ch14_5th - Solutions to Chapter 14 Venture Capital, IPOs,...

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Solutions to Chapter 14 Venture Capital, IPOs, and Seasoned Offerings 1. a.A rights issue can be used for subsequent issues of stock. A rights issue requires that there are already existing shareholders. b. Seasoned offerings are security issues by firms that are already publicly traded. Publicly traded firms usually find it advantageous to sell new shares in a public offering because the public offering is less costly than a private placement. In contrast, even publicly traded firms may find it advantageous to use a private placement of bonds. Such bonds can be issued with unusual terms and can allow the firm to negotiate directly with the bondholders should the firm later wish to make changes in the terms of the debt. Therefore, it is more likely that the private placement is used for the bond issue. c.Shelf registration is more likely to be used for bonds issued by a large industrial company. 2. a.A €10 million bond issue. b. A $50 million stock issue. c.A $75 million debt issue. 3. [Note: the stock price cited in the fourth sentence of this problem should be $40 per share, not $30 per share.] The shares issued in the first-stage financing are valued at: $500,000/25,000 = $1,000,000/50,000 = $20 per share The market value balance sheet after the first-stage financing is as follows: First-Stage Market Value Balance Sheet (figures in millions) Assets Cash from new equity 1.0 New equity from first venture capital firm 1.0 Other assets 1.0 Ravi A. equity 0.5 Carlos M. equity 0.5 Value 2.0 Value 2.0 14-1
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The market value balance sheet after the second-stage financing is as follows: Second-Stage Market Value Balance Sheet (figures in millions) Assets Cash from new equity 2.0 New equity from second venture capital firm 2.0 Other assets 4.0 First venture capital firm equity 2.0 Ravi A. equity 1.0 Carlos M. equity 1.0 Value 6.0 Value 6.0 4. Issue costs for debt are less than for equity for several reasons. Underwriting spreads are lower because there is less risk to the underwriters concerning the price at which the debt can be placed. Debt is more standard than equity, so it can be evaluated by, and marketed to, the public more easily. Underpricing is much less of a concern because debt issues are far less likely to signal management assessments of the value of the firm relative to the market price. 5. The advantages of shelf registration (as enumerated in the text) are: Securities can be issued gradually, over time, without incurring excessive costs. Securities that have been registered can be issued on short notice. Security issues can be timed in accordance with ‘market conditions,’ although this concept is inconsistent with the notion of market efficiency. The issuer can be assured that investment banking firms will compete for the
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This note was uploaded on 10/18/2010 for the course MACAU macau taught by Professor Macau during the Spring '10 term at University of Macau.

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ch14_5th - Solutions to Chapter 14 Venture Capital, IPOs,...

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