Raising Capital in

the Financial
Markets
EBF 1023 BASIC FINANCE
Q: What are SECURITIES?
Ans:
Financial Assets that Investors
purchase hoping to earn a high rate of
return.
Types of Securities
Treasury Bills and Treasury Bonds
Municipal Bonds
Corporate Bonds
Preferred Stocks
Common Stocks

Which of these are RISKY?
Which promise HIGH RETURNS?
Is there a relationship between RISK and RETURN?
Corporate Financing Sources
From 1999 through 2001, capital has been
raised through the following sources:

Corporate Bonds and Notes 76.9%
Equities 23.1%
Movement of Savings
Direct Transfer of Funds
Movement of Savings
Direct Transfer of Funds
saver
Movement of Savings
Direct Transfer of Funds
saver
firm
Movement of Savings
Direct Transfer of Funds
cash
saver
firm
Movement of Savings
Direct Transfer of Funds
cash
securities
saver
firm
Movement of Savings
Indirect Transfer using Investment
Banker
Movement of Savings
Indirect Transfer using Investment
Banker
investment
banker
Movement of Savings
Indirect Transfer using Investment
Banker
investment
banker
firm
Movement of Savings
Indirect Transfer using Investment
Banker
funds
investment
banker
firm
Movement of Savings
Indirect Transfer using Investment
Banker
funds
securities
investment
banker
firm
Movement of Savings
Indirect Transfer using Investment
Banker
funds
securities
saver
investment
banker
firm
Movement of Savings
Indirect Transfer using Investment
Banker
funds funds
securities
saver
investment
banker
firm
Movement of Savings
Indirect Transfer using Investment
Banker
securities
funds funds
securities
saver
investment
banker
firm
Movement of Savings
Indirect Transfer using a Financial
Intermediary
Movement of Savings
Indirect Transfer using a Financial
Intermediary
financial
intermediary
Movement of Savings
Indirect Transfer using a Financial
Intermediary
financial
intermediary
firm
Movement of Savings
Indirect Transfer using a Financial
Intermediary
funds
financial
intermediary
firm
Movement of Savings
Indirect Transfer using a Financial
Intermediary
funds
firm
securities
financial
intermediary
firm
Movement of Savings
Indirect Transfer using a Financial
Intermediary
funds
firm
securities
financial
intermediary
firm
saver
Movement of Savings
Indirect Transfer using a Financial
Intermediary
funds funds
firm
securities
financial
intermediary
firm
saver
Movement of Savings
Indirect Transfer using a Financial
Intermediary
funds
intermediary
securities
funds
firm
securities
financial
intermediary
firm
saver
What is Market??

Financial Market
Components
Public Offering
Firm issues securities, which are
made available to both individual
and institutional investors.

Private Placement (direct
placement)
Securities are offered and sold to a
limited number of investors.


Financial Market
Components
Primary Market
Market in which new issues of a
security are sold to initial buyers.
Secondary Market
Market in which previously issued
securities are traded.


Financial Market
Components
Money Market
Market for short-term debt
instruments (maturity periods of one
year or less).
Capital Market
Market for long-term securities
(maturity greater than one year).


Financial Market
Components
Organized Exchanges
Buyers and sellers meet in one
central location to conduct trades.
Over-the-Counter (OTC)
Securities dealers operate at many
different locations across the
country.
Investment Banking
How do investment
bankers help firms
issue securities?

Underwriting the issue.
Distributing the issue.
Advising the firm.
Distribution Methods
Negotiated Purchase
Issuing firm selects an
investment banker to underwrite
the issue.
The firm and the investment
banker negotiate the terms of the
offer.
Competitive Bid
Several investment bankers bid
for the right to underwrite the
firms issue.
The firm selects the banker
offering the highest price.
Distribution Methods
Best Efforts
Issue is not underwritten.
Investment bank attempts to
sell the issue for a
commission.
Privileged Subscription
Investment banker helps
market the new issue to a
select group of investors.
Usually targeted to current
stockholders, employees, or
customers.
Distribution Methods
Distribution Methods
Direct Sale
Issuing firm sells the securities directly
to the investing public.
No investment banker is involved.
Distribution Methods
Stock Issue Example:
Our firm needs to raise approximately
$100 million for expansion. Our stock
price is $20. We Select Merrill Lynch to
underwrite the issue for a 2%
underwriting spread.

What type of issue is this?
Its a negotiated purchase.
Stock Issue Example:
Our firm needs to raise approximately
$100 million for expansion. Our stock
price is $20. We Select Merrill Lynch to
underwrite the issue for a 2%
underwriting spread.

How many shares will be sold?
$100,000,000 / $20
= 5 million new shares of common stock.
Stock Issue Example:
Our firm needs to raise approximately
$100 million for expansion. Our stock
price is $20. We Select Merrill Lynch to
underwrite the issue for a 2%
underwriting spread.


What are the flotation costs?
Underwriting spread: 2% of $100 million
= $2 million.
Issuing costs: printing and engraving
costs; legal, accounting, and trustee
fees.
End of Lecture 3