Topic 11 Raising Capital

Question 1

2 arrangement options in underwriting

Answer 1

Firm commitment - all risk on underwriter
Best-efforts-Corporation raising capital bears all risk *generally for smaller deals

Question 2

Public offering underwriting process

Answer 2

1) form an underwriting syndicate
2) registration and “red herring”
3) due diligence, book building, and roadshows
4) set the offer price and issue a prospectus
5) aftermarket price stabilization

Question 3

Overallotment Option Process

Answer 3

issuer grants the underwriter an option to purchase an additional 10-15% of shares that incentivizes underpricing and decreases risk to the underwriter

Question 4

Why underprice

Answer 4

1)the rock model
-informed and uninformed investors want IPOs and the uninformed buy all the shares in overpriced IPOs
->winners curse of being allotted all the shares
*therefore banks must keep uninformed participating by offering incentives through underpricing

2)Limit shareholder lawsuits

3)Reduced underwriter risk

4)Creates good sentiment about the firm

Question 5

2 types of seasoned public offer SEO

Answer 5

Cash offer -firm offers new shares to investors at large
Rights offer- firm offers new shares to existing shareholders -> more common abroad

Question 6

Accelerated Offers

Answer 6

-Generally, shelf registered with the SEC under rule 415
-bought deal -> underwriters bid for them and then resale the shares afterward to institutional investors
-accelerated book building offer -> 48-hour proposal specifies a gross spread and creates a syndicate