CHAPTER 20: RAISING CAPITAL—EQUITY. Topics: 20.1Background 20.7Venture Capital 20.2-20.5Initial Public Offerings 20.6Rights Offerings. Background. The procedures for selling debt and equity securities are basically the same—we will focus only on equity here
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Firm Life Cycle & Financing
Private debt & equity
-Private placements of debt and equity
- Insider financing
- Angel Financing
Mostly public finance (traded bonds and equity)
Types of underwriting
Source: 1990-1994. Jay Ritter et. Al (1996), Journal of Financial Research, “The Cost of Raising Capital”
Informed investors “Good issues” underpricing
Uninformed investors Every issue ?
“What Should be Changed in the IPO Market?”, Jay Ritter, April 2003
9/14/05: SEO of 14.2 m shares at $295, 2.7% below closing price of $303.
IPO Underpricng :18%
(1) How many rights are required to purchase one share?
(2) What is the value of a right?
(3) What will the price per share be after the rights offer?
(4) Does the subscription price matter?
(1) Number of new shares =
Number of rights needed to buy a share =
The Formula: R0 = (M0-S)/(N+1)
Suppose instead S=$5?
R0 = (M0-S)/(N+1) =