Chapter16 вЂўRaising Capital McGraw-Hill/Irwin Copyright В© 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 16 вЂ“ Index of Sample Problems вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў вЂў Slide # 02 - 03 Slide # 04 - 05 Slide # 06 - 07 Slide # 08 - 09 Slide # 10 - 11 Slide # 12 - 18 Slide # 19 - 20 Slide # 21 - 25 Slide # 26 - 30 Dutch auction IPO allocations Flotation costs Rights вЂ“ Number of shares needed Rights вЂ“ Number of rights Rights вЂ“ Value of a right Dilution вЂ“ Ownership Dilution вЂ“ Accounting and financial Dilution вЂ“ Portfolio value The Financial life cycle of a firm вЂў Early-stage financing and venture capital вЂў Selling securities to public: cash offers, right offers вЂў Initial public offering (IPO) вЂў Seasoned equity offering (SEO) Underwriter вЂў Cash offers вЂў 1. Formulating the method used to issued the securities вЂў 2. Pricing the new securities вЂў 3. Selling the new securities вЂў Syndicate вЂў Gross spread Types of underwriting вЂў Firm commitment underwriting вЂў Best efforts underwriting вЂў Dutch auction underwriting ( uniform price auction) вЂў вЂў вЂў вЂў Aftermarket The green shoe provision Lockup agreement The Quiet period вЂў IPOs and underpricing Seasoned equity offering вЂў вЂў вЂў вЂў вЂў вЂў вЂў Costs 1. gross spread Other direct expense Indirect expenses Abnormal returns Underpricing Green shoe options 2: Dutch auction The Samson Co. wants to sell 1,000 shares of stock. The shares are to be sold in a Dutch auction. The following bids have been received. Bidder Quantity Price A 200 $23 B 400 $21 C 600 $19 D 500 $18 How much will the company receive per share of stock sold? 3: Dutch auction The Samson Co. wants to sell 1,000 shares of stock. Bidder A B C D Quantity 200 400 600 500 Price $23 $21 $19 $18 Total Quantity 200 = 200 200 + 400 = 600 200 + 400 + 600 = 1,200 How much will the company receive per share of stock sold? 4: IPO Allocations You have placed orders to purchase 100 shares of each of three IPOs. Each IPO is priced at $10 a share. The number of shares you are allocated and the market price at the end of the first day are: Stock Shares allocated Market price A 100 $ 8.00 B 80 $11.00 C 20 $15.00 What is the amount of your total profit or loss on these stocks as of the end of the first day of trading? 5: IPO allocations Number of shares п‚ґ (Ending price вЂ“ Cost) Profit or Loss 100 п‚ґ ($ 8 - $10) -$200 80 п‚ґ ($11 - $10) $ 80 20 п‚ґ ($15 - $10) $100 Total -$ 20 6: Flotation costs The Alpha Co. wants to raise $20 million to fund a new project. The company estimates that it will spend $500,000 for accounting, legal and other costs related to the issue. The underwriting spread is 7.5 percent. The issue price of the stock is $25 a share. How many shares of stock does the Alpha Co. need to sell? 7: Flotation costs T otal value of issue пЂЅ $20,000,00 0 пЂ« $500,000 1 - .075 пЂЅ $ 20 , 500 , 000 . 925 пЂЅ $ 22 ,162 ,162 (rounded) Number of shares пЂЅ $22,162,16 2 $25 пЂЅ 886 , 486 shares (rounded) 8: Rights вЂ“ Number of shares needed Tell Me Why, Inc. wants to raise $6 million to develop a new website designed for kids. The company has decided to do this through a rights offering with a subscription price of $40. The current market price of Tell Me Why, Inc. stock is $51.59 per share. How many new shares of stock does the company need to sell? Note: The subscription price is less than the current market price. This is necessary if a right is to have any value. 9: Rights вЂ“ Number of shares needed Number of shares needed пЂЅ $ 6 , 000 , 000 $ 40 пЂЅ 150 , 000 shares 10: Rights вЂ“ Number of rights Telephoto, Inc. wants to raise $12 million through a rights offering. Each shareholder will receive one right for each share they own. The subscription price has been set at $20. Currently, the company has 1.5 million shares outstanding with a current market price of $28.45 a share. How many rights will be issued? How many rights will be needed to purchase one new share of stock in this offering? 11: Rights вЂ“ Number of rights The company will issue 1.5 million rights since there are 1.5 million shares of stock outstanding. Number of shares needed пЂЅ $12,000,00 0 $20 пЂЅ 600 , 000 Rights needed for each new share пЂЅ Old shares New shares пЂЅ 1,500,000 600,000 пЂЅ 2 .5 12: Rights вЂ“ Value of a right Kurt currently owns 4 shares of Ideals, Inc. These shares have a market value of $36 each. Ideals just announced the details of a new rights offering. The company will issue one right per share of outstanding stock. The new shares in this offering are priced at $20 plus 4 rights. What is the value of one right? 13: Rights вЂ“ Value of a right Total invested пЂЅ (4 п‚ґ $36) пЂ« $20 пЂЅ $164 Cost per share пЂЅ $164 пЂЅ $ 164 4 пЂ«1 5 пЂЅ $ 32 . 80 Value of right пЂЅ $36.00 - $32.80 пЂЅ $3.20 14: Rights вЂ“ Value of a right Ex - rights price пЂЅ $20 пЂ« 4 rights $ 32 . 80 пЂЅ $20 пЂ« (4 п‚ґ $3.20) $ 32 . 80 пЂЅ $20 пЂ« $12.80 $ 32 . 80 пЂЅ $32.80 15: Rights вЂ“ Value of a right Alexander & Co. currently has a total firm value of $21.6 million. The company has decided to raise another $6 million through a rights offering. The subscription price is $15 per new share purchased. The company currently has 1.2 million shares outstanding and will issue one right per outstanding share. How many rights will be needed to purchase one new share? What is the value of one right? 