In addition, none of the investors can sell their securities on the secondary market to the public. Increases liquidity and allows founders to reap their wealth. The shares in a private or closely held company are illiquid. Similarly, the owners of the business may not want people to know their net worth.
Third, the investment bank, through its affiliated brokerage firm, will have an analyst “cover” the shares after they are issued. Ritter, “The Market's Problems with the Pricing of Initial Public Offers,” Journal of Applied Corporate Finance, Spring 1994, pp. Ritter, “The Long-Run Performance of Initial Public Offers,” Journal of Finance, March 1991, pp. .
Stock Exchanges. The SEC regulates all national stock exchanges, and companies whose securities are listed on an exchange must file annual reports similar to the registration statement with both the SEC and the exchange. insider trading The SEC has control over trading by corporate insiders. Officers, directors and major shareholders must submit monthly reports of changes in their ownership of the shares of the corporation. Market manipulation. The SEC has the power to prohibit manipulation through devices such as pools (large sums of money used to buy or sell stocks to artificially influence prices) or laundering (sales between members of the same group to record artificial transaction prices ).
Proxy Statements. The SEC has control over the proxy statement and the way the company uses it to solicit votes.
E QUITY C ARVE - OUTS : A S PECIAL T YPE OF IPO
O THER W AYS TO R AISE F UNDS
IN THE C APITAL M ARKETS
- I NVESTMENT B ANKING A CTIVITIES AND T HEIR R OLE IN THE G LOBAL E CONOMIC C RISIS
- T HE D ECISION TO G O P RIVATE
- M ANAGING THE M ATURITY S TRUCTURE OF D EBT
- R EFUNDING O PERATIONS
- Determine the Investment Outlay Required to Refund the Issue
- Calculate the Annual Flotation Cost Tax Effects
- Calculate the Annual Interest Savings
- Determine the NPV of the Refunding
- M ANAGING THE R ISK S TRUCTURE
Thus, if the closing price of the shares on the last registration day had been USD 23.50, MTI would have been able to withdraw from the agreement. Shelf registrations have two advantages over standard registrations: (1) lower flotation costs and (2) more control over the timing of issuance.11. In the following sections, we discuss activities primarily associated with the investment banking arm of the financial conglomerates.
Investment banks often advise financial institutions on the securitization of the institutions' loans or leases. However, some of the recommended investments may be funds managed by the adviser's own investment bank. There is a lot of blame to spread for the cause of the global economic crisis, but investment banks certainly played a special role.
Note that some of the new capital will come from common capital, which is permanent capital. This flexibility comes at a price, however, due to the call premium and also because the company must set a higher coupon for the callable debt. This issue, which was sold 5 years ago, had flotation costs of $3 million, which the company amortized on a straight-line basis over the 25-year original life of the issue.
Because the company is in the 40% tax bracket, it saves $2.4 million in taxes; therefore, the after-tax cost of the call is only $3.6 million. The net present value of this bond repayment project will therefore be the sum of the initial outlay and the present values of the annual IPO costs, tax effects and interest savings. Tax savings on stock market listing costs for the new issue: In terms of tax, stock market listing costs must be amortized over the term of the new bond, which is 20 years.
14 The investment expense (in this case is usually obtained by increasing the amount of the new bond issue. Because the net present value of the repayment is positive, it will be profitable to repay the old bond issue. Therefore, the present value of the cash flows must be found by discounting at the firm's least risky rate—its after-tax marginal cost of debt.
Fourth, we set up our example so that the new issue had the same maturity as the remaining lifetime of the old one. If interest rates continue to fall, the company may be better off waiting, as this will increase the NPV of the repayment operation even more.
OF D EBT WITH P ROJECT F INANCING
At first glance, it seems reasonable to calculate the expected NPV of next year's repayment in terms of the probability distribution. However, these letters are not legally binding, so in project financing, lenders and lessors should focus their analysis on the inherent merits of the project and on the equity provided by the sponsors.17. The Crown made no guarantees about the amount of ore that could be extracted or the value of the silver refined.
17 In another type of project financing, each sponsor guarantees its share of the project's debt obligations. Here creditors also consider the creditworthiness of the sponsors in addition to the prospects of the project itself. It should be noted that financing projects with multiple sponsors in the electric utility industry has presented problems when one or more of the sponsors have fallen into financial difficulty.
If the project is financed as an integral part of the firm's normal operations, investors in all of the firm's outstanding securities will need information about the project. By isolating the project, the need for information is limited to the investors in the project financing, who only need to monitor the project's operations and not those of the entire firm. In such situations, lenders look only at the merits of the new project, and its cash flow can support additional debt, even though the company's overall situation does not.
A company goes private when a small group of investors, including the company's top management, buys all the equity in the company. Is it true that the "flatter" (more nearly horizontal) the demand curve for a particular company's stock, and the less important investors view the signaling effect of the offering, the more important the role of investment banks when the company sells a new issue of stock. 20-3). Do you think the SEC should, as part of each. new share or bond offerings, make a statement to investors about the true value of the securities being offered. 20-4).
How do you think each of the following would impact a company's ability to raise new capital and the associated IPO costs? The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $300,000. The company has placed many issues on the capital markets over the past decade and the cost of raising debt is currently estimated at 4% of the value of the issue.
S PREADSHEET P ROBLEM
What is the semi-annual tax savings resulting from amortizing the IPO costs on the new issue. So far, Volk has identified two future cash flows: (1) the net of the tax savings on the IPO costs of new issues and the tax savings on the IPO costs of old issues that are lost if there is refinancing, and (2) after-tax interest . savings. Mullet Technologies is considering whether to call back a $75 million, 30-year, 12% coupon bond issue it sold five years ago.
It amortizes $5 million in flotation costs on the 12% bonds over the issue's 30-year life. Mullet's investment banks indicated that the company could sell a new 25-year issue at an interest rate of 10% in today's market. Neither they nor Mullet's management foresee interest rates falling below 10% anytime soon, but there is a chance that rates will rise.
A 12% call premium would be required to retire the old bonds, and the flotation costs of the new issue would be $5 million. The new bonds would be issued 1 month before the old bonds were called, with the proceeds invested in short-term government securities yielding 6% annually in the interim period. You have been asked to educate family members about these issues by answering the following questions.
Without actually doing any calculations, describe how the preliminary bid range for the price of an IPO would be determined. Describe the typical first-day return of an IPO and the long-term return for IPO investors. Describe some ways, other than an IPO, that companies can use to raise funds from the capital markets.
S ELECTED A DDITIONAL C ASES
