公司理财第19章

Chapter 19: Issuing Equity Securities to the PublicCONCEPT QUESTIONS - CHAPTER 1919.1 ∙Describe the basic procedures in a new issue.1.Obtain approval of the Board of Directors.2.File registration statement with the SEC3.Distribute prospectus4.Determine offer price5.Place tombstone advertisements.∙What is a registration statement?A document filed with the SEC containing information relevant to the offering.19.3 ∙Describe a firm commitment underwriting and a best-efforts underwriting.In a firm commitment underwriting, the underwriter buys the entire issue and then resells it. In a best efforts underwriting, the underwriter is only legally bound touse "best efforts" to sell the securities at the agreed upon offering price.∙Suppose that a stockholder calls you up out of the blue and offers to sell you some shares of a new issue. Do you think the issue will do better or worsethan average?It will probably do worse because otherwise it would have been oversold andthere would be no need for the broker to try to sell it to you.19.4 ∙What are some reasons that the price of stock drops on the announcement ofa new equity issue?1.Managers are disinclined to issue stock when the share price is below theirestimate of intrinsic value. Equity offerings signal that management considersthe share price high.2.Equity offerings are more likely when the firm is over-levered.19.5 ∙Describe the costs of a new issue of common stock.1.Spread: The difference between the offering price and what the underwriterpays the issuing company.2.Other direct expenses: Filing fees, legal fees and taxes.3.Indirect expenses: Management time spent analyzing the issuance.4.Abnormal returns: The drop in the current stock price by 1% to 2% in aseasoned new issue of stock.5.Underpricing: Setting the offering price below the correct value in an initialnew issue of stock.6.Green shoe option: The underwriter's right to buy additional shares at the offerprice to cover overallotments.∙What conclusions emerge from an analysis of Table 19.5?1.There are substantial financial economies of scale.2.Direct costs are somewhat greater than indirect ones.3.Higher costs for best efforts offers.4.More underpricing for firm commitment than for best efforts offers.5.Both direct and indirect costs are higher for initial offerings than for seasonedones.19.6 ∙Describe the details of a rights offering.In a rights offering, each shareholder is issued an option to buy a specifiednumber of shares from the firm at a specified price within a certain time frame.These rights are often traded on securities exchanges or over the counter.∙What are the questions that financial management must answer in a rights offerings?1.What price should existing shareholders pay for a share of new stock?2.How many rights will be required to purchase one share of stock?3.What effect will the rights offering have on the price of the existing stock?∙How is the value of a right determined?Value of one right= Rights-on stock price - ex-rights stock price= (Ex-rights price - Subscription price) / (rights/share)= (Rights-on price - Subscription price) / (rights/share+1)19.7 ∙What are the several kinds of dilution?1.Dilution of ownership2.Dilution of market value3.Dilution of book value∙Is dilution important?True dilution, of ownership or market value, is very important because it is aneconomic loss to current shareholders. Book value dilution, on the other hand, is irrelevant.∙Why might a firm prefer a general cash offering to a rights offering?1.Underwriters provide insurance regarding the amount raised by the firmregardless of true stock value.2.Proceeds are available sooner.3.Underwriters will provide wider distribution of ownership4.Underwriters provide consulting advice.19.8 ∙Describe shelf registration.It is registration allowed by Rule 415 of the SEC whereby a corporation registers stock that will be sold within two years of registration.∙What are the arguments against shelf registration?1.The costs of new issues might go up because underwriters may be unable toprovide as much information to potential investors as would be true otherwise.2.It may cause "market overhand" which will depress market prices.19.9 ∙What are the different sources of venture-capital financing?Private partnerships and corporations, large industrial or financial corporation,and wealthy families and individuals.∙ What are the different stages for companies seeking venture capital financing?Seed money, start-up, and then first through fourth round financing as thecompany gets off the ground.∙What is the private equity market?The private equity market involves the issuance of securities to a small number of private investors or certain qualified institutional investors.