Raising Capital Introduction Definition of capital borrowed sums or equity with which the firms assets are acquired and its operations are funded When does a firm need capital New or start up companies ID: 430953
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Slide1
Chapter 15
Raising CapitalSlide2
Introduction
Definition of capital:
borrowed sums or equity with
which the firm's assets are acquired and its operations are funded.
When does a firm need capital?
New or start up companies
Finance expansion
Rapid growth
Opening new market lines
Mergers and acquisitionsSlide3
How can a firm raise money??
Equity:
the value of an ownership interest in property or interest in a corporation in the form of common stock or preferred stocks
2.
Debt: An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and interest requirements.
IntroductionSlide4
Can new start-up firms rely on bank loans for capital?
Venture capital
: general term for financing startup, early stage, and "turn around" type businesses
Sources of VC
New business will be riskyWhat does Venture capitalist do to avoid this risk?Why might Venture capitalist be willing to take this risk?Capital for new firmsSlide5
Capital for existing firms
How can a company finance its investments?
Selling securities to the public
Public
Private General cash offerRights offerInitial public offering (IPO)Seasoned equity offering (SEO) Refer to table 15.1Slide6
Underwriters
Definition:
investment firms that act as intermediaries between a company selling securities and the investing capital
Services provided by underwriters
Formulate method used to issue securitiesPrice the securitiesSell the securitiesPrice stabilization by lead underwriterSlide7
Syndicate
– group of investment bankers that market the securities and share the risk associated with selling the issue
Spread
– difference between what the syndicate pays the company and what the security sells for initially in the market
UnderwritersSlide8
Types of underwriter
Firm Commitment Underwriting
Issuer sells entire issue to 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 soldThe syndicate bears the risk of not being able to sell the entire issue for more than the costSlide9
Best efforts underwriting
Underwriter must make their “best effort” to sell the securities at an agreed-upon offering price
The company bears the risk of the issue not being sold
Not as common as it used to be
Types of underwriterSlide10
Dutch auction underwriting:
Underwriter accepts a series of bids that include number of shares and price per share
Google was the first large Dutch auction IPO
Types of underwriterSlide11
IPOs & under pricing
Initial Public Offering – IPO
May be difficult to price an IPO because there isn’t a current market price available
Under pricing causes the issuer to “leave money on the table”Slide12
Why does under pricing exist?
To attract investors for young firms
To act as an Insurance for the investment bank
A way that a bank can reward investors for reveling what they think the stock worth and the numbers of shares they would like to buySlide13
The costs of issuing securities
Gross spread
Other direct expenses
Indirect expenses
Abnormal returnsUnder pricingSlide14
Rights
Definition:
an issue of common stock offered to existing stockholders
“Rights” are given to the shareholders
Specify number of shares that can be purchasedSpecify purchase priceSpecify time frameWhy do companies offer Rights? (Advantages)Rights may be traded OTC or on an exchangeSlide15
The mechanics of a rights offering
Number of rights needed to purchase a share
RightsSlide16
The value of a right
Example:
National Power current share price is 20$, there is 1,000,000 shares outstanding. Suppose they want to raise 5,000,000$ in new equity using a right offering (1 right for each 1 share) with a subscription price of 10$. Calculate the following:
Number of new shares to be issued
Number of rights needed to buy a new shareThe value of the rightShow in calculations the effects of the rights offering on shareholdersSlide17
Effects on share holders
The case of buying a new share using rights
The case of selling rightsSlide18
Results
The price specified in a rights offering is generally less than the current market price
The share price will adjust based on the number of new shares issued
The value of the right is the difference between the old share price and the “new” share price
The value of a rightSlide19
Suppose a company wants to raise $10 million. The subscription price is $20 and the current stock price is $25. The firm currently has 5,000,000 shares outstanding.
How many shares have to be issued?
How many rights will it take to purchase one share?
What is the value of a right?
Rights Offering ExampleSlide20
Dilution
Dilution
is a loss in value for existing shareholders that occurs through the issuance of additional stocks
Dilution kinds:
Percentage ownership – shares sold to the general public without a rights offeringMarket value – firm accepts negative NPV projectsBook value and EPS – occurs when market-to-book value is less than oneSlide21
Types of Long-term Debt
Public issue
of long-term debt are usually in the form of bonds
Private issues
Long-Term loans usually bank loans or could be from private firm which has a history with the companyEasier to renegotiate than public issuesIf bonds were issued to private investors costs would be lower than public issuesMORE THAN 50% OF ALL DEBT ARE ISSUED PRIVATELY Interest rates are higher in private issues when compared to public issues
Issuing
Long-term DebtSlide22
Ex 1 Page 505
Big Time, Inc., is proposing a rights offering. Presently there are 500,000 shares outstanding at 81$ each. There will be 60,000 new shares offered at 70$ each.
What is the new market value of the firm
How many rights are associated with one of the new shares?
What is the value of a right?Why might a company have a rights offering rather than a general cash offer?