?The McGraw-Hill Companies,Inc.,2001
14- 1
Irwin/McGraw-Hill
Chapter 14Fundamentals of Corporate FinanceThird Edition
How
Corporations
Issue
Securities
Brealey Myers Marcus
slides by Matthew Will
?The McGraw-Hill Companies,Inc.,2001
14- 2
Irwin/McGraw-Hill
Topics Covered
?Venture Capital
?The Initial Public Offering
?The Underwriters
?General Cash Offers
?The Private Placement
?The McGraw-Hill Companies,Inc.,2001
14- 3
Irwin/McGraw-Hill
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
?The McGraw-Hill Companies,Inc.,2001
14- 4
Irwin/McGraw-Hill
Venture Capital
First S tag e M ar k et V alu e B ala n ce S h ee t ( $ m il )
As sets L iab il it ie s and E q u i ty
C ash fr o m n ew equ it y 0,5 New equ it y fr o m v ent u re ca p it a l 0,5
Ot h er asse ts 0,5 Yo u r ori g i n al equ it y 0,5
Valu e 1,0 Valu e 1,0
?The McGraw-Hill Companies,Inc.,2001
14- 5
Irwin/McGraw-Hill
Venture Capital
S ec o n d S t a g e M arket V alu e Bal a n ce S h ee t ($ m i l )
A s s ets L i ab i l i t i e s an d E q u i ty
C ash from n ew eq u i t y 1, 0 N ew eq u i t y from 2 n d s t ag e 1, 0
O t h er ass e ts 2, 0 E q u i t y fro m 1 s t s t ag e 1, 0
Y o u r o rigi n al eq u i t y 1, 0
V alu e 3, 0 V alu e 3, 0
?The McGraw-Hill Companies,Inc.,2001
14- 6
Irwin/McGraw-Hill
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.
?The McGraw-Hill Companies,Inc.,2001
14- 7
Irwin/McGraw-Hill
Initial Offering
Average Expenses on 1767 IPOs from 1990-1994
Va lu e of I ssu e s
( $m il )
Dire c t
C ost s (% )
Avg F irst Da y
R e tu r n (%)
Tot a l
C ost s (% )
2 - 9.9 9 16,96 16,36
10 - 19,99 11,63 9.6 5
20 - 39,99 9.7 12,48
40 - 59,99 8.7 2 13,65
60 - 79,99 8.2 11,31
80 - 99,99 7.9 1 8.9 1
100 - 19 9.9 9 7.0 6 7.1 6
200 - 49 9.9 9 6.5 3 5.7 0
50 0 and up 5.7 2 7.5 3
All I ssu e s 11,00 12,05
25 16
18 15
18 18
17 95
16 35
14 14
12 78
11 10
10 36
18 69
.
.
.
.
.
.
.
.
.
.
?The McGraw-Hill Companies,Inc.,2001
14- 8
Irwin/McGraw-Hill
The Underwriters
82 0,1$e r s U n de r w r i tA l l
61J e n r e t t e L u f ki nD on a l ds on
71 M a n h a t t a nC h a s e
83S t e a r n sB e a r
89M or g a nJP
12 7os t onC S / F i r s t B
14 7 B r ot h e r sL e h m a n
19 2S a c h s G ol dm a n
20 3W i t t e r anS t a n l e y D e M or g a n
22 5 B r ot h e r sS a l om a n
$3 04 L y n c hM e r r i l l
i s s u e s ) t o t a l of ( $ b i l
19 98 in rsU n de r w r i t e U, S, T op
?The McGraw-Hill Companies,Inc.,2001
14- 9
Irwin/McGraw-Hill
The Underwriters
5.665$e r s U n de r w r i tA l l
25.7os t onC S / F i r s t B
31.1C a pi t a l B a r c l a y s
36.0M or g a nJP
38.7P a r i ba s
39.0 B a n kD e u t s c h e
41.5A M R OA B N
42.5S a c h s G ol dm a n
43.6W i t t e r anS t a n l e y D e M or g a n
52.3 L y n c hM e r r i l l
$63.6 R e a d D i l l onW a r bu r g
i s s u e s ) t o t a l of ( $ b i l
1998 in rsU n de r w r i t e U,S, -N on T op
?The McGraw-Hill Companies,Inc.,2001
14- 10
Irwin/McGraw-Hill
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.
?The McGraw-Hill Companies,Inc.,2001
14- 11
Irwin/McGraw-Hill
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?
?The McGraw-Hill Companies,Inc.,2001
14- 12
Irwin/McGraw-Hill
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?
