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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.

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Common Stocks

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  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. Choices of Finance. • Internal or External. • External: Debt or Equity. • Statistic of Debt/Equity ratio. • Question: Is a high ratio bad?

  6. Start-up • See book by Jerry Kaplan. • Stages • Angel investors. • Venture Capital • IPO

  7. 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.

  8. 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.

  9. Venture Capital

  10. Venture Capital

  11. 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.

  12. 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.

  13. 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.

  14. Initial Offering Average Expenses on 1767 IPOs from 1990-1994

  15. The Underwriters

  16. 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.

  17. 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?

  18. 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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