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Chapter 15
15-2
Chapter outline
The financing life cycle of a firm: Earlystage financing and venture capital
Selling securities to the public: The basic
procedure
Alternative issue methods
Underwriters
IPOs and underpricing
New equity sales and the value of the
firm
The cost of issuing securities
Issuing long-term debt
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
15-3
Venture capital
Private financing for relatively new
businesses in exchange for shares in the firm
Individual investors
Venture capital firms
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Second stage
Mezzanine financing
Begin manufacturing, marketing and
distribution
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
15-5
Choosing a venture
capitalist
Look for financial strength.
Choose a VC that has a
management style that is
compatible with your own.
Obtain and check references.
What contacts does the VC have?
What is the exit strategy?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
15-6
15-7
Issue methods
Public issueInitial public offering (IPO)
General cash offer = offered to general
public
Usually open for six to eight weeks
Only cash offers
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Underwriters
Services provided by underwriters:
Formulate method used to issue
securities
Price securities
Sell securities
Syndicategroup of investment
bankers (underwriters) that market
securities and share the risk
associated with selling the issue
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
1511
Standby underwriting
At the end of the issue, the issuer buys
any shares not bought by the public.
The underwriter charges a fee for this
service.
The underwriter bears the risk of not
being able to sell the entire issue to
the public.
Most common type of underwriting in
Australia.
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
1512
Best efforts
underwriting
Underwriter must make their best
effort to sell the securities at an
agreed-upon offer price.
The company bears the risk of the
issue not being sold.
The offer may be pulled if there is not
enough interest at the offer price and
the company does not get the capital
while still incurring substantial
flotation costs.
Not as common as it used to be.
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
1513
IPO underpricing
Initial public offering IPO.
May be difficult to price an IPO because
there is not a current market price
available.
Additional asymmetric information
associated with companies going public.
Underwriters want to ensure that their
clients earn a good return on IPOs on
average.
Underpricing causes the issuer to leave
money on the table.
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
1514
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Number of offerings by
month
Figure
15.2
Number of offerings by month for ASX-listed initial
public offerings: February 1993December 2009
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IPO underpricing
reasons
Underwriters want offerings to sell
out
Reputation for successful IPOs is critical
Underpricing = insurance for
underwriters
Oversubscription and allotment
Winners curse
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Types of long-term
debt
Bonds/Debenturespublic issue of longterm debt
Private issues
Term loans
Direct business loans from commercial banks,
insurance companies, etc.
Maturities 15 years
Repayable during life of the loan
Private placements
Similar to term loans with longer maturity
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Quick quiz
What is venture capital and what types
of firms receive it?
What are some of the important services
provided by underwriters?
What type of underwriting is the most
common in Australia and how does it
work?
What is IPO underpricing and why might
it persist?
What are some of the costs associated
with issuing securities?
What are some of the characteristics of
private placement debt?
Copyright 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh
1521
Chapter 15
END
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