• Prospectus

✓ Formal summary that provides • Underpricing

• Underwriter Arrangements
✓ Firm Commitment – Firm that
buys an issue of securities from a
company and resells it to the
public
✓ Best Efforts Commitment –
Underwriters agree to sell as
much of the issue as possible but
do not guarantee the sale of the
entire issue
• Spread
✓ Floatation Costs – The costs
incurred when a firm issues new
✓ Difference between public offer price and
securities to the public
information on an issue of securities
The Initial Public
Offering (IPO)
First offering of stock to
the general public
price paid by underwriter
✓ Issuing securities at an offering
price set below the true value of
the security
❖Assume the issuer incurs $1
million in other expenses to sell 3
million shares at $40 each to an
underwriter and the underwriter
sells the shares at $43 each. The
end of the first day’s trading, the
issuing company’s stock price
had risen to $70.
Cost of underpricing:
3 million($70 − $43) = $81 million

❖Assume the issuing company incurs $1

million in expenses to sell 3 million shares at
$40 each to an underwriter; the
underwriter sells the shares at $43 each

3 million x ($43-$40)=$9 million

• General Cash Offer – Sale of securities open to all investors
by an already public company
➢ Seasoned Offering – Sale of securities by a firm that
is already publicly traded
➢ Shelf Registration – A procedure allows firms to file
one registration statement for several issues of the
same security
Security Sales by Public Companies
• International Security Issues – Sale of securities in other
countries
➢ Eurobond – Bonds underwritten by a group of
international banks and offered simultaneously to
investors in a number of countries
➢ Global bonds – Bonds where one part is sold
internationally in the eurobond market and the
remainder sold in the company’s domestic
market
• Right Issue – Issue of securities offered only to current
stockholders
❖ Ivanhoe Mines needs C$1.2 billion of new equity.
Market price C$24.73. Ivanhoe Mines decides to
raise additional funds by offering the right to buy 3
new shares for 20 at C$13.93 per share. With 100%
subscription, what is value of each right?
▪ Current market value = 20 × C$24.73 = C$494.60
▪ Total shares = 20 + 3 = 23
▪ Amount of new funds = 3 × C$13.93 = C$41.79
▪ New share price = (41.79 + 494.60) / 23 = C$23.32
▪ Value of a right = C$23.32 - C$13.93 = C$9.39
❖ Lafarge Corp needs to raise €1.28billion of new equity.
The market price is €60/sh. Lafarge decides to raise
additional funds via a 4 for 17 rights offer at €41 per
share. If we assume 100% subscription, what is the
value of each right?
▪ Current market value = 17 × €60 = €1,020
▪ Total shares = 17 + 4 = 21
▪ Amount of funds = 1,020 + (4x41) = €1,184
▪ New share price = (1,184) / 21 = €56.38
▪ Value of a right = 56.38 – 41 = €15.38