1 chapter 18 issuing capital and the investment banking process mcgraw-hill/irwin copyright © 2012...
TRANSCRIPT
![Page 1: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/1.jpg)
1
Chapter 18Chapter 18 Issuing Capital and the Investment Banking Process
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
![Page 2: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/2.jpg)
Introduction• Firms finance assets with capital– Retained earnings– Debt– Equity
18-2
![Page 3: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/3.jpg)
Sources of Capital for New and Small Firms
• Debt– Borrowing from friends and relatives– Bank loans– Venture capitalists
• Equity– Venture capitalists
18-3
![Page 4: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/4.jpg)
Debt Financing
• Bank Loans– New and small firms rely on banks– Availability of small-business loans was heavily
affected by the 2008 financial crisis
18-4
![Page 5: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/5.jpg)
Bank Loans
• Small Business Loans
– Risky for commercial banks
– Banks use small-business scoring models
18-5
![Page 6: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/6.jpg)
Bank Loans
• Mid-market firms
– Sales between $5 million and $100 million per year
– Rely on banks for funding
18-6
![Page 7: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/7.jpg)
Credit Process Flow Chart
18-7
![Page 8: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/8.jpg)
Loan Commitments
• Loan commitment agreements specify
– maximum loan amount
– interest rate terms
– length of loan
18-8
![Page 9: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/9.jpg)
Fixed versus Floating Rate Loans– Interest rates for variable-rate loans change over
the life of the loan
– Floating rate loans are set at a fixed spread over a prevailing benchmark rate
18-9
![Page 10: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/10.jpg)
Small Business Administration• Created to help small businesses
• Basic loan guarantee program– for qualified new firms that cannot get reasonable long-term financing from other financial institutions
18-10
![Page 11: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/11.jpg)
Equity Financing and Expertise• New and high-risk firms use venture capital (VC)
for financing– Professionally managed– VC firm takes an equity stake in the firm financed– VC firms are actively involved in the business
18-11
![Page 12: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/12.jpg)
Venture Capital Firms
Institutional venture capital firm types:
– Venture capital limited partnerships
– Financial venture capital firms
– Corporate venture capital firms
– Small Business Investment Companies
18-12
![Page 13: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/13.jpg)
Angel Venture Capitalists• Majority of VC equity investments from
wealthy individuals (angels), not institutions
• Angel VCs want– High return– Easy exit
18-13
![Page 14: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/14.jpg)
The Choice to Go Public• Choice made when firm’s capital needs
exceed its ability to raise capital
• Initial public offering (IPO) of firm’s stock– Equity is publicly traded in stock markets for the
first time
18-14
![Page 15: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/15.jpg)
The Choice to Go Public
• Benefits of being a public firm– Access to a larger pool of equity capital– Stock market provides a market value for the
firm’s stock
18-15
![Page 16: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/16.jpg)
The Choice to Go Public
Benefits of being a public firm
– Firm’s managers can be rewarded with firm’s stock
– Original owners can diversify their holdings
18-16
![Page 17: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/17.jpg)
The Choice to Go PublicDisadvantages of being a public firm– Costs of an IPO– Public disclosure of information required — may
be valuable to competitors– Shareholders demand a great deal of information
18-17
![Page 18: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/18.jpg)
Public Firms’ Capital Sources
• Debt Financing– Commercial Paper• Unsecured, short-term promissory note• Used to raise short-term cash, often working capital
18-18
![Page 19: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/19.jpg)
Commercial Paper• Trading process– Can be sold directly to investors or through broker
dealer – Firm’s credit rating critical because commercial
paper is unsecured debt
18-19
![Page 20: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/20.jpg)
Long-Term DebtCorporate bonds
• Minimum denomination on publicly traded bonds is $1,000
• Most coupon-paying bonds pay interest semiannually
18-20
![Page 21: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/21.jpg)
Trading Process for Corporate Bonds
• Initial sale made by public offering or private placement to institutional investors– Large firms use large investment banks– Smaller firms use small regional investment banks
18-21
![Page 22: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/22.jpg)
Trading Process for Corporate Bonds
• Investment banks– Firm commitment underwriting
• Entire issue bought by bank at fixed price (discount from par) and resold at higher price
• Issuing firm has price guarantee – investment bank has risk
18-22
![Page 23: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/23.jpg)
Firm Commitment Underwriting Corporate Bond Issue
18-23
![Page 24: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/24.jpg)
Trading Process for Corporate Bonds
• Competitive sale — highest bid from group of underwriters wins
• Negotiated sale — issuing firm negotiates with single investment bank
18-24
![Page 25: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/25.jpg)
Trading Process for Corporate Bonds
Best efforts underwriting – Underwriter does not buy issue but instead acts as
a placing or distribution agent for a fee– Price risk remains with issuing firm
18-25
![Page 26: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/26.jpg)
Equity Financing
• Majority of both the board of directors and the firm’s existing stockholders must approve any new stock issue
18-26
![Page 27: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/27.jpg)
The Trading Process for Corporate Equity
• Primary market– IPO– Seasoned offering is when the firm already has
publicly-traded shares
18-27
![Page 28: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/28.jpg)
Primary Market Stock Transaction
18-28
![Page 29: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/29.jpg)
The Securities and Exchange Commission (SEC) must approve any new issues to the public
The Trading Process for Corporate Equity
18-29
![Page 30: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/30.jpg)
The Trading Process for Corporate Equity
• Stock issues – Firm commitment underwriting– Best-efforts basis
• Registration statement– Full disclosure of firm information, risks,
management background and securities to be issued
18-30
![Page 31: 1 Chapter 18 Issuing Capital and the Investment Banking Process McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader035.vdocument.in/reader035/viewer/2022070412/56649db25503460f94aa24c0/html5/thumbnails/31.jpg)
• Prospectus– Red herring prospectus is preliminary version of
the public offering prospectus– Official prospectus describes issue• Shelf registration allows multiple stock issues for two
years under one registration
The Trading Process for Corporate Equity
18-31