1. The board of directors must approve the issuance of securities. Once the board has made this decision, the next important decision is whether to sell the securities through a private placement or a public offering. To be listed on a stock exchange, the listing requirements must be met. In general, companies must meet a threshold of revenues and/or assets to qualify for listing. These listing requirements vary by exchange.
2. The next step is to hire an investment bank to act as the company's underwriter. An underwriter assists with the issuing process by advising on the offer price and helping to market and sell the new securities.
3. If a private placement is to be completed, the investment bank will prepare an offering memorandum and help sell the issue to interested private investors.
4. For a public offering, the company must decide on the method of issue to be used. Generally, there are two kinds of public issues: a cash offer and a rights offer. In a cash offer, the securities are offered to the public as part of a public offering. In a rights offer, the securities are offered to existing shareholders in proportion to their current holdings. Rights offerings are further discussed in the eBook chapter on sources of equity financing.
5. If a cash offer is being made, the company must decide on the type of underwriting arrangement: a bought deal, a firm commitment, a best efforts arrangement or a Dutch auction. These arrangements are described in Section 3.4 below.
6. The next step is to prepare, finalize, and file the necessary documents, including the prospectus. The prospectus is described in more detail below. The underwriter will use this prospectus to market the shares.
7. The last step is for the underwriter to advise on the final offer price. Once this is known, the prospectus is finalized, the regulators give their final approval, and the shares can start to trade.
• company-specific information such as announcements related to:
o actual earnings or forecasts of future earnings
o dividends, acquisitions, or divestitures
o changes in strategy
o the introduction of new products or the discontinuance of old products
o new customers or geographic expansion of the company's market
o a change in management or in the board of directors
o plans for restructuring, employee layoffs, or closing of facilities
o product recalls, fraud, and accounting errors
• industry-wide performance indicators, including announcements by competitors
• economic indicators such as changes in:
o interest rates
o foreign currency exchange rates
o economic outlook
o inflation or deflation
o prices for oil, energy costs, minerals, and metals
Efficient capital markets imply that investors quickly learn about the desirability and economic values of financial and real assets. Therefore, market participants allocate funds to the most desirable assets first. Combining this conclusion with the theory of optimal investment suggests that firms choose projects to maximize net present values. Firms that are successful in locating projects that accomplish this objective attract capital and increase shareholder wealth, while unsuccessful firms fade away through bankruptcy or mergers.
• Efficient capital markets imply that a security should have one price, even if it is trading simultaneously on several physically separated markets. Arbitrage is the ability to make a profit without taking on any risk; for instance, by purchasing one security (in one market) and immediately selling the same security (in another market) for a different price, taking advantage of temporary pricing differences. Arbitrage among market participants ensures the law of one price. For example, if a security trades at C$10 on the Toronto Stock Exchange (TSX) and at C$9 on the New York Stock Exchange (NYSE), market arbitragers would notice the difference and exploit it for immediate riskless profit. They would sell the same stock on the TSX for C$10 and simultaneously buy it on the NYSE for C$9 for an immediate profit of C$1. Selling on the TSX would put downward pressure on the TSX's price, while buying on the NYSE would put upward pressure on the NYSE's price. The trading activity would continue until the two prices become equal.
• The market price of a security continuously approximates its intrinsic value and reflects all publicly available information on that security.
• The intrinsic value is determined by a firm's ability to generate cash from operations.
• Given that the intrinsic value of a security — and therefore its price — reflects current information publicly available on the security, and that new information arrives randomly, future market (or stock price) trends are not predictable from past trends. Therefore, investors who rely on trading strategies based on historical market patterns should not earn superior returns.
• Securities are purchased on the basis of their expected return and risk characteristics. Fads will not affect market trends or security prices for any prolonged period if investors' expectations are not met.
• Sponsors can share the benefits from the same project. For example, it may not be economically feasible or justifiable to build a facility for a product or service if only one end user is willing to commit to purchasing the product. A purchase agreement ensures that sponsors can pool their interests and share in the benefits of the project.
• Sponsors can share the risks of a new project. For example, the costs of a project may be too large for one sponsor and there may be high probability that the project will not be as successful as expected. Instead of bearing the entire risk of failure, a sponsor may secure participation and risk sharing by other partners. Alternatively, the sponsor may be able to pass some of the risk on to suppliers, customers, and sometimes, creditors.
• Sponsors can expand their debt capacity beyond what might be possible with direct financing. For example, a firm's bond indenture may restrict its ability to issue new debt. Project arrangements (such as the arrangements noted above in Section 2) can be structured so that the sponsor's existing debt covenants and capacity will not be affected by the project debt financing because project financing stands alone and outside the sponsoring entity. Debt related to the project will only show on the project entity's balance sheet and not on the sponsor's balance sheet.
• Sponsors can share the business and financial risk in some project financing arrangements. The result is a lower cost of debt and a lower cost of capital. The sponsor will realize a higher net present value for the project through a lower cost of financing. For example, output or service purchase arrangements guarantee the demand for the project's products. Consequently, the risk of bankruptcy is lower than for a similar firm that has no ready customers. Given the lower business risk, lenders should be willing to finance the project at a relatively lower rate. However, this advantage may not be obtained on all projects.
8th EditionN. Gregory Mankiw
2nd EditionDavid Anderson, Margaret Ray
David Anderson, Margaret Ray
5th EditionBen Bernanke, Robert Frank
ACCOUNTING Harrison Forklift’s pension expense includes a service cost of $10 million. Harrison began the year with a pension liability of$28 million (underfunded pension plan). Required: Prepare the appropriate general journal entries to record Harrison’s pension expense in each of the following independent situations regarding the other components of pension expense ($in millions): 1. Interest cost,$6; expected return on assets, $4; amortization of net loss,$2. 2. Interest cost, $6; expected return on assets,$4; amortization of net gain, $2. 3. Interest cost,$6; expected return on assets, $4; amortization of net loss,$2; amortization of prior service cost, $3 million.