Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VI. Cost of Capital and

Long−Term Financial

Policy

16. Raising Capital © The McGraw−Hill^559
    Companies, 2002

Aseasoned equity offering (SEO)is a new issue for a company with securities that
have been previously issued.^4 A seasoned equity offering of common stock can be made
by using a cash offer or a rights offer.
These methods of issuing new securities are shown in Table 16.1. They are discussed
in Sections 16.4 through 16.8.

UNDERWRITERS

If the public issue of securities is a cash offer, underwritersare usually involved. Un-
derwriting is an important line of business for large investment firms such as Merrill
Lynch. Underwriters perform services such as the following for corporate issuers:

1. Formulating the method used to issue the securities


2. Pricing the new securities


3. Selling the new securities

CONCEPT QUESTIONS

16.3a Why is an initial public offering necessarily a cash offer?

16.3bWhat is the difference between a rights offer and a cash offer?

CHAPTER 16 Raising Capital 531

seasoned equity offering

(SEO)

A new equity issue of

securities by a company

that has previously

issued securities to the

public.

(^4) The terms follow-on offering and secondary offering are also commonly used.

TABLE 16.1

The Methods of Issuing

New Securities

Method Type Definition

Public Firm Company negotiates an agreement with an

Traditional commitment investment banker to underwrite and

negotiated cash offer distribute the new shares. A specified

cash offer number of shares are bought by

underwriters and sold at a higher price.

Best efforts Company has investment bankers sell as

cash offer many of the new shares as possible at the

agreed-upon price. There is no guarantee

concerning how much cash will be raised.

Privileged Direct rights Company offers the new stock directly to its

subscription offer existing shareholders.

Standby rights Like the direct rights offer, this contains a

offer privileged subscription arrangement with

existing shareholders. The net proceeds are

guaranteed by the underwriters.

Nontraditional Shelf cash offer Qualifying companies can authorize all

cash offer shares they expect to sell over a two-year

period and sell them when needed.

Competitive Company can elect to award the

firm cash offer underwriting contract through a public

auction instead of negotiation.

Private Direct Securities are sold directly to the purchaser,

placement who, at least until recently, generally could

not resell securities for at least two years.

underwriters

Investment firms that act

as intermediaries

between a company

selling securities and the

investing public.

16.4

IPO information is

widely available.

Try http://www.ipo.com,

http://www.ipohome.com,

and IPO Central at

http://www.hoovers.com.