Professional Documents
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How Corporations Raise Venture Capital and Issue Securities
How Corporations Raise Venture Capital and Issue Securities
How
Corporations
Raise Venture
Capital and
Issue Securities
15- 2
Venture Capital
first-stage financing.
subsequent staged
financing.
15- 4
Venture Capital
Venture Capital
Money invested to finance a new firm
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Venture Capital
Cash from new equity 0.5 New equity from venture capital 0.5
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Venture Capital
Cash from new equity 1.0 New equity from 2nd stage 1.0
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Venture Capital
15- 10
Initial Public Offering
15- 11
Arranging Public Issues
15- 12
IPO Flowchart
2
Underwriter Firm Investors
3
5
1. Underwriter provides advice to firm
2. Underwriter pays firm for a number of shares
3. Firm provides shares to underwriter to be resold
4. Underwriter offers shares to investors
5. Investors purchase shares from underwriter
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Underwriter Spread
Example
Assume the issuing company incurs $1 million in expenses to
sell 3 million shares at $40 each to an underwriter; the
underwriter sells the shares at $43 each. What is the spread
for this deal?
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Underwriting Arrangements
Example
How much will a firm receive in net funding from a
firm commitment underwriting of 250,000 shares
priced to the public at $40 if a 10% underwriting
spread has been added to the price paid by the
underwriter? Additionally, the firm pays $600,000 in
legal fees.
Cost to public = $40
Net to issuer = $40/1.10 = $36.36
Therefore, the spread was $3.64 per share
Net to issuer = 250,000 × $36.36 = $9,090,000
Less legal fees 600,000
$8,490,000 15- 16
Underpricing of an IPO
Example – (continued)
Assume the issuer incurs $1 million in other expenses to sell 3
million shares at $40 each to an underwriter and the
underwriter sells the shares at $43 each. By the end of the first
day’s trading, the issuing company’s stock price had risen to
$70. What is the total cost of underpricing?
Cost of underpricing:
3 million($70 - $43) = $81 million
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Initial Public Offering
www.IPOScoop.com 15- 18
Initial Public Offering
Expenses
15- 19
The Underwriters
15- 21
Rights Issue
Example
Barclays Bank currently has 12.68 billion shares
outstanding. The market price is £2.85/sh.
Barclays decides to raise additional funds via a 1
for 4 rights offer at £1.85/sh. If we assume 100%
subscription, what is the value of each right?
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Rights Issue
Example
Barclays Bank currently has 12.68 billion shares outstanding.
The market price is £2.85/sh. Barclays decides to raise
additional funds via a 1 for 4 rights offer at £1.85/sh. If we
assume 100% subscription, what is the value of each right?
15- 23
Rights Issue
Example
Barclays Bank currently has 12.68 billion shares outstanding.
The market price is £2.85/sh. Barclays decides to raise
additional funds via a 1 for 4 rights offer at £1.85/sh. If we
assume 100% subscription, what is the value of each right?
2.85 − 1.85
Value of a right = = 0.20
4
+1
1
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