∙What is Rule 144A?Rule 144A establishes a legal framework for the issuance of private securities to qualified institutional investors.Answers to End-of-Chapter Problems19.1 a. A general cash offer is a public issue of a security that is sold to all interestedinvestors. A general cash offer is not restricted to current stockholders.b. A rights offer is an issuance that gives the current stockholders the opportunity tomaintain a proportionate ownership of the company. The shares are offered to thecurrent shareholders before they are offered to the general public.c. A registration statement is the filing with the SEC, which discloses all pertinentinformation concerning the corporation that wants to make a public offering.d. A prospectus is the legal document that must be given to every investor whocontemplates purchasing registered securities in a public offering. The prospectusdescribes the details of the company and the particular issue.e. An initial public offering (IPO) is th e original sale of a company’s securities to thepublic. An IPO is also called an unseasoned issue.f. A seasoned new issue is a new issue of stock after the company’s securities havepreviously been publicly traded.g. Shelf registration is an SEC procedure, which allows a firm to file a masterregistration statement summarizing the planned financing for a two year period.The firm files short forms whenever it wishes to sell any of the approved masterregistration securities during the two year period.19.2 a. The Securities Exchange Act of 1933 regulates the trading of new, unseasonedsecurities.b. The Securities Exchange Act of 1934 regulates the trading of seasoned securities.This act regulates trading in what is called the secondary market.19.3 Competitive offer and negotiated offer are two methods to select investment bankers forunderwriting. Under the competitive offers, the issuing firm can award its securities to the underwriter with the highest bid, which in turn implies the lowest cost. On the other hand, in negotiated deals, underwriter gains much information about the issuing firm throughnegotiation, which helps increase the possibility of a successful offering.19.4 a. Firm commitment underwriting is an underwriting in which an investment bankingfirm commits to buy the entire issue. It will then sell the shares to the public. Theinvestment banking firm assumes all financial responsibility for any unsold shares.b. A syndicate is a group of investment banking companies that agree to cooperate in ajoint venture to underwrite an offering of securities.c. The spread is the difference between the underwriter’s buying price and the offeringprice. The spread is a fee for the services of the underwriting syndicate.d. Best efforts underwriting is an offering in which the underwriter agrees to distributeas much of the offering as possible. Any unsold portions of the offering are returnedto the issuing firm.19.5 a. The risk in a firm commitment underwriting is borne by the underwriter(s). Thesyndicate agrees to purchase all of an offering. Then they sell as much of it aspossible. Any unsold shares remain the responsibility of the underwriter(s). Therisk that the security’s price may become unfavorable also lies with theunderwriter(s).b. The issuing firm bears the risk in a best efforts underwriting. The underwriter(s)agrees to make its best effort to sell the securities for the firm. Any unsoldsecurities are the responsibility of the firm.19.6 In general, the new price per share after the offering is:P = (market value + proceeds from offering) / total number of sharesi. At $40 P = ($400,000 + ($40 x 5,000)) / 15,000 =$40ii. At $20 P = ($400,000 + ($20 x 5,000)) / 15,000 = $33.33iii. At $10 P = ($400,000 + ($10 x 5,000)) / 15,000 = $3019.7 The poor performance result should not surprise the professor. Since he subscribed to everyinitial public offering, he was bound to get fewer superior performers and more poorperformers. Financial analysts studied the companies and separated the bad prospects from the good ones. The analysts invested in only the good prospects. These issues becameoversubscribed. Since these good prospects were oversubscribed, the professor received a limited amount of stock from them. The poor prospects were probably under-subscribed, so he received as much of their stock as he desired. The result was that his performancewas below average because the weight on the poor performers in his portfolio was greater than the weight on the superior performers. This result is called the winner’s curse. The professor “won” the shares, but his bane was that the shares he “won” were poorperformers.19.8 There are two possible reasons for stock price drops on the announcement of a new equityissue:i. M anagement may attempt to issue new shares of stock when the stock is over-valued, that is, the intrinsic value is lower than the market price. The price drop isthe result of the downward adjustment of the overvaluation.ii. W