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					Chapter 16
RAISING CAPITAL
SLIDES
   16.1    Key Concepts and Skills
   16.2    Chapter Outline
   16.3    Venture Capital
   16.4    Choosing a Venture Capitalist
   16.5    Selling Securities to the Public
   16.6    Table 16.1 - I
   16.7    Table 16.1 - II
   16.8    Underwriters
   16.9    Firm Commitment Underwriting
   16.10   Best Efforts Underwriting
   16.11   Green Shoes and Lockups
   16.12   IPO Underpricing
   16.13   Figure 16.2
   16.14   Figure 16.3
   16.15   Work the Web Example
   16.16   New Equity Issues and Price
   16.17   Issuance Costs
   16.18   Rights Offerings: Basic Concepts
   16.19   The Value of a Right
   16.20   Rights Offering Example
   16.21   More on Rights Offerings
   16.22   Dilution
   16.23   Types of Long-term Debt
   16.24   Shelf Registration
   16.25   Quick Quiz


CHAPTER WEB SITES
           Section                                          Web Address
            16.1                              www.vfinance.com
                                              www.dealflow.com
                                              www.globaltechnoscan.com
                                              www.pwcmoneytree.com
                  16.2                        cbs.marketwatch.com
                  16.3                        www.ipo.com
                                              www.ipohome.com
                                              www.hoovers.com
                  16.4                        www.ml.com
                  16.5                        www.bloomberg.com
                 16.10                        www.dallasfed.org/htm/pubs/er.html
A-208 CHAPTER 16


CHAPTER ORGANIZATION

16.1   The Financing Life Cycle of a Firm: Early Stage Financing and Venture Capital
              Venture Capital
              Some Venture Capital Realities
              Choosing a Venture Capitalist

16.2   Selling Securities to the Public: The Basic Procedure

16.3   Alternative Issue Methods

16.4   Underwriters
             Choosing an Underwriter
             Types of Underwriting
             The Aftermarket
             The Green Shoe Provision
             Lockup Agreements

16.5   IPOs and Underpricing
              Underpricing: The 1999-2000 Experience
              Evidence on Underpricing
              Why Does Underpricing Exist?

16.6   New Equity Sales and The Value of the Firm

16.7   The Costs of Issuing Securities
             The Costs of Selling Stock to the Public
             The Costs of Going Public: The Case of Multicom

16.8   Rights
                The Mechanics of a Rights Offering
                Number of Rights Needed to Purchase a Share
                The Value of a Right
                Ex Rights
                The Underwriting Arrangements
                Rights Offers: The Case of Time-Warner
                Effects on Shareholders
                The Rights Offering Puzzle

16.9   Dilution
              Dilution of Proportionate Ownership
              Dilution of Value: Book versus Market Values

16.10 Issuing Long-Term Debt
                                                                    CHAPTER 16 A-209


16.11 Shelf Registration

16.12 Summary and Conclusions

ANNOTATED CHAPTER OUTLINE

Slide 16.1    Key Concepts and Skills
Slide 16.2    Chapter Outline
   16.1. The Financing Life Cycle of a Firm: Early-Stage Financing and Venture
       Capital

              A.     Venture Capital

                     Venture capital – financing for new, often high-risk businesses
                     First-stage financing – early financing used to get the firm off the
                     ground
                     Second-stage financing – subsequent financing to begin operations
                     and manufacturing

Slide 16.3 Venture Capital Click on the web surfer icon to go to the PWC
Money Tree report.
                     Real-World Tip, page 526: In a Forbes article, Guy Kawaski,
                     business author and CEO of Garage.com, a start-up capital firm,
                     identified four factors that investors should consider.
                              “Factor number one: the idea … ask who would use the
                     product. The best answer is that you already use it. The second
                     best answer is that you would use it if it existed.” He also suggests
                     that the business model should be coherent and that development
                     of the firm can be broken into stages.
                              “Factor number two: the source of the referral. The best
                     source of investment opportunities is people who have experience
                     picking from a constant flow of new deals.”
                              “Factor number three: the quality of the entrepreneur. You
                     want to invest in people who run at a high-megahertz rate … and
                     who are adaptable.”
                              “Factor number four: the existence of organizations that
                     would be natural partners and allies … today’s partner is
                     tomorrow’s acquirer. It’s nice to have an exit ramp.”

