公司财务精品教学（徐江旻）Session11 IPOs.pdfVIP

Security Issuance and IPOs Jiangmin Xu Comparing the Financing Alternatives • Alternative ways to raise $50 million now given total enterprise value (post-financing) of $100 million in 5 years: – Issue Debt – Issue Equity • What are the costs and benefits of each? – We have discussed various costs/benefits of using debt (optimal leverage) – What about equity? © Jiangmin Xu Modigliani and Miller again • In a perfect capital market: The choice of security will not affect the value of the firm or the current share price • It will, however, affect the risk and return of the firm’s equity • Imperfections then needed © Jiangmin Xu Important Considerations • The “optimal” security choice will be motivated by capital market imperfections – Tax shields – Financial distress costs – Issuance costs – Agency costs (and/or benefits) – Security mispricing – Signaling / Asymmetric Information • Remember: For a financial transaction to create value, there must be a cash flow story! © Jiangmin Xu Capital Structure as a Signal • Perfect capital markets assumes – Investors and managers have the same information regarding the firm’s prospects – The firm’s securities are priced fairly based on this information • But: Executives may have superior information – Based on this info, the firm’s equity may be over/under-priced – What implications does this have for capital structure? • Asymmetric Information – And how could you signal your superior information? © Jiangmin Xu Market for Lemons (Akerlof, 2001 Nobel) • You need to buy a used car. Suppose used cars are equally likely to be worth $6k, $8k, or $10k, depending on quality. • A car suddenly becomes available. If you cou