Topic Flow Chart

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Topic Flow Chart

• Goal of Finance Maximize Value of Firm
• HOW? Get the most cash
• Steps
• 1. Methods to evaluate projects cash flow
  (NPV, IRR, etc)
• 2. Develop risk adjusted discount rates for use
  in NPV
• 3. Apply NPV, IRR, Decision Trees, PVI, etc to
  capital budgeting decisions
• 4. Changes in capital structure influence
  discount rates
• 5. Financial Distress can result form changes in
  capital structure

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Efficient Capital Markets

• Switches gears
• Past lectures decided how to spend money (invest)
• Todays lecture deal with raising money
  (financing decisions)
• Fisher Separation Theorem

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Efficient Capital Markets

• Market Efficiency Theory sez
• Capital markets reflect all relevant information.
  You can not consistently earn excess profits.

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Efficient Capital Markets
Cost of Capital Price of Money
R
D
S
Qty
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Type of Market Efficiency

• Weak Form Efficiency
• Semistrong Form Efficiency
• Strong Form Efficiency

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Efficient Market Theory
Announcement Date
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Efficient Market Theory
Average Annual Return on 1493 Mutual Funds and
the Market Index
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Efficient Market Theory
IPO Non-Excess Returns
Year After Offering
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Efficient Market Theory
Strong-Form Efficiency Test Historical performance
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Random Walk Theory
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Random Walk Theory
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Efficient Market Theory

• Fundamental Analysts
• Research the value of stocks using NPV and other
  measurements of cash flow

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Efficient Market Theory

• Technical Analysts
• Forecast stock prices based on the watching the
  fluctuations in historical prices (thus wiggle
  watchers)

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Market Efficiency Theory

• Conflicts in Theory
• Stock market crash of 1987
• Daily fluctuations
• Culprits?
• Arbitrage
• Computers
• Institutions

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Efficient Market Theory
1987 Stock Market Crash
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Efficient Market Theory
1987 Stock Market Crash
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Efficient Market Theory
2000 Dot.Com Boom
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Lessons of Market Efficiency

• Markets have no memory
• Trust market prices
• Read the entrails
• There are no financial illusions
• The do it yourself alternative
• Seen one stock, seen them all

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Corporate Financing

• Types of Financing
• 1 - Equity
• 2 - Debt
• 3 - Hybrids

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Corporate Financing

• READ TEXT FOR TERMINOLOGY

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Initial Offering

• Initial Public Offering (IPO) - First offering of
  stock to the general public.
• Underwriter - Firm that buys an issue of
  securities from a company and resells it to the
  public.
• Spread - Difference between public offer price
  and price paid by underwriter.
• Prospectus - Formal summary that provides
  information on an issue of securities.
• Underpricing - Issuing securities at an offering
  price set below the true value of the security.

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General Cash Offers

• Seasoned Offering - Sale of securities by a firm
  that is already publicly traded.
• General Cash Offer - Sale of securities open to
  all investors by an already public company.
• Shelf Registration - A procedure that allows
  firms to file one registration statement for
  several issues of the same security.
• Private Placement - Sale of securities to a
  limited number of investors without a public
  offering.

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Rights Issue

• Rights Issue - Issue of securities offered only
  to current stockholders.
• Example - 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?

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Rights Issue
Example - 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 x 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

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Rights Issue - example

• YRU Corp currently has 9 million shares
  outstanding. The market price is 15/sh. YRU
  decides to raise additional funds via a 1 for 3
  rights offer at 12 per share. If we assume 100
  subscription, what is the value of each right?
• Current Market Value 9 mil x 15 135 mil
• Total Shares 9 mil 3 mil 12 mil
• Amount of new funds 3 mil x 12 36 mil
• New Share Price (136 36) / 12 14.25/sh
• Value of a Right 15 - 14.25 0.75