Fundamentals of

Chapter 14 Corporate Finance

Fourth Edition

How Corporations
Issue Securities

Slides by
Matthew Will

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 2

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

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 3

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.

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 4

Venture Capital
Top U.S. Underwriters in 2001
($bil of total issues)
Citigroup/Salomon Smith Barney $487
Merrill Lynch 433
CS/First Boston 347
JPMorgan 315
Goldman Sachs 302
Morgan Stanley 278
Lehman Brothers 261
UBSWarburg 253
Deutsche Bank 224
Bank of America 163
All Underwriters $3,062

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 5

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

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 6

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.

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 7

Initial Public Offering

Expenses

2-9.99
18
10-19.99
16 20-39.99
Total Direct Costs (% of issue)

40-59.99
14
60-79.99
12 80-99.99
10 100-199.99
200-499.9
8 500 and up
6
4
2
0
Value of Issue ($mil)
Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 8

The Underwriters
Top U.S.Underwriters in 2001
($bil of total issues)
Citigroup/Salomon Smith Barney $487
Merrill Lynch 433
CS/First Boston 347
JPMorgan 315
Goldman Sachs 302
Morgan Stanley 278
Lehman Brothers 261
UBSWarburg 253
Deutsche Bank 224
Bank of America 163
All Underwriters $3,062
Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 9

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.

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 10

Rights Issue

Rights Issue - Issue of securities offered only to

current stockholders.

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 11

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?

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 12

Rights Issue
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?

 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

Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights
 14- 13

Web Resources
Click to access web sites
Internet connection required

www.ventureeconomics.com
www.vnpartners.com
www.freeedgar.com
www.ipo.com
http://cbs.martketwatch.com
www.tfibcm.com
http://bear.cba.ufl.edu/ritter

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