                     Real World Tip, page 526: Information on venture capital is much
                     more readily available than it has been in the past. The
                     introduction of publications such as Red Herring and Wired has
                     provided substantial information on high-tech firms that have not
A-210 CHAPTER 16


                   yet gone public. Red Herring regularly profiles firms in columns
                   with titles such as “IPO Candidates” (private companies projected
                   to go public within the next six months).
                      The Internet is a bountiful source of information on venture
                   capital and high-tech startups. In December 2001, entering the
                   keywords “venture capital” into the AltaVista search engine
                   resulted in 1,189,228 hits, up from 528,706 in October 2000!

                   Real-World Tip, page 527: Various groups supply venture capital.
                   An article in the May 16, 2000 issue of Inc. magazine discusses
                   Champion Ventures, a venture capital firm based in California.
                   It’s first fund was for $40 million and included investors such as
                   Barry Bonds, Wayne Gretzky, Joe Montana, Dan Marino and
                   others.
                       Corporations are also getting into the venture capital game,
                   although they often refer to it as “strategic investment.” One such
                   company is Intel, who formed its venture capital program, “Intel
                   Capital,” in the early 1990s. It was originally designed to provide
                   funding for companies that would complement its product line and
                   capacity. It now invests in a wide range of companies including
                   Internet companies and companies that are trying to expand
                   bandwidth for users.

                   Real World Tip, page 527: PriceWaterhouseCoopers Money Tree
                   Report provides information about VC funding on a quarterly
                   basis. Go to www.pwcmoneytree.com to investigate current VC
                   activity by quantity, sector and region (the hot link on Slide16.3
                   will help).

           B.      Some Venture Capital Realities

                   Even with the explosion in VC funds, access to venture capital is
                   still limited and expensive, particularly when you consider that
                   VCs often take large equity stakes in the new firm and may exert
                   substantial pressure on management to do things the way the VC
                   wants. On the other hand, small, risky firms might never be able to
                   get off the ground without venture capitalists, which would deprive
                   society of much of the innovation we have enjoyed in recent years.

           C.      Choosing a Venture Capitalist

                   A list of important considerations when choosing a VC is provided
                   below:
                                                                    CHAPTER 16 A-211


                          -Financial strength – you want to make sure the VC will be
                          able to provide additional financing when necessary.
                          -Style – since VCs often take an active role in advising
                          management, you want to make sure that your management
                          style is compatible with the VCs style.
                          -References – you need to obtain and check references. Has the
                          VC been successful in other ventures and how have they
                          handled adversity.
                          -Contacts – ideally your VC will have contacts that will be
                          useful in your business.
                          -Exit strategy – VCs are not long-term investors. How does the
                          VC anticipate getting their investment back from the business?

Slide 16.4 Choosing a Venture Capitalist Click on the web surfer to go to
www.dealflow.com.
   16.2.   Selling Securities to the Public: The Basic Procedure

                      Process for issuing securities:

                      -Obtain approval from the Board of Directors
                      -File registration statement with 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 – large advertisements used by underwriters to let
                      investors know that new securities are coming to market

Slide 16.5 Selling Securities to the Public
                      Real-World Tip, page 528: 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.

