A bond's coupon rate is equal to the annual interest divided by which one of the following, Lecture notes of Venture Capital

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Finance 4330

Advanced Corporate finance

Raising Capital

Lecture 25

Key Concepts and Skills

• (^) Understand how securities are sold to the

public and the role of investment bankers

• (^) Understand initial public offerings and the

costs of going public

• (^) Understand the venture capital market and its

role in financing new businesses

1 The Public Issue

• (^) The Basic Procedure
  • (^) Management gets the approval of the Board.
  • (^) The firm prepares and files a registration statement with the SEC.
  • (^) The SEC studies the registration statement during the waiting period.
  • (^) The firm prepares and files an amended registration statement with the SEC.
  • (^) If everything is OK with the SEC, a price is set and a full-fledged selling effort gets underway.

The Process of a Public Offering

Steps in Public Offering Time

1. Pre-underwriting conferences
2. Registration statements
3. Pricing the issue
4. Public offering and sale
5. Market stabilization Several months 20-day waiting period Usually on the 20th day After the 20th day 30 days after offering

2 Alternative Issue Methods

• (^) There are two kinds of public issues:
  • (^) The general cash offer
  • (^) The rights offer
• (^) Almost all debt is sold in general cash

offerings.

Table

3 The Cash Offer

• (^) There are three methods for issuing securities

for cash:

• (^) Firm Commitment
• (^) Best Efforts
• (^) Dutch Auction
• (^) There are two methods for selecting an

underwriter

• (^) Competitive
• (^) Negotiated

Firm Commitment Underwriting

• (^) The issuing firm sells the entire issue to the underwriting syndicate.
• (^) The syndicate then resells the issue to the public.
• (^) The underwriter makes money on the spread between the price paid to the issuer and the price received from investors when the stock is sold.
• (^) The syndicate bears the risk of not being able to sell the entire issue for more than the cost.
• (^) This is the most common type of underwriting in the United States.

Dutch Auction Underwriting

• (^) Underwriter accepts a series of bids that include number of shares and price per share.
• (^) The price that everyone pays is the highest price that will result in all shares being sold.
• (^) There is an incentive to bid high to make sure you get in on the auction but knowing that you will probably pay a lower price than you bid.
• (^) The Treasury has used Dutch auctions for years.
• (^) Google was the first large Dutch auction IPO.

IPO Underpricing

• (^) May be difficult to price an IPO because there is

not a current market price available.

• (^) Private companies tend to have more

asymmetric information than companies that are

already publicly traded.

• (^) Underwriters want to ensure that, on average,

their clients earn a good return on IPOs.

• (^) Underpricing causes the issuer to “leave money

on the table.”

5 The Cost of New Issues

1. Spread or underwriting discount

2. Other direct expenses

3. Indirect expenses

4. Abnormal returns

5. Underpricing

6. Green Shoe Option

The Costs of Equity Public Offerings Proceeds Direct Costs Underpricing (in millions) SEOs IPOs IPOs 2 - 9.99 2.88% 15.36% 18.18% 10 - 19.99 8.81% 11.63% 10.02% 20 - 39.99 7.24% 9.81% 17.91% 40 - 59.99 6.20% 9.21% 29.57% 60 - 79.99 5.81% 8.65% 39.20% 80 - 99.99 5.56% 8.34% 45.36% 100 - 199.99 5.00% 7.67% 37.10% 200 - 499.99 4.26% 6.72% 17.72% 500 and up 3.64% 5.15% 12.19%

Mechanics of Rights Offerings

• (^) The management of the firm must decide:
  • (^) The exercise price (the price existing shareholders must pay for new shares).
  • (^) How many rights will be required to purchase one new share of stock.
• (^) These rights have value:
  • (^) Shareholders can either exercise their rights or sell their rights.

Rights Offering Example

• (^) Popular Delusions, Inc. is proposing a rights

offering. There are 200,000 shares

outstanding trading at $25 each. There will be

10,000 new shares issued at a $

subscription price.

• (^) What is the new market value of the firm?
• (^) What is the ex-rights price?
• (^) What is the value of a right?