ith the increase of financial distress possibility, the firm is more likely to raise capital through equity than debt. The market price drops because it interprets theequity issue announcement as bad news.19.9 The costs of new issues include underwriter’s spread, direct and indirect expenses, negativeabnormal returns associated with the equity offer announcement, under-pricing, and green-shoe option.19.10 a. $12,000,000/$15 = 800,000b. 2,400,000/800,000 = 3c. The shareholders must remit $15 and three rights for each share of new stock theywish to purchase.19.11 a. In general, the ex-rights price isP = (Market value + Proceeds from offering) / Total number of sharesP = ($25 x 100,000 + $20 x 10,000) / (100,000 + 10,000) = $24.55b. The value of a right is the difference between the rights-on price of the stock andthe ex-rights price of the stock. The value of a right is $0.45 (=$25 - $24.55).Alternative solution:The value of a right can also be computed as:(Ex-rights price - Subscription price) / Number of rights required to buy a share ofstockValue of a right = ($24.55 - $20) / 10 = $0.45c. The market value of the firm after the issue is the number of shares times the ex-rights price.Value = 110,000 x $24.55 $2,700,000 (Note that the exact ex-rights price is$24.5454.)d. The most important reason to offer rights is to reduce issuance costs. Also, rightsofferings do not dilute ownership and they provide shareholders with moreflexibility. Shareholders can either exercise or sell their rights.19.12 The value of a right = $50 - $45 = $5The number of new shares = $5,000,000 / $25 = 200,000The number of rights / share = ($45 - $25) / $5 = 4The number of old shares = 200,000 x 4 = 800,00019.13 a. Assume you hold three shares of the company’s stock. The value of your holdingsbefore you exercise your rights is 3 x $45 = $135. When you exercise, you mustremit the three rights you receive for owning three shares, and ten dollars. You haveincreased your equity investment by $10. The value of your holdings is $135 + $10= $145. After exercise, you own four shares of stock. Thus, the price per share ofyour stock is $145 / 4 = $36.25.b. The value of a right is the difference between the rights-on price of the stock andthe ex-rights price of the stock. The value of a right is $8.75 (=$45 - $36.25).c. The price drop will occur on the ex-rights date. Although the ex-rights date isneither the expiration date nor the date on which the rights are first exercisable, it isthe day that the price will drop. If you purchase the stock before the ex-rights date,you will receive the rights. If you purchase the stock on or after the ex-rights date,you will not receive the rights. Since rights have value, the stockholder receivingthe rights must pay for them. The stock price drop on the ex-rights day is similar tothe stock price drop on an ex-dividend day.19.14 a. Stock price (ex-right) = (13+2) / (1+0.5) = $10Subscription price = 2 / 0.5 = $4Right’s price = 13-10 = $3= (10-4) / 2 = $3b. Stock price (ex-right) = (13+2) / (1+0.25) = $12Subscription price = 2 / 0.25 = $8Right’s price = 13-12 = $1= (12-8) / 4 = $1c. The stockholders’ wealth is the same between the two arrangements.19.15 If the interest of management is to increase the wealth of the current shareholders, a rightsoffering may be preferable because issuing costs as a percentage of capital raised is lower for rights offerings. Management does not have to worry about underpricing becauseshareholders get the rights, which are worth something. Rights offerings also preventexisting shareholders from losing proportionate ownership control. Finally, whether the shareholders exercise or sell their rights, they are the only beneficiaries.19.16 Reasons for shelf registration include:i. Flexibility in raising money only when necessary without incurring additional issuancecosts.ii. As Bhagat, Marr and Thompson showed, shelf registration is less costly than conventional underwritten issues.iii. Issuance of securities is greatly simplified.19.17 Suppliers of venture capital can include:i. Wealthy families / individuals.ii. Investment funds provided by a number of private partnerships and corporations.iii. Venture capital subsidiaries established by large industrial or financial corporations.iv. “Angels” in an informal venture capital market.19.18 The proceeds from IPO are used to:i. exchange inside equity ownership for outside equity ownershipii. finance the present and future operations of the IPO firms.19.19 Basic empirical regularities in IPOs include:i. underpricing of the offer price,ii. best-efforts offerings are generally used for small IPOs and firm-commitment offerings are generally used for large IPOs,iii. the underwriter price stabilization of the after market and,iv. that issuing costs are higher in negotiated deals than in competitive ones.。