Video Note: “Going Public” shows what must be done to take a company public. This is
a common exit strategy for VCs.
A-212 CHAPTER 16


   16.3.   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
                      -Initial Public Offering (IPO) – a company’s first equity issue
                      made available to the public
                      -Seasoned equity offering – a new equity issue of securities by a
                      company that has previously issued securities to the public


Slide 16.6    Table 16.1 – I
Slide 16.7    Table 16.1 - II
   16.4.   Underwriters

           Underwriters are investment firms that act as intermediaries between the
           issuer and the public. Some of the services provided by underwriters include:

           -Type of security to issue
           -Method used to issue the securities
           -Pricing of the securities
           -Selling the securities
           -In the case of an IPO, stabilizing the price in the aftermarket

           Syndicates – a group of underwriters that work together to market the
           securities and share the risk, managed by a lead underwriter
           Spread – the difference between the underwriter’s buying price and the
           offering price; it is the underwriter’s main source of compensation and for
           IPO’s in the range of $20 to $80 million the spread is typically 7%

           Lecture Tip, page 531: The underwriter’s spread is defined as the difference
           between price and the price at which the underwriter purchases the securities
           from the issuing firm. In a study of utility stock issues by Bhagat and Frost,
           published in the Journal of Financial Economics in 1986, average spreads
           were found to be lower for competitive issues (3.1%) than for negotiated
           issues (3.9%); however, negotiated offerings are still more common.
              Chen and Ritter in the June 2000 issue of The Journal of Finance looked at
           spreads for IPOs. They found that the spread for over 90% of the issues in the
           $20 to $80 million range was 7%, which is above a competitive price.
           However, they suggest that this persists because issuing companies are more
           concerned about the reputation of the underwriter and view a lower price as a
           signal of lower quality.

Slide 16.8    Underwriters
                                                                 CHAPTER 16 A-213



          A.    Choosing an Underwriter

                Competitive offer basis – taking the underwriter that bids the most
                for the securities
                Negotiated offer basis – the more common (and expensive) method

                Real-World Tip, page 532: “Corporate America is turning more
                fickle in choosing finance partners on Wall Street …[m]ore
                companies are ditching the Wall Street underwriters they had
                selected for initial public offerings and picking different investment
                banks when it comes time to complete follow-on stock sales.” So
                read the opening lines of an article in the December 19, 1996 issue
                of The Wall Street Journal. But why is this occurring? According
                to the article, the phenomenon is attributable in part to the fact
                that many recent offerings have quickly risen above the offering
                price, leading issuers to feel that their shares were underpriced
                (and that they left millions of dollars “on the table” as a result).

          B.    Types of Underwriting

                Firm commitment underwriting – the underwriting syndicate
                purchases the shares from the issuing company and then sells them
                to the public. The syndicate’s profit comes from the spread
                between the prices and it bears the risk that the actual spread
                earned will not be as high as anticipated (or may not even cover
                costs). This is the most common type of underwriting

Slide 16.9 Firm Commitment Underwriting
Slide 16.10 Best Efforts Underwriting

                Best efforts underwriting – the underwriters are legally bound to
                maker 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.

          C.    The Aftermarket

                Trading period after a new issue is initially sold to the public. The
                syndicate, and in particular the lead underwriter, stabilizes the
                price by purchasing shares when the price falls below the offer
                price. Most IPO’s are overalloted (more shares were sold than
                actually existed), so the lead underwriter has a built in short
                position. If the price falls, then the short is covered by buying
A-214 CHAPTER 16


                    shares in the market to support the price. If the price rises, then the
                    short is covered by exercising the Green Shoe option. For more
                    information, see Aggarwal, 2000, “Stabilization Activities by
                    Underwriters After Initial Public Offerings,” The Journal of
                     Finance, June 2000, pp. 1075 – 1103 and Ellis, Michaely and
                    O’Hara, 2000, “When the Underwriter Is the Market Maker: An
                    Examination of Trading in the IPO Aftermarket,” The Journal of
                    Finance, June 2000, pp. 1039 – 1074.

