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BFC3140 Week 4: Raising Equity Capital (Types of offerings (Underwriter:…
BFC3140 Week 4: Raising Equity Capital
Equity Financing for Private Companies
Sources of Funding
Angel Investors
buy equity in small private firms
Venture Capital Firm
limited partnership that
specializes in raising money to invest
in the private equity of young firms
limited partners are more diversified
they also benefit from the
expertise
of the general partners
Cost (come to consult)
Private Equity Firms
Invests in the equity of existing privately held firms or public companies rather than start- up companies
Leveraged buyout (LBO)
uses debt as well as equity to finance the purchase
Institutional Investors
Corporate Investor
in addition to the financial returns, corporate investors might invest for
corporate strategic objectives
Outside Investors
Preferred Stock (between debt and common stock)
usually has preferential dividend
sometimes has special voting rights
contains a right to convert to common stock (
convertible preferred stock
)
Convertible Preferred Stock
Example (page 9)
The initial public offering (IBO)
selling stock to the public for the first time
Advantages
greater liquidity
better access to capital
Disadvantages
equity holders become more widely dispersed
firm must satisfy all of the
requirements of public companies
Types of offerings
Underwriter:
investment banking firm
, manages a security issuance and design its structure
Primary offering: issuing new shares
Secondary offering: sold by existing shareholders in an equity offering
Best- efforts basis
Firm Commitment
Auction IPO
The mechanics of an IPO
Lead Underwriter
Syndicate
Valuation
compute PV of Future CFs
examining comparable (recent IPOs)
IPO Puzzles
Under-pricing
: owners are selling stock in their firm for less than they could get in the aftermarket
The
pre- IPO shareholders
bear the cost of under-pricing
Reasons that IPO firms leave so much money on the table
Signaling theory: high quality => can survive after giving huge discount
Underwriters and their risk
Underwriters and their clients
Winner's Curse
Costs of an IPO
Long- run under-performance
The seasoned equity offering (SEO)
market price for the stock has already existed, the
price- setting process is not necessary
Offers
Cash offer: offers new shares to investors at large
Rights offer: offers new shares to only existing shareholders
Price Reaction