analysis of securities

1. Chapter 14
Fundamentals of
Corporate
Finance
Fifth Edition
Slides by
Matthew Will
McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
Venture Capital, IPOs,
and Seasoned Offerings

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Topics Covered
Venture Capital
The Initial Public Offering
The Underwriters
General Cash Offers by Public Companies
The Private Placement

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Venture Capital

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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

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Venture Capital
1.0
Value
1.0
Value
0.5
equity
original
Your
0.5
assets
Other
0.5
capital
venture
from
equity
New
0.5
equity
new
from
Cash
Equity
and
s
Liabilitie
Assets
($mil)
Sheet
Balance
Value
Market
Stage
First

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Venture Capital
Second Stage Market Value Balance Sheet ($mil)
Assets Liabilities and Equity
Cash from new equity 1.0 New equity from 2nd stage 1.0
Other assets 2.0 Equity from 1st stage 1.0
Your original equity 1.0
Value 3.0 Value 3.0

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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.

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Initial Public Offering

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Initial Public Offering
0
2
4
6
8
10
12
14
16
18
Total
Direct
Costs
(%
of
issue)
Value of Issue ($mil)
IPOs
SEOs
Convertibles
Bonds
Expenses

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The Underwriters
564
,
3
$
ers
Underwrit
All
204
America
of
Bank
286
Sachs
Goldman
300
UBS
335
Bank
Deutsche
362
Boston
CS/First
370
Lynch
Lerrill
370
Brothers
Lehman
386
Morgan
JP
414
Stanley
Morgan
$534
Citigroup
issues)
total
of
($bil
2004
in
rs
Underwrite
U.S.
Top

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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.

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

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Rights Issue
Rights Issue - Issue of securities offered only to
current stockholders.
Example - YRU Corp currently has 9 million shares
outstanding. The market price is $15/sh. YRU
decides to raise additional funds via a 1 for 3
rights offer at $12 per share. If we assume 100%
subscription, what is the value of each right?

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Rights Issue
Current Market Value = 9 mil x $15 = $135 mil
Total Shares = 9 mil + 3 mil = 12 mil
Amount of new funds = 3 mil x $12 = $36 mil
New Share Price = (136 + 36) / 12 = $14.25/sh
Value of a Right = 15 - 14.25 = $0.75
Example - YRU Corp currently has 9 million shares
outstanding. The market price is $15/sh. YRU decides to raise
additional funds via a 1 for 3 rights offer at $12 per share. If we
assume 100% subscription, what is the value of each right?