14- 1
Irwin/McGraw-Hill
Chapter 14Fundamentals of Corporate FinanceThird Edition
How
Corporations
Issue
Securities
Brealey Myers Marcus
slides by Matthew Will
?The McGraw-Hill Companies,Inc.,2001
14- 2
Irwin/McGraw-Hill
Topics Covered
?Venture Capital
?The Initial Public Offering
?The Underwriters
?General Cash Offers
?The Private Placement
?The McGraw-Hill Companies,Inc.,2001
14- 3
Irwin/McGraw-Hill
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
?The McGraw-Hill Companies,Inc.,2001
14- 4
Irwin/McGraw-Hill
Venture Capital
First S tag e M ar k et V alu e B ala n ce S h ee t ( $ m il )
As sets L iab il it ie s and E q u i ty
C ash fr o m n ew equ it y 0,5 New equ it y fr o m v ent u re ca p it a l 0,5
Ot h er asse ts 0,5 Yo u r ori g i n al equ it y 0,5
Valu e 1,0 Valu e 1,0
?The McGraw-Hill Companies,Inc.,2001
14- 5
Irwin/McGraw-Hill
Venture Capital
S ec o n d S t a g e M arket V alu e Bal a n ce S h ee t ($ m i l )
A s s ets L i ab i l i t i e s an d E q u i ty
C ash from n ew eq u i t y 1, 0 N ew eq u i t y from 2 n d s t ag e 1, 0
O t h er ass e ts 2, 0 E q u i t y fro m 1 s t s t ag e 1, 0
Y o u r o rigi n al eq u i t y 1, 0
V alu e 3, 0 V alu e 3, 0
?The McGraw-Hill Companies,Inc.,2001
14- 6
Irwin/McGraw-Hill
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.
?The McGraw-Hill Companies,Inc.,2001
14- 7
Irwin/McGraw-Hill
Initial Offering
Average Expenses on 1767 IPOs from 1990-1994
Va lu e of I ssu e s
( $m il )
Dire c t
C ost s (% )
Avg F irst Da y
R e tu r n (%)
Tot a l
C ost s (% )
2 - 9.9 9 16,96 16,36
10 - 19,99 11,63 9.6 5
20 - 39,99 9.7 12,48
40 - 59,99 8.7 2 13,65
60 - 79,99 8.2 11,31
80 - 99,99 7.9 1 8.9 1
100 - 19 9.9 9 7.0 6 7.1 6
200 - 49 9.9 9 6.5 3 5.7 0
50 0 and up 5.7 2 7.5 3
All I ssu e s 11,00 12,05
25 16
18 15
18 18
17 95
16 35
14 14
12 78
11 10
10 36
18 69
.
.
.
.
.
.
.
.
.
.
?The McGraw-Hill Companies,Inc.,2001
14- 8
Irwin/McGraw-Hill
The Underwriters
82 0,1$e r s U n de r w r i tA l l
61J e n r e t t e L u f ki nD on a l ds on
71 M a n h a t t a nC h a s e
83S t e a r n sB e a r
89M or g a nJP
12 7os t onC S / F i r s t B
14 7 B r ot h e r sL e h m a n
19 2S a c h s G ol dm a n
20 3W i t t e r anS t a n l e y D e M or g a n
22 5 B r ot h e r sS a l om a n
$3 04 L y n c hM e r r i l l
i s s u e s ) t o t a l of ( $ b i l
19 98 in rsU n de r w r i t e U, S, T op
?The McGraw-Hill Companies,Inc.,2001
14- 9
Irwin/McGraw-Hill
The Underwriters
5.665$e r s U n de r w r i tA l l
25.7os t onC S / F i r s t B
31.1C a pi t a l B a r c l a y s
36.0M or g a nJP
38.7P a r i ba s
39.0 B a n kD e u t s c h e
41.5A M R OA B N
42.5S a c h s G ol dm a n
43.6W i t t e r anS t a n l e y D e M or g a n
52.3 L y n c hM e r r i l l
$63.6 R e a d D i l l onW a r bu r g
i s s u e s ) t o t a l of ( $ b i l
1998 in rsU n de r w r i t e U,S, -N on T op
?The McGraw-Hill Companies,Inc.,2001
14- 10
Irwin/McGraw-Hill
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.
?The McGraw-Hill Companies,Inc.,2001
14- 11
Irwin/McGraw-Hill
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?
?The McGraw-Hill Companies,Inc.,2001
14- 12
Irwin/McGraw-Hill
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?