16: Rights вЂ“ Value of a right Number of shares needed пЂЅ $6,000,000 $15 пЂЅ 400 , 000 shares Number of rights needed пЂЅ Old shares New shares пЂЅ 1, 200 , 000 400 , 000 пЂЅ3 17: Rights вЂ“ Value of a right Current share price пЂЅ $21,600,00 0 1,200,000 пЂЅ $ 18 . 00 Ex пЂ rights price of stock пЂЅ пЂЅ $ 21 , 600 , 000 пЂ« $ 6 , 000 , 000 1, 200 , 000 пЂ« 400 , 000 $27,600,00 0 1,600,000 пЂЅ $ 17 . 25 Value of one right пЂЅ $18.00 - $17.25 пЂЅ $.75 18: Rights вЂ“ Value of a right Ex - rights price пЂЅ Subscripti on price пЂ« 3 rights $17.25 пЂЅ $15 пЂ« (3 п‚ґ $.75) $17.25 пЂЅ $15 пЂ« $2.25 $17.25 пЂЅ $17.25 19: Dilution - Ownership Tomas owns 3,500 shares of stock in Hot Tamales. The company currently has 25,000 shares outstanding and is preparing to sell an additional 10,000 shares to finance future expansion. Tomas is not going to purchase any additional shares. How will TomasвЂ™ ownership position in Hot Tamales change as a result of this new issue of stock? 20: Dilution - Ownership Current пЂЅ position 3,500 пЂЅ 14 % 25,000 Future position пЂЅ 3,500 25,000 пЂ« 10,000 пЂЅ 10 % 21: Dilution вЂ“ Accounting and financial JKL, Inc. has compiled information on their current financial status as seen in the table on the next slide. The company is analyzing the financial impact of a proposed project. The project requires an initial investment of $200,000 for fixed assets. This investment will be funded by issuing additional shares of stock. The project has a net present value of $100,000 and a price / earnings ratio equal to that of the firm. Given this information, can you complete the last column on the next slide to show how the various values will change if the project is implemented? 22: Dilution вЂ“ Accounting and financial Current firm Shares outstanding Book value Book value per share Market value Market value per share Net income 200,000 $1 million $5 $1.6 million $8 $100,000 Return on equity 10% Earnings per share $.50 Earnings per share / Price .0625 Price / Earnings per share 16 Price / Book 1.6 Firm with new project 23: Dilution вЂ“ Accounting and financial Here are some questions to help you: What will the book value of the company be if you add $200,000 of fixed assets to the current book value? What will the market value of the company be if you add $200,000 of fixed assets plus $100,000 from the net present value of the project to the current market value? How many shares of stock will need to be sold at the current market price to raise the $200,000 needed to buy assets? 24: Dilution вЂ“ Accounting and financial What is the market value per share? If the market value per share, also called the price, is $8.4444 and the price / earnings ratio is 16, what is the earnings per share? If you multiply the earnings per share times the number of shares, wonвЂ™t you get the net income? IsnвЂ™t the return on equity equal to the net income divided by the book value? 25: Dilution вЂ“ Accounting and financial Current firm Firm with new project 200,000 225,000 $1 million $1.2 million $5 $5.3333 $1.6 million $1.9 million $8 $8.4444 $100,000 $118,755 Return on equity 10% 9.90% Earnings per share $.50 $.5278 Earnings per share / Price .0625 .0625 Price / Earnings per share 16 16 Price / Book 1.6 1.58 Shares outstanding Book value Book value per share Market value Market value per share Net income 26: Dilution вЂ“ Portfolio value You own 5,000 shares of ABC Co. This represents a 20% ownership position. The current market price of ABC stock is $40 a share. By what percentage will your portfolio value change if the company sells an additional 5,000 shares of stock at $38 a share and you do not buy any? 27: Dilution вЂ“ Portfolio value Here are some questions to help you answer this problem: How many shares of stock are currently outstanding? What is the current value of the firm? How many shares will be outstanding after the new issue is released? By how much will the value of the firm increase when the new shares are sold? 28: Dilution вЂ“ Portfolio value How many shares of stock are currently outstanding? 5,000 п‚ё .20 = 25,000 What is the current value of the firm? 25,000 п‚ґ $40 = $1,000,000 How many shares will be outstanding after the new issue is released? 25,000 + 5,000 = 30,000 By how much will the value of the firm increase when the new shares are sold? $1,000,000 + (5,000 п‚ґ $38) = $1,190,000 29: Dilution вЂ“ Portfolio value What is the new price per share? What is your new portfolio value? What was your original portfolio value? What is the percentage change in the value of your portfolio? 30: Dilution вЂ“ Portfolio value What is the new price per share? $1,190,000 п‚ё 30,000 = $39.6667 What is your new portfolio value? 5,000 п‚ґ $39.6667 = $198,333.50 What was your original portfolio value? 5,000 п‚ґ $40.00 = $200,000.00 What is the percentage change in the value of your portfolio? Percentage change in your portfolio пЂЅ $198,333.5 0 - $200,000 $200,000 пЂЅ пЂ . 0083 пЂЅ пЂ . 83 % Chapter16 вЂўEnd of Chapter 16 McGraw-Hill/Irwin Copyright В© 2006 by The McGraw-Hill Companies, Inc. All rights reserved.