                    Ethics Note, page 533: The regulatory process attempts to ensure
                    that investors receive enough information to make informed
                    decisions; this is the role of the prospectus. However, this is not
                    always the case. Brokers have been known to sell securities based
                    on sales scripts that have little to do with the information provided
                    in the prospectus. Also, investors often make investment decisions
                    before receiving (or reading) the prospectus. While the behavior of
                    the brokers is hardly ethical, it reinforces the point that you should
                    take what the broker says with a grain of salt and always read the
                    prospectus before making a purchase decision.

             D.     The Green Shoe Provision

                    The Green Shoe provision allows the underwriters to purchase
                    additional shares (up to 15% of the issue) at the original price up to
                    30 days after the initial sale. This provision is used primarily when
                    an offering goes well and the underwriters need to cover their short
                    positions created by overallotment of the issue. See the references
                    provided above for more information.

Slide 16.11 Green Shoes and Lockups
             E.     Lockup Agreements

                    The lockup agreement prevents insiders from selling their shares
                    for some period after the IPO, usually 180 days. The stock price
                    often drops right before the lockup period expires in anticipation of
                    a large number of shares flooding the market (excess supply causes
                    the price to drop).

  16.5.   IPOs and Underpricing

             A.     Underpricing: The 1999 - 2000 Experience

Slide 16.12 IPO Underpricing
                                                      CHAPTER 16 A-215


B.   Evidence on Underpricing

     The underpricing (see a large increase above the offer price the
     first day of trading) of IPOs is very common. Empirical evidence
     suggests that it has gotten worse in recent years. As Table 15.2
     points out the average underpricing has been higher from 1990 to
     1999 than any other period in the study; and in 1999 the average
     issue was underpriced by almost 70%!

     Real-World Tip, page 534: An article in the Red Herring
     supplemental issue “Going Public 2000” discusses the issue of
     IPO underpricing. The title of the article is “Leaving Money on the
     Table, Why banks are pricing IPOs so far below what the public
     market seems willing to pay.” It illustrates that underpricing is not
     just an academic issue. As the article says, “The difference …
     between the offer price and the first-day close could have gone to
     the issuing company rather than to the chosen few investors lucky
     enough to be given IPO shares to flip for a big one-day take.”
         The author points out that a more accurate measure of “money
     left on the table” might be the difference between the offer price
     and the opening price. In 1999, five IPO’s left over $1 billion on
     the table using this measurement. When you consider that the
     underwriters generally earn a 7% spread based on the offer price,
     they are losing a substantial chunk of money in these transactions
     as well.
         The author argues that the wild swings are at least partially due
     to the unpredictability of online traders. He uses the example of
     Andover.net to illustrate his point. The shares of Andover.net were
     sold at a Dutch auction that was open to all investors large or
     small. Each investor tendered a secret bid. The winning bids were
     tallied and all winners paid the lowest accepted price.
     Theoretically, there should not have been a price jump because all
     investors who were interested could place a bid. If they were
     willing to pay enough, they would receive the stock. The Dutch
     auction led to an offer price of $18 per share, but it opened trading
     at $48 and closed at $63.38.
         The other main argument that the author gives is that the
     underwriter does not want to face a lawsuit for overpricing an
     issue. His final comment about “leaving money on the table” puts
     a different light on the whole process: “Everybody wins. The
     issuer gets its money and the publicity that comes from a huge
     first-trade gain, and the initial investors get a fat profit. As for the
     bank, it earns its fees, keeps its customers happy, and, perhaps
     most importantly, steers clear of the lawyers.”
A-216 CHAPTER 16


Slide 16.13 Figure 16.2
Slide 16.14 Figure 16.3
Slide 16.15 Work the Web Example
             C.     Why Does Underpricing Exist?

