Introduction to Corporate Finance

PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY

a What is likely to happen to RP’s share price when the plan for this seasoned offering is publicly

announced?

b Assume that RP’s share price closes at $72.75 per share the day before the seasoned offering is

launched, what net proceeds will RP receive from this offering?

c Calculate the return earned by RP’s existing shareholders on their shares from the time before

the seasoned offering was announced until it was actually sold for $72.75 per share.

d Calculate the total cost of the seasoned equity offering to RP’s existing shareholders as a

percentage of the offering proceeds.

mini case

Since graduation from university, you have worked at

Precision Manufacturing Pty Ltd as a financial analyst. You

have recently been promoted to the position of senior

financial manager, with responsibilities that include capital

budgeting decisions and the raising of long-term financing.

Therefore, you decide to investigate the various alternatives

for raising funds. Your goal is to make sure that the benefits

from undertaking long-term projects are greater than the

costs of raising the long-term funds needed to finance

those projects. With this goal in mind, you decide to

answer the following questions.

ASSIGNMENT

1 What should managers consider when making the

decision whether to finance internally or externally?

2 What services does an investment banker offer to

businesses that choose to raise funds in the capital market?

3 What are the benefits to the company of going public?

4 What are the drawbacks to the corporation of going

public?

5 What returns can investors in the ordinary equity expect

on the first day of trading if they commit to purchase

shares through the IPO issue? What factors may affect

the relative amount of these first-day returns?

6 Describe the following offers: (a) seasoned equity

offer, (b) rights offer, and (c) private placement. In what

circumstances would a company use each of these

offerings to raise funds?

7 Discuss the differences between international public

offerings and domestic (US) public offerings.

RAISING LONG-TERM FINANCING

ONLINE STUDY TOOLS

Visit http://login.cengagebrain.com and use

the access code that comes with this book

for 12 months’ access to the resources

and study tools for this chapter. The

CourseMate website contains:

Smart concepts – step-by-step explanations of

concepts

» See financing options available to large

corporations.

Smart solutions – step-by-step explanations of

problems

Smart videos

» Tim Jenkinson, Oxford University

» Frank Popoff, Chairman of the Board

(retired), Dow Chemical

» Jay Ritter, University of Florida

Interactive quizzes

Audio

Flashcards and more.