Ch 15 - FIN.pdf - LEARNING OBJECTIVES After studying this...

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After studying this chapter, you should understand: LO1 The venture capital market and its role in the financing of new, high- risk ventures. LO2 How securities are sold to the public and the role of investment banks in the process. LO3 Initial public offerings and some of the costs of going public. LO4 How rights are issued to existing shareholders and how to value those rights. LEARNING OBJECTIVES 15 471 Cost of Capital and Long-Term Financial Policy PA R T 6 RAISING CAPITAL IN AN EAGERLY AWAITED INITIAL PUBLIC OFFERING (IPO), credit card giant Visa went public on March 19, 2008. Assisted by J.P. Morgan, Goldman Sachs, and Bank of America, Visa sold about 447 mil- lion shares of stock to the public at a price of $44. In a nod to the public’s unfortunate fascination with credit, the stock price jumped to $56.50 at the end of the day, a 28 percent increase. The Visa offer raised a total of $19.65 billion, easily the largest IPO in U.S. history. The largest IPO had been the AT&T Wireless offering in 2000, which raised $10.6 billion. In this chapter, we will examine the process by which companies such as Visa sell stock to the public, the costs of doing so, and the role of investment banks in the process. All firms must, at varying times, obtain capital. To do so, a firm must either borrow the money (debt financing), sell a portion of the firm (equity financing), or both. How a firm raises capital depends a great deal on the size of the firm, its life-cycle stage, and its growth prospects. In this chapter, we examine some of the ways in which firms actually raise capital. We begin by looking at companies in the early stages of their lives and the importance of ven- ture capital for such firms. We then look at the process of going public and the role of investment banks. Along the way, we discuss many of the issues associated with selling securities to the public and their implications for all types of firms. We close the chapter with a discussion of sources of debt capital. 1 1 We are indebted to Jay R. Ritter of the University of Florida for helpful comments and suggestions for this chapter. Master the ability to solve problems in this chapter by using a spreadsheet. Access Excel Master on the student Web site .
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472 PA R T 6 Cost of Capital and Long-Term Financial Policy The Financing Life Cycle of a Firm: Early-Stage Financing and Venture Capital One day, you and a friend have a great idea for a new computer software product that helps users communicate using the next-generation meganet. Filled with entrepreneurial zeal, you christen the product Megacomm and set about bringing it to market. Working nights and weekends, you are able to create a prototype of your product. It doesn’t actually work, but at least you can show it around to illustrate your idea. To actually develop the product, you need to hire programmers, buy computers, rent office space, and so on. Unfortunately, because you are both college students, your combined assets are not sufficient to fund a pizza party, much less a start-up company. You need what is often referred to as OPM—other people’s money.
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