                    Ethics Note, page 540: Traditionally, IPOs have been reserved for
                    the syndicates’ best customers, but given the explosion of interest
                    in IPOs in recent years, more opportunities are available for the
                    average investor. One such example is the Dutch auctions that
                    have been used to some success by W. R. Hambrecht, a relatively
                    new investment banker. Be careful, however, if a broker tells you
                    that you can “buy IPOs” from them. It is doubtful you can buy the
                    IPO at the offer price; more than likely you will be buying it in the
                    aftermarket at whatever price is then available.

                    Real-World Tip, page 541: How good is the long-run performance
                    of IPO firms? Not overwhelmingly good. In addition to the
                    growing academic research, there is a good bit of institutional
                    research suggesting that holding on to IPO stocks is a risky
                    proposition. Consider the following table compiled by Prudential
                    Securities: Percentage of IPO Companies reporting financial
                    losses after:
                    Year          % of Companies
                    1                     32%
                    2                     37%
                    3                     38%
                    4                     42%
                    5                     44%

  16.6.   New Equity Sales and the Value of the Firm

Slide 16.16 New Equity Issues and Price
                    Stock prices tend to decline when a company announces a
                    seasoned equity offering. Why? A lot of the decline may be due to
                    the asymmetric information contained by management and the
                    signals that the choice to issue equity send to the market.

                    -Managerial information concerning value of the stock –
                    expectation that managers will issue equity only when they believe
                    the current price is too high
                                                                    CHAPTER 16 A-217


                     -Debt usage – expectation that a firm will issue debt as long as it
                     can afford to (allows stockholders to benefit more from good
                     projects), consequently a stock issue indicates that management
                     believes that the firm is too highly leveraged

                     -Issue costs – equity is more expensive to issue than debt from a
                     straight flotation cost perspective

  16.7.   The Costs of Issuing Securities

             A.      The Costs of Selling Stocks to the Public

                     The cost of issuing securities can be broken down into the
                     following main categories:

                        -Spread
                        -Other direct expenses – filing fees, legal fees, etc.
                        -Indirect expenses – opportunity costs, such as management
                        time spent working on the issue
                        -Abnormal returns – seasoned stock issue, the reduction in
                        price when the announcement is made
                        -Underpricing – IPOs
                        -Green Shoe option – additional allotment of shares sold at
                        offer price

                     Other conclusions:

                        -There are substantial economies of scale
                        -Best efforts cost more (may be why firm commitment is the
                        standard)
                        -The cost of underpricing may be greater than the direct
                        issuance costs
                        -An IPO is more expensive than a seasoned offering

Slide 16.17 Issuance Costs
             B.      The Costs of Going Public: The Case of Multicom

                     This section describes a real IPO and the attendant costs. The
                     important conclusion is that, while $7.15 million was raised by
                     selling shares, the issuing firm received only $6.6 million.
                     Additionally, the firm had to pay $145,000 to the underwriters to
                     defray expenses incurred.
A-218 CHAPTER 16


  16.8.   Rights

                   Privileged subscription – issue of common stock offered to
                   existing stockholders. Offer terms are evidenced by warrants or
                   rights. Rights are often traded on exchanges or over the counter.

             A.    The Mechanics of a Rights Offering

                   Early stages are the same as for a general cash offer, i.e., obtain
                   approval from directors, file a registration statement, etc. The
                   difference is in the sale of the securities. Current shareholders get
                   rights to buy new shares. They can subscribe (buy) the entitled
                   shares, sell the rights or do nothing.

Slide 16.18 Rights Offerings: Basic Concepts
             B.    Number of Rights Needed to Purchase as Share

                   Number of new shares = funds to be raised / subscription price

                   Shareholders get one right for each share already owned. The
                   number of rights needed to buy a new share is:

                   Number of rights needed to buy a share = # old shares / # new
                   shares

                   Example: Suppose a firm with 200,000 shares outstanding wants to
                   raise $1 million through a rights offering. Each current shareholder
                   gets one right per share held. The following table illustrates how
                   the subscription price, number of new shares to be issued, and the
                   number of rights needed to buy a share are related, ignoring
                   flotation costs.

