Finance 301 1st Edition Lecture 12 Outline of Last Lecture I Corporate Bonds II Secondary Market for Corporate Bonds III Junk Bonds IV How Corporate Bonds Finance Restructuring V Globalization of Bond Markets VI Other Types of Long Term Debt Outline of Current Lecture VII Private Equity VIII Public Equity IX Ownership and Voting Rights X Preferred Stock XI Participation in Stock Markets XII Initial Public Offerings XIII Stock offerings and Repurchases Current Lecture I Private Equity a People who want to invest privately funds of money were they don t necessarily invest in the stock market Want higher returns riskier because the financial statements are not published These people are going to invest in start up companies can buy public company and take them back to private fix them and bring them back they are usually companies that are not in the greatest financial shape b Some business owners hope to go public so that i They want to get paid off ready to cash out and do something else shares to stock market to get paid off ii Raise capital on equity markets so they can expand c A public offering is feasible if i You can raise at least 50 million dollars ii Wont go public if they didn t because the shares would not be liquid want a liquid market because you want your investment to keep going up in price d What is venture capital i Looking for start ups technology Technology because they think that they can make more money want something with broke potential so they get large returns Apple microsoft all started with venture capital ii Investors are not allowed to withdraw their money before a specified deadline iii VC funds typically plan to exit in 4 to 7 years by selling the equity stake to the public iv The VC fund will set out requirements for the business and VC fund managers may serve as advisers to the business v Can be long term investments e II Public Equity a What is the difference between the primary market and the secondary market when a company goes public b Primary market is where the company issues their stock and they get the money This is where the IPO occurs The secondary market is where investors buy c Going public has two effects on the firm i Ownership structure How Changes from private equity to public equity because you are now accountable to the stockholders Public equity has more owners ii Capital structure How Finance with some equity now instead of debt May be paying off debt now Want to change their capital structure even tho it might be more expensive because they need more money to expand even more you don t necessarily have to pay dividends you can make it cheaper in the short run for your company by issuing stock d Stock markets are like other financial markets in that they link the surplus units that have excess funds with deficit units that need funds III Ownership and Voting Rights a Owners of small companies also tend to be the managers In publicly traded firms most shareholders are not the managers b Ownership of common stock entitles shareholders to certain rights c Which stockholders have voting rights common preferred both or neither common stock when you become common stock holder you are basically telling a company how to run their business they vote once a year Let you vote on 4 or 5 questions Log into internet provide you with pages of guides to their financial statements with tables and pictures and then you vote 1 share stock 1 vote A lot of the time it is just causes Most of the measures you vote on get voted down because of a proxy d What is a proxy You vote with the company in essence Whether you go to meeting and allow people to vote for you or you check the box to do what company says Most people just check off box to go with what company says e Mutual funds people are invested in don t get all stockholders statements 401k s don t go in and vote on each individual stock f IV Most people do not go to the annual meeting most people do it quick over the internet and most people do not read the financial statements Preferred Stock a What is preferred stock i Stock that is preferred they are the preferred stock of payment dividends they are going to get paid first when quarterly dividends are paid Do not get to vote on the company but they get paid first They are usually issued separately from common stock Less volatile in price They always get paid need to catch up on them before common stock Companies issue a lot more common stock than preferred stock b Which is more risky Which is more desirable preferred stock common stock or bonds i Preffered most desirable because they are going to get paid ii Bonds is more risky to the company because they might not be able to pay the debt V Participation in Stock Markets a Investor Decisions Affects Upon Stock Prices and Investor Reliance on Information i Why do stock prices go up or down 1 Expectations of the companies cash flow and emotion BP oil spill they thought they were going to loose money because of lawsuit settlements they are still making a lot of money stock got volatile people didn t t like the fact that they screwed up ii Will the decision of one investor affect the stock price 1 Yes if warren Buffett is going to buy a stock that stock is probably going to go up cause he is known to always buy winners 1 person can affect stock price Emotion type thing iii Are stock markets considered efficient 1 Price movements are usually before the news gets out They jump some on earning iv On a given day suppose a company has a favorable news story why would any investor sell their shares 1 They might think that the stock is going to fall back down They sell or take profits just to get out VI Initial Public Offerings a Process of Going Public i What is a prospectus The prospectus is filed with the Securities and Exchange Commission SEC ii Packet that tells incestors the cash flows of the company and what to expect and tells you the risks of the company They go around to big institution investors and give them this For example Facebook they werent making money but knew that they were going to and started making money quick They make money from advertisements iii Who determines the offer price 1 Lead underwriter works for someone like jp morgan they allocate the shares and when they do this IPO they contact all of their friends at mutual funds first Usually gets 7 to 10 percent of IPO iv Who allocates the IPO shares 1 Transaction Costs Usually 7 percent of the funds raised b Underwriter