15. How Corporations Issue Securities

Question 1

Underwriter

Answer 1

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

Question 2

spread

Answer 2

Difference between public offer price and price paid by underwriter

Question 3

Underpricing

Answer 3

• Issuing securities at an offering price set below the true value of the security
  • Underwriter can’t give a lot of underpricing away, but must give away some to incentivize over-subscription.

Question 4

Prospectus

Answer 4

Formal summary that provides information on an issue of securities

Question 5

Arrangement of underwriter

Answer 5

• Underwriters paid a commission, + spread (measure of risk undertaken by underwriter, the more risk undertaken, the greater the spread  depends on negotiation skills)

Question 6

Types of commitments underwriters can make

Answer 6

• Firm Commitment - Underwriters buy the securities from the firm and then resell them to the public  super incentivised to increase share price
• Best Efforts Commitment - Underwriters agree to sell as much of the issue as possible but do not guarantee the sale of the entire issue (don’t buy stock from issuing firm, since they have less incentive, they have lower spread)
• Flotation Costs - (IPO costs) The costs incurred when a firm issues new securities to the public  majority of costs are paid to underwriter

Question 7

General cash offer

Answer 7

• Sale of securities open to all investors by an already public company
  • Can be a target by competing firms

Question 8

seasoned offer

Answer 8

Sale of securities by a firm that is already publicly traded

• Publicly listed firm makes cash offer (small firms don’t like, could be taken over)

Question 9

shelf registration

Answer 9

A procedure that allows firms to file one registration statement for several issues of the same security
• Ie issue for each project, saves costs, as don’t have to pay underwriter as much

Question 10

rights issue

Answer 10

Issue of securities offered only to current stockholders.
• Protects company from takeover. Rights issues must be issued at discount, as there must be an incentive to buy a rights issue.

Question 11

public placement

Answer 11

Sale of securities to a limited number of investors without a public offering.
• Regulations around this, otherwise firms would target certain institutions that other shareholders wouldn’t know about
• In US can’t raise more than 5% of total market cap with private placement

Question 12

qualified institutional buyer

Answer 12

Entity entitled under SEC Rule 144A to purchase and trade private placements.

Question 13

value of a right

Answer 13

Opportunity value = (rights on price – issue price) / (N + 1)

Question 14

after issue stock price

Answer 14

= after issue company value/after issue no. shares

Question 15

How far could the total value of the company fall before shareholders would be unwilling to take up their rights?

Answer 15

the share price would have to fall to the issue price per share (before the issue of the new stock, so find the market capitalisation of original stock price*original no. shares)