                   Subscription Price     # of new shares         # of rights required
                      $25                         40,000                  5
                      $20                         50,000                  4
                      $10                        100,000                  2
                      $5                         200,000                  1

             C.    The Value of a Right

Slide 16.19 The Value of a Right
                   A right has value if the subscription price is below the share price.
                   How much a right is worth depends on how many rights it takes to
                   buy a share and the difference between the stock price and the
                                                                  CHAPTER 16 A-219


                 subscription price. If it takes N rights to buy one share, the value of
                 one right is equal to

                 (initial stock price – subscription price) / (N + 1)

Slide 16.20 Rights Offering Example
           D.    Ex Rights

                 When a privileged subscription is used, the firm sets a holder-of-
                 record date. The stock sells rights-on, or cum rights, until two
                 business days before the holder-of-record date. After that, the stock
                 sells without the rights or ex rights.

                 ex rights price = (1 / (N+1))(N*initial stock price + subscription
                 price)

                 Example: Suppose the above firm decides on a subscription price
                 of $20, with 50,000 shares to be issued. Assume the shares
                 outstanding currently sell for $35. Using the valuation formula and
                 letting N = 4, a right is worth (35 – 20)/(4+1) = $3. The expected
                 ex rights price is (1/5)(4*35 + 20) = $32

                 Lecture Tip, page 550: You may wish to link the stock behavior
                 associated with the ex rights date to that of the ex dividend date.
                 Point out that a time line could be drawn that applies to stocks
                 trading ex rights as well as stocks trading ex dividend. Both
                 dividend and rights declarations involve setting an ex date, which
                 is two days before the record date. In both situations, the share
                 price reacts on the ex date to reflect the value of the right or
                 dividend that would not be received if the shares were purchased
                 after the ex date.

           E.    The Underwriting Arrangements

                 Standby underwriting – firm makes a rights offering and the
                 underwriter makes a commitment to “take up” (purchase) an
                 unsubscribed shares. In return, the underwriter receives a standby
                 fee. In addition, shareholders are usually given oversubscription
                 privileges, the right to purchase unsubscribed shares at the
                 subscription price.

           F.    Rights Offers: The Case of Time Warner

Slide 16.21 More on Rights Offerings
A-220 CHAPTER 16


                     Time Warner’s rights offering was somewhat unusual. As
                     originally proposed, the subscription price would vary, dependent
                     upon the percentage of the issue actually sold. This feature was
                     later dropped. As is typical of most rights offerings, only 2 percent
                     of the rights were neither exercised nor sold. However,
                     oversubscription rights were used to absorb the unsold stock. The
                     underwriters’ total compensation was approximately 4 percent of
                     the issue for management services, standby commitments, and
                     other services.

             G.      Effects on Shareholders

                     Absent taxes and transaction costs, shareholder wealth is not
                     differentially affected whether they exercise or sell their rights.
                     Nor does it matter what subscription price the firm sets as long as
                     it is below the market price.

             H.      The Rights Offerings Puzzle

                     Although there is evidence that rights offers are cheaper than
                     general cash offers, they are relatively infrequent in the US
                     Arguments for underwritten offerings include:

                     1. Underwriters get higher prices (this is dubious, given
                        underpricing).
                     2. Underwriters insure against a failed offering (also dubious).
                     3. Offering proceeds are available sooner (questionable).
                     4. Advice from underwriters is valuable.

  16.9.   Dilution

                     Dilution of percentage ownership
                     Dilution of market value
                     Dilution of book value and EPS

Slide 16.22 Dilution
             A.      Dilution of Proportionate Ownership

                     This occurs when the firm sells stock through a general cash offer
                     and new stock is sold to persons who previously weren’t
                     stockholders. For many large, publicly held firms this simply isn’t
                     an issue, the stockholders being many and varied to begin with.
                     For some firms with a few large stockholders it may be of concern.
                                                                   CHAPTER 16 A-221


            B.     Dilution of Value: Book versus Market Values

                   A stock’s market value will fall if the NPV of the finance project is
                   negative and rise if the NPV is positive. Whenever a stock’s book
                   value is greater than its market value, selling new stock will result
                   in accounting dilution.

