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Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Chapter 14 Outline
14.1 Equity Financing for Private Companies 14.2 Taking Your Firm Public: The Initial Public Offering 14.3 IPO Puzzles 14.4 Raising Additional Capital: The Seasoned Equity Offering
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Corporate Investors:
Many established corporations purchase equity in younger, private companies
corporate strategic objectives desire for investment returns
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Disadvantages:
Equity holders more dispersed Must satisfy requirements of public companies
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Syndicate: other underwriters that help market and sell the issue
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
After the IPO, Wagner will have 20 million shares outstanding. Estimate the IPO price for Wagner using the price/earnings ratio and the price/revenues ratio.
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
14.2 Taking Your Firm Public: The Initial Public Offering Pricing the Deal and Managing Risk
Firm Commitment IPO: the underwriter guarantees that it will sell all of the stock at the offer price Over-allotment allocation, or Greenshoe provision: allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
14.2 Taking Your Firm Public: The Initial Public Offering Other IPO Types
Best-Efforts Basis: the underwriter does not guarantee that the stock will be sold, but instead tries to sell the stock for the best possible price Auction IPO: The company or its investment bankers auction off the shares, allowing the market to determine the price of the stock
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Figure 14.4 Aggregating the Shares Sought in the Hypothetical Auction IPO
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Figure 14.6 Cyclicality of Initial Public Offerings in the United States, (1980-2009)
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
14.4 Raising Additional Capital: The Seasoned Equity Offering A firm s need for outside capital rarely ends at the IPO
Seasoned Equity Offering (SEO): firms return to the equity markets and offer new shares for sale
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
14.4 Raising Additional Capital: The Seasoned Equity Offering SEO Process
When a firm issues stock using an SEO, it follows many of the same steps as for an IPO. Main difference is that the price-setting process is not necessary.
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Debt Financing
(Chapter 15)
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Chapter Outline
15.1 Corporate Debt 15.2 Bond Covenants 15.3 Repayment Provisions
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Private Placements
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Figure 15.1 Front Cover of the Offering Memorandum for the Hertz Junk Bond Issue
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Tranches
Different classes of securities that comprise a single bond issuance
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Foreign Bonds
Issued by a foreign company in a local market and are intended for local investors Denominated in the local currency
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Eurobonds
International bonds that are not denominated in the local currency of the country in which they are issued
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Table 15.3 Summary of New Debt Issued as Part of the Hertz LBO
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Advantages of Covenants
With more covenants, a firm firms can reduce its costs of borrowing.
The reduction in the firm s borrowing cost can more than outweigh the cost of the loss of flexibility associated with covenants
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Yield to Worst
Quoted by bond traders as the lower of the yield to call or yield to maturity
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
103 =
108 Solving for the yield to call gives: (1 + YTC) 108 YTC = ! 1 = 4.85% 103
1 4.85
-103
100
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Balloon Payment
A large payment that must be made on the maturity date of a bond when the sinking fund payments are not sufficient to retire the entire bond issue.
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Conversion Price
By converting the bond you essentially paid $1000 for 20 shares, implying a conversion price per share of $1,000/20 = $50.
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard
Copyright 2012 Pearson Prentice Hall. All rights reserved. Edited by Olivier Greusard