Principles of
Corporate Finance
Chapter 15 Eighth Edition
How Corporations
Issue Securities
Slides by
Matthew Will
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15- 2
Topics Covered
Venture Capital
The Initial Public Offering
Other New-Issue Procedures
Security Sales by Public Companies
– Rights Issue
Private Placements and Public Issues
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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.
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Venture Capital
First Stage Market Value Balance Sheet ($mil)
Assets Liabilities and Equity
Cash from new equity 1.0 New equity from venture capital 1.0
Other assets 1.0 Your original equity 1.0
Value 2.0 Value 2.0
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Venture Capital
Second Stage Market Value Balance Sheet ($mil)
Assets Liabilities and Equity
Cash from new equity 4.0 New equity from 2nd stage 4.0
Fixed assets 1.0 Equity from 1st stage 5.0
Other assets 9.0 Your original equity 5.0
Value 14.0 Value 14.0
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U.S. Venture Capital Investments
120
106.2
100
80
$ Millions
54.4
60
40.7
40
21.2 21.2 18.4
14.8
20 7.6 11.5
3.7 4.2
0
1994
1999
1993
1995
1996
1997
1998
2000
2001
2002
2003
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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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The Top Managing Underwriters
Value of Issues
Underwriter ($billion) Number of issues
Citigroup 543 1872
Morgan Stanley 395 1365
Merrill Lynch 380 1914
Lehman Brothers 354 1264
J.P. Morgan 354 1417
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Average Initial IPO Returns
Canada
Netherlands
Spain
France
Australia
Hing Kong
UK
USA
Italy
Germany
Japan
Singapore
Sweden
Taiwan
Mexico
257 %
Switzerland
India
Greece
Korea
Brazil 0 20 40 60 80 100
China
return (percent)
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Initial Offering
Average Expenses on 1767 IPOs from 1990-1994
Value of Issues Direct Avg First Day Total
($mil) Costs (%) Return (%) Costs (%)
2 - 9.99 16.96 16.36 25. 16
10 - 19.99 11.63 9.65 18. 15
20 - 39.99 9.7 12.48 18. 18
40 - 59.99 8.72 13.65 17. 95
60 - 79.99 8.2 11.31 16. 35
80 - 99.99 7.91 8.91 14. 14
100 - 199.99 7.06 7.16 12. 78
200 - 499.99 6.53 5.70 11. 10
500 and up 5.72 7.53 10. 36
All Issues 11.00 12.05 18. 69
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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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15- 12
Underwriting Spreads (2003)
Issue Amount Underwriter's
Type Company ($ millions) spread
Common Stock:
IPO Buffalo Wild Wings 45 7.0%
IPO Carter's Inc. 119 7.0%
IPO Genitope Corp. 41 7.0%
IPO International Steel Group 462 6.5%
IPO Ipass 98 7.0%
Seasoned General Cable Corp. 41 5.5%
Seasoned Big 5 sporting Goods Corp. 94 5.0%
Seasoned Red Robin Goods Corp. 92 5.3%
Seasoned Gibraltar Steel 102 5.0%
Seasoned Interstate hotels 47 5.3%
Debt (cupon rate, type,
maturity) :
4.85% Fixed Rate Notes,
2011 Raytheon 500 0.6%
4.85% Notes, 2015 Procter & Gamble 150 0.5%
6.3% Notes, 2018 Eastman Chemical 248 0.8%
5.9% Senior Notes, 2008 Bausch & Lomb 50 1.0%
6.25% Convertible Senior
Debentures, 2033 General Motors 4,000 1.8%
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Rights Issue
Rights Issue - Issue of securities offered only to
current stockholders.
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?
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Rights Issue
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 = 17 + 4 = 21
Amount of funds = 1,020 + (4x41) = €1,184
New Share Price = (1,184) / 21 = €56.38
Value of a Right = 56.38 – 41 = €15.38
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Web Resources
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