Tài chính doanh nghiệp - Chapter 15: Raising capital

Raising CapitalChapter 150Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerKey Concepts and SkillsUnderstand the venture capital market and its role in financing new businessesUnderstand how securities are sold to the public and the role of investment bankersUnderstand initial public offerings and the costs of going public1Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChapter OutlineThe Financing Life Cycle of a Firm: Early-Stage Financing and Venture CapitalSelling Securities to the Public: The Basic ProcedureAlternative Issue MethodsUnderwritersIPOs and UnderpricingNew Equity Sales and the Value of the FirmThe Cost of Issuing SecuritiesIssuing Long-Term Debt2Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerVenture CapitalPrivate financing for relatively new businesses in exchange for shares in the firmUsually entails some hands-on guidanceThe ultimate goal is usually to take the company public and the VC will benefit from the capital raised in the IPOMany VC firms are formed from a group of investors that pool capital and then have partners in the firm decide which companies will receive financingSome large corporations have a VC division3Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerChoosing a Venture CapitalistLook for financial strengthChoose a VC that has a management style that is compatible with your ownObtain and check referencesWhat contacts does the VC have?What is the exit strategy?4Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerSelling Securities to the PublicManagement must obtain permission from the Board of DirectorsFirm must file a prospectus with ASIC and also the ASX if public listing is soughtASIC examines the prospectus and approves itThe period between filing and approval is called the registration periodSecurities may not be sold during the registration periodThe price is usually determined on the effective date of the registration 5Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 15.16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTable 15.27Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerUnderwritersServices provided by underwriters:Formulate method used to issue securitiesPrice the securitiesSell the securitiesSyndicate – group of investment bankers that market the securities and share the risk associated with selling the issue8Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerStandby UnderwritingAt the end of the issue, the issuer buys any shares not bought by the publicThe underwriter charges a fee for this serviceThe underwriter bears the risk of not being able to sell the entire issue to the publicMost common type of underwriting in Australia9Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerBest Efforts UnderwritingUnderwriter must make their “best effort” to sell the securities at an agreed-upon offering priceThe company bears the risk of the issue not being soldThe offer may be pulled if there is not enough interest at the offer price and the company does not get the capital and they have still incurred substantial flotation costsNot as common as it used to be10Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerIPO UnderpricingInitial Public Offering – IPOMay be difficult to price an IPO because there is not a current market price availableAdditional asymmetric information associated with companies going publicUnderwriters want to ensure that their clients earn a good return on IPOs on averageUnderpricing causes the issuer to “leave money on the table”11Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 15.112Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerFigure 15.213Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerNew Equity Issues and PriceShare prices tend to decline when new equity is issuedPossible explanations for this phenomenonSignalling and managerial informationSignalling and debt usageIssue costsSince the drop in price can be significant and much of the drop may be attributable to negative signals, it is important for management to understand the signals that are being sent and try to reduce the effect when possible14Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerIssuance CostsUnderwriting costsOther direct expenses – legal fees, filing fees, etc.Indirect expenses – opportunity costs, i.e., management time spent working on issueAbnormal returns – price drop on existing sharesUnderpricing – below market issue price on IPOs15Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerTypes of Long-term DebtBonds/debentures – public issue of long-term debtPrivate issuesTerm loansDirect business loans from commercial banks, insurance companies, etc.Maturities 1 – 5 yearsRepayable during life of the loanPrivate placementsSimilar to term loans with longer maturityEasier to renegotiate than public issuesLower costs than public issues16Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan TraylerQuick QuizWhat 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?17Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance by Ross, Trayler, Bird, Westerfield & JordanSlides prepared by Rowan Trayler