  16.10. Issuing Long-term Debt

Slide 16.23 Types of Long-Term Debt

                   The process for issuing long-term debt is similar to issuing stock
                   except the registration statement must include the bond indenture.

                   Much of the corporate debt is privately placed. Term loans are
                   direct business loans with one to five years’ maturity, usually
                   amortized. Private placements are similar to term loans, except
                   longer term. Commercial banks, insurance companies and other
                   intermediaries often grant both types of loans.

                   Differences between private placements and public issues:

                      -No SEC registration is required for a private placement
                      -Direct placements may have more restrictive covenants
                      -Private placements are easier to renegotiate if necessary
                      -Issuance costs are generally lower on private placements,
                      although the coupon rate is generally higher

                   It is much cheaper to issue debt than equity.

                   Real-World Tip, page 557: Corporate issues continued to exploit
                   the relatively low level of long-term interest rates in 1996 and
                   1997. In December 1996, IBM issued 100-year bonds with a face
                   value of $850 million. As evidence of the low required return, note
                   that the yield on these bonds is only one-tenth of one percent
                   higher than on similar 30-year IBM bonds. In all, approximately
                   $3.6 billion worth of 100-year bonds were issued between
                   November 1995 and December 1996. Previous “century bond”
                   issuers include Walt Disney Company, Coca-Cola and Yale
                   University.

                   Real-World Tip, page 557: An interesting article on private
                   placements appeared in the third quarter 1997 issue of the Dallas
                   Federal Reserve Bank’s Economic Review. An electronic version is
                   available at http://www.dallasfed.org/htm/pubs/er.html. Stephen
                   Prowse, an economist with the Dallas Fed, describes the structure
A-222 CHAPTER 16


                     of the private placement market, calling private placements “a
                     significant source of funds for U.S. corporations.” He notes that,
                     on average, private placements tend to be “larger than bank loans
                     and smaller than public bonds.” In a similar fashion, the maturity
                     of privately placed debt tends to be longer than that of bank debt
                     but shorter than that of publicly placed debt. Finally, he notes that
                     borrowers in the private placement market tend to fall between
                     those who rely on bank loans and those who rely on public debt, in
                     terms of firm size.

                     International Debt, page 557: The globalization of the financial
                     markets is nowhere more evident than in the rise in popularity of
                     large issues by foreign corporations and governments. In
                     December 1993, Argentina issued $1 billion of “global bonds.”
                     (Global bonds are offered simultaneously in all of the world’s
                     major financial markets. First issued by the World Bank in 1989,
                     they are often, but not always, denominated in U.S. dollars.)
                     Investor demand was so strong that the size of the issue was raised
                     from $750 million to $1 billion, even though these were considered
                     junk bonds at issuance. Furthermore, a Wall Street Journal story
                     on the Argentina issue states that it is “only the latest in a stream
                     of global-bond offerings that have flooded the world’s markets this
                     year.”

   16.11. Shelf Registration

                     Shelf registration – SEC Rule 415 allows a company to register all
                     securities that it expects to issue within the next two years in one
                     registration statement. The firm can then issue the securities in
                     smaller increments, as funds are needed during the two-year
                     period. Both debt and equity can be registered using Rule 415.

                     Qualifications:

                        -Securities must be investment grade
                        -No debt defaults in the last three years
                        -Market value of stock must be greater than $150 million
                        -No violations of the Securities Act of 1934 within the last
                        three years

Slide 16.24 Shelf Registration
   16.12. Summary and Conclusions

Slide 16.25 Quick Quiz

				
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