Common stocks
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Common Stocks. Authorized Share Capital: maximum number of shares that can be issued. Issued Shares: Total shares that have been issued. Treasury stocks: shares that have been purchased by the company and held in its treasury. Outstanding shares: shares that are held by investors.

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Common stocks
Common Stocks

  • Authorized Share Capital: maximum number of shares that can be issued.

  • Issued Shares: Total shares that have been issued.

  • Treasury stocks: shares that have been purchased by the company and held in its treasury.

  • Outstanding shares: shares that are held by investors.


Preferred stock
Preferred Stock.

  • Preferred Stock: takes priority over common stock in dividends, but has no voting rights.

  • Floating-rate preferred: pays dividends tied to short-term interest rates.


Corporate debt
Corporate Debt

  • Bonds rated based on default risks.

  • “Bond Ratings” are issued on debt instruments to help investors assess the default risk of a firm.


Convertible securities
Convertible Securities

  • Warrant- Right to buy shares a fixed price at a fixed date. (similar to call options).

  • Question: which is more valuable:warrant or call option?

  • Convertible Bond - bond that the holder may exchange for another security such as common stock. This is both a bond and a warrant.


Choices of finance
Choices of Finance.

  • Internal or External.

  • External: Debt or Equity.

  • Statistic of Debt/Equity ratio.

  • Question: Is a high ratio bad?


Start up
Start-up

  • See book by Jerry Kaplan.

  • Stages

    • Angel investors.

    • Venture Capital

    • IPO


Angel investors
Angel Investors.

  • Rich friend or relative.

  • Some people will help for finder’s fee.

  • Should be compensated for the risk.

  • Need to value the firm. For instance, could sell of 10% for 100k.

  • Usually set up as a partnership.


Venture capital
Venture Capital

  • Money invested to finance a new firm

  • Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved

  • Usually demand a few board seats as well.




Incubators
Incubators

  • Idea started by Bill Gross: idealabs.

  • Have all startups in same buildings.

  • Advantages:

    • Easy monitoring.

    • Shared fixed-costs. (connection/accounting/law)

    • Faster preparation.

  • Now individual firms provide separate services. Not so diversified.


IPO

Initial Public Offering (IPO) - First offering of stock to the general public.

Underwriter - Firm that buys an issue of securities from a company and resells it to the public.

Spread - Difference between public offer price and price paid by underwriter.

Prospectus - Formal summary that provides information on an issue of securities.

Underpricing - Issuing securities at an offering price set below the true value of the security.


IPO

  • Time to IPO was decreasing. Now… Not so many.

  • IPOs are underpriced. Possible explanation is the winners curse.

    • While new issues have high return, you get a smaller fraction of them if the return is high.

    • On average you get normal returns.


Initial Offering

Average Expenses on 1767 IPOs from 1990-1994



General Cash Offers

Seasoned Offering - Sale of securities by a firm that is already publicly traded.

General Cash Offer - Sale of securities open to all investors by an already public company.

Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security.

Private Placement - Sale of securities to a limited number of investors without a public offering.


Rights Issue

Rights Issue - Issue of securities offered only to current stockholders.

Example - YRU Corp currently has 9 million shares outstanding. The market price is $15/sh. YRU decides to raise additional funds via a 1 for 3 rights offer at $12 per share. If we assume 100% subscription, what is the value of each right?


Rights Issue

Example - YRU Corp currently has 9 million shares outstanding. The market price is $15/sh. YRU decides to raise additional funds via a 1 for 3 rights offer at $12 per share. If we assume 100% subscription, what is the value of each right?

  • Current Market Value = 9 mil x $15 = $135 mil

  • Total Shares = 9 mil + 3 mil = 12 mil

  • Amount of new funds = 3 mil x $12 = $36 mil

  • New Share Price = (135 + 36) / 12 = $14.25/sh

  • Value of a Right = 15 - 14.25 = $0.75


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