Principles of
Corporate
Finance
Seventh Edition
Chapter 15
How Corporations Issue
Securities
Richard A. Brealey
Stewart C. Myers
Slides by
Matthew Will
McGraw Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
15- 2
Topics Covered
 Venture Capital
 The Initial Public Offering
 Other New-Issue Procedures
 Private Placements and Public Issues
 Rights Issue
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Venture Capital
Venture Capital
Money invested to finance a new firm
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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 ($mil)
Assets
Liabilitie s and Equity
Cash from new equity
1.0 New equity from venture capital
1.0
Other assets
1.0
Your original equity
1.0
Value
2.0
Value
2.0
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Venture Capital
Second Stage Market Value Balance Sheet ($mil)
Assets
Liabilitie s 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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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 Underwriters
Top U.S.Underwriters in 2000
($bil of total issues)
ABN AMRO
$357
Merrill Lynch
248
Citigroup/ Soloman Smith Barney
227
JP Morgan
207
Credit Suisse First Boston
169
Morgan Stanley
151
Goldman Sachs
140
Lehman Brothers
136
Deutsche Bank
113
Bear Stearns
96
All Underwrit ers
McGraw Hill/Irwin
1,844
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The Underwriters
Top Intl.Underwriters in 2000
($bil of total issues)
ABN AMRO
$387
Merrill Lynch
185
Deutsche Bank
140
Citigroup/ Solomon Smith Barney
113
BNP Paribas
113
Credit Suisse First Boston
108
JP Morgan
108
Barclays Capital
100
Morgan Stanley
99
UBSWarburg
77
All Underwrit ers
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1,430
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Initial Offering
Average Expenses on 1767 IPOs from 1990-1994
Value of Issues
($mil)
Direct Avg First Day
Costs (%)
Total
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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Underwriting Spreads
Gross underwriter spreads of selected issues, 2001
Type
Company
IPO
IPO
IPO
IPO
IPO
Torch Offshore
Alliance Imaging
Usp
Tellium
Agere Systems
Seasoned
Seasoned
Seasoned
Seasoned
Seasoned
Seasoned
Debt:
8.3 % Sub notes, 2011
6.875% Med term notes, 2006
7.75% Notes, 2011
8.5% Senior notes, 2011
5.875% Global bonds, 2004
3.5% Conv bonds, 2031
7.45% Global bonds, 2031
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Issue amount,
millions of dollars
Underwriter's
spread, percent
80.0
122.0
126.0
135.0
3600.0
7.00
7.00
7.00
7.00
3.90
National Golf Properties
Lifepoint Hospitals
Valspar corp
Raytheon Co.
Pepsico, Inc.
Allegheny Energy, Inc.
29.6
92.8
168.0
343.8
534.6
598.3
5.13
5.00
4.25
3.75
2.00
3.01
Bank of the West
Maytag Corp
Shurgard Storage Centers
Hilton Hotels
American Home Products
Cox Communications
Kellogg
50
185
250
300
500
385
1100
0.65
0.50
0.65
0.88
0.35
2.25
0.88
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Rights Issue
Rights Issue - Issue of securities offered only to
current stockholders.
Example - Lafarge Corp needs to raise E1.1billionof
new equity. The market price is E99.65/sh.
Lafarge decides to raise additional funds via a 1
for 8 rights offer at E80 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 E1.1billionof new equity. The
market price is E99.65/sh. Lafarge decides to raise additional funds via a 1
for 8 rights offer at E80 per share. If we assume 100% subscription, what is
the value of each right?
 Current Market Value = 8 x E99.65 = E797.20
 Total Shares = 8 + 1 = 9
 Amount of funds = 797.20 + 80 = 877.20
 New Share Price = (877.20) / 9 = E97.47
 Value of a Right = 97.47 - 80 = 17.47
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