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Securities Market
Lecture 3: Primary Market
MSc. Le Quoc Tuan (Thomas)
 Contents

1 Definitions, functions and characteristics

2 Prepare for a securities offering!

3 Underwriting

4 Conducting a securities offering

 Definitions, functions &
Characteristics

Definitions Characteristics Function

• Price
• Market that • Help firms or
• Participants
deals with government
• Frequency of
issuing new mobilize
trades
securities capital
 Direct finance
Fund Fund

Fund providers Fund spenders

- Government - Government
- Businesses Primary - Businesses
- Households market - Households
- Foreigners… - Foreigners…

Securities Securities
 The General Process

1
• Issuing preparation

2
• Distribution phase

3
• Post-offering activities
Underwriting consideration

Self-
issuance

Underwriting
 Self-issuance

1. Should a company issue securities via self-

issuance?
2. What are the requirements for self-issuance?
3. Pros and cons of self-issuance?
4. When should a company do that?
 Self-issuance

 The company (issuer) sells its securities directly to

the market without the involvement of any
intermediaries.
 Preparation of documents (by itself)
 Selling the securities to investors (by itself)
 Collecting the proceeds and stabilize the market price
(by itself).
 When should a company do that?

 The capital needed is not large

 The issuer is experienced in issuing and
registering procedure
 The issuer is well informed of the current stock
market conditions
 The issuer possess a well-functioned securities
distribution network.
Pros and cons of self-issuance

• Cost of capital is
potentially low
Pros

• It takes longer to collect

the proceeds
Cons • The likelihood of not
being able to collect the
amount needed
 Underwriting
Definition:
The process by which the underwriters raise
investment capitals on behalf of corporations
or government by helping them with:
- Registering procedure
- Securities distribution
- Price stabilization
The underwriter’s mission
- Would the
securities be
Guarante
fully sold?
- If the e
firm
have to - Their
- What to reduce the Sales of
relationship
Advisory
issue? offfering
- When to price? securities
with other IBs
- Professional
issue? underwriting
- Price?
network
-… A
successful
issuance
 Advisory Service

 What to advice?:
 Which securities to offer?
 How to issue them?
 How does an underwriter give advice?
 Due Diligence
 Cooperate with the firm managers to prepare
appropriate documents for registration
 Underwriter

 Which of the following could be the underwriter?

Brokerage Commercia Investment

firms? l banks? Banks?
 Underwriter

 Legal Capital for Vietnamese Securities

Companies (Investment Banks) to conduct
business (in billion VND)
 Stock Brokerage: 25
 Derivatives Brokerage: 800
 Proprietary Trading: 100
 Proprietary Trading of Derivatives: 600
 Underwriting: 165
 Investment advisory: 10
Types of Underwriting commitment
• Firm commitment

• Best effort

• All or none

• Mini/Maxi

• Standby
 Firm commitment

Sell all the securities issued

At a predefined price
The
underwriter
makes a
At a predefined amount commitment to
the issuer to…

HOW DO THEY KEEP THE COMMITMENT ???

 Firm commitment
Amount Price Expected Capital Commitment
Issuer
(shares) (VND) mobilized (VND) type
Firm
ABC JSC. 20,000,000 12,000 240,000,000,000
commitment

Underwriter: Vietcombank securities JSC. (VCBS)

 Situation 1: VCBS could sell 18 million shares
 Situation 2: VCBS could only sell 2 million shares
Pros and cons of this commitment (who bears the
risk)?
 Best effort
The underwriter commits to try their best to
sell all the securities that are being offered
by the issuer.
What if they could not sell all?
 Best effort
Amount Price Expected Capital Commitment
Issuer
(shares) (VND) mobilized (VND) type
ABC JSC. 20,000,000 12,000 240,000,000,000 Best effort

Underwriter: Vietcombank securities JSC. (VCBS)

 Situation 1: VCBS could sell 18 million shares
 Situation 2: VCBS could only sell 2 million shares
Pros and cons of this commitment (who bears the
risk)?
 All or None

The issuer determined to receive the

proceeds from the sale of all the securities
What if not all the securities are sold???
 All or None
Amount Price Expected Capital Commitment
Issuer
(