - 2irst offering of stoc1to the general public%

'nderwriter - 2ir that bu#s an issue of securities

fro a copan# and resells it to the public%Spread - 7ifference between public offer price and

 price paid b# underwriter%

$rospectus - 2oral suar# that provides

inforation on an issue of securities%

'nderpricin# - Issuing securities at an offering price

set below the true value of the securit#%

8/20/2019 Chapter 15 Issue Of Securities

8/14

15- 8

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

The 'nderwriters

($833ers9nderwrit,ll

5:Stearns0ear

((;0an1 7eutsche

(;:0rothers+ehan

(3'SachsP

&&=0arne#SithSoloanCitigroup?

&38+#nch"errill

.;4=,"!O,0N

issues)total of ($bil 

 2000inrsUnderwriteU.S.Top

8/20/2019 Chapter 15 Issue Of Securities

9/14

15- 9

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

The 'nderwriters

($3;'ers9nderwrit,ll

==@arburg90S

55Stanle#"organ

(''Capital0arcla#s

('8"organ>P

('80oston2irstSuisseCredit

((;Paribas0NP

((;0arne#SithSoloonCitigroup?

(3'0an1 7eutsche

(84+#nch"errill

.;8=,"!O,0N

issues)total of ($bil 

 2000inrsUnderwrite Intl.Top

8/20/2019 Chapter 15 Issue Of Securities

10/14

15- 10

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

nitial !""erin#

 Average Expenses on 1767 IPOs from 1990-1994Value of Issues

.il/

7irect

Costs A/

,vg 2irst 7a#

!eturn A/

Total

Costs A/

& - 5%55 (:%5: (:%;:

(' - (5%55 ((%:; 5%:4

&' - ;5%55 5%= (&%38

3' - 45%55 8%=& (;%:4

:' - =5%55 8%& ((%;(

8' - 55%55 =%5( 8%5(

('' - (55%55 =%': =%(:

&'' - 355%55 :%4; 4%='

4'' and up 4%=& =%4;

,ll Issues ((%'' (&%'4

&4(:

(8 (4

(8 (8

(= 54

(: ;4

(3 (3

(& =8

((('

(' ;:

(8 :5

.

.

.

.

.

.

.

.

.

.

8/20/2019 Chapter 15 Issue Of Securities

11/14

15- 11

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

(eneral Cash !""ers

Seasoned !""erin# - Sale of securities b# a fir that isalread# publicl# traded%

(eneral Cash !""er - Sale of securities open to all

investors b# an alread# public copan#%Shel" Re#istration - , procedure that allows firs to

file one registration stateent for several issues of

the sae securit#%

$rivate $lace)ent - Sale of securities to a liited

nuber of investors without a public offering%

8/20/2019 Chapter 15 Issue Of Securities

12/14

15- 12

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

'nderwritin# SpreadsGross underwriter spreads of selected issues, 2001

 Issue amount, Underwriters

T!pe "ompan! millions of dollars spread, percent  

IPO Torch Offshore 8'%' =%''

IPO ,lliance Iaging (&&%' =%''

IPO 9sp (&:%' =%''

IPO Telliu (;4%' =%''

IPO ,gere S#stes ;:''%' ;%5'

easone!   National

8/20/2019 Chapter 15 Issue Of Securities

13/14

15- 13

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

Ri#hts ssue

Ri#hts ssue - Issue of securities offered onl# tocurrent stoc1holders%

*+a)ple - +afarge Corp needs to raise E(%(billionofnew e)uit#% The ar1et price is E55%:4?sh%+afarge decides to raise additional funds via a (for 8 rights offer at E8' per share% If we assue(''A subscription$ what is the value of each

rightD

8/20/2019 Chapter 15 Issue Of Securities

14/14

15- 14

McGraw Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. ll rights

Ri#hts ssue

⇒Current "ar1et Value 8 6 E55%:4 E=5=%&'

⇒Total Shares 8 F ( 5

⇒,ount of funds =5=%&' F 8' 8==%&'

⇒ New Share Price  8==%&'/ ? 5 E5=%3=⇒Value of a !ight 5=%3= - 8' (=%3=

*+a)ple - +afarge Corp needs to raise E(%(billionof new e)uit#% Thear1et price is E55%:4?sh% +afarge decides to raise additional funds via a (

for 8 rights offer at E8' per share% If we assue (''A subscription$ what is

the value of each rightD