Chapter 20 - NEW
Chapter 20 - NEW
Chapter 20 - NEW
Public
Chapter 20
Executive Summary
decisions.
investing public.
• The basic procedure for selling debt and equity securities are
5
D
%
D $1
0
$10
E
$90+
E new100
$90 95
%
Total
100
Total =
200
of stock for cash. Existing stockholders are notified that they have been
– The subscription price (the price existing shareholders must pay for
new shares).
– How many rights will be required to purchase one new share of stock?
• A rational shareholder will subscribe to the rights offering only
if the subscription price is below the market price.
• For example, if the stock price at expiration is $13 and the subscription
price is $15, no rational shareholder will subscribe. Why pay $15 for
something worth $13?
20
SHARE
Ans.
Right offering example
🞂
🞂 Rights
Advantages:
🞂 Lowest cost method
🞂 Maintains ownership percentage
🞂 Protects against underpricing.
Disadvantages:
Shareholders may not have capital,
May not be fully subscribed,
Rights vs Underwriting
🞂 Underwriting
Advantages:
🞂 Advice on issue characteristics and pricing from
investment bankers,
🞂 Access to broader market,
🞂 Acts to guarantee price in firm commitment.
Disadvantages:
- Most costly--both direct and other expenses
- Current shareholders may not be able to maintain
ownership percentage
The Private Equity Market
🞂 The previous sections of this chapter assumed that a company is big enough,
successful enough, and old enough to raise capital in the public equity market.
🞂 Private equity is capital that is not listed on a public exchange. Private equity is
composed of funds and investors that directly invest in private companies. Private-
equity firms are formed by investors who want to directly invest in other
companies, rather than buying stock.
🞂 There are many firms that have not reached this stage and cannot use the public
equity market.
🞂 For start-up firms and firms in financial trouble, the public equity market is often
not available.