FIN 620-session 7 lecture

FIN 620-session 7 lecture - FIN 620 Long-Term Financial...

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FIN 620 Long-Term Financial Management Session 7  1. Lecture Notes/Comments In session 7 we examine issuing securities to the public (chapter 20) and leasing. (chapter v21). Issuing Shares to the Public The Basic Procedure for a New Issue: -Obtain approval from the Board of Directors -File registration statement with the SEC -SEC requires a 20-day waiting period Company distributes a preliminary prospectus called a red herring Cannot sell securities during waiting period -The price is set when the registration becomes effective and the securities can be sold Tombstones are large advertisements used by underwriters to let investors know that new securities are coming to market. An Example of a Tombstone: The June 2000 issue of Red Herring provides a summary of the IPO process in “The Anatomy of an IPO” (p. 392). It provides a look at how a company goes public, starting with choosing the underwriter all the way through the first day of trading. The process is a hectic one with a lot of paperwork and marketing. Alternative Issue Methods: -General cash offer – securities offered for sale to the general public on a cash basis -Rights offer – public issue in which securities are first offered to existing shareholders on a pro rata basis An Initial Public Offering (IPO) is a company’s first equity issue made available to the public. A Seasoned Equity Offering (SEO) is a new equity issue of securities by a company that has previously issued securities to the public There are three methods for issuing securities : firm commitment, best efforts, and Dutch auction. Firm commitment underwriting – the underwriting syndicate purchases the shares from the issuing company and then sells them to the public. This is the most common type of underwriting.
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Best efforts underwriting – the underwriters are legally bound to make their “best effort” to sell the securities at the offer price, but do not actually purchase the securities from the issuing firm. In this case, the issuing firm bears the risk of the market being unwilling to buy at the offer price. Dutch auction underwriting – the underwriter does not set the offer price. Instead, a series of bids is solicited from potential investors, and the price that is paid by everyone is the price that will result in all shares being sold. The U.S. Treasury has sold bills, bonds, and notes using the Dutch auction process for many years. Google is the highest profile Dutch auction IPO to date. To choose an underwriter, two alternative methods exist: Competitive offer basis – taking the underwriter that bids the most for the securities. Negotiated offer basis – the more common (and expensive) method. Investment Banks
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This note was uploaded on 02/14/2011 for the course FINANCE 620 taught by Professor Halstead during the Fall '09 term at UMBC.

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FIN 620-session 7 lecture - FIN 620 Long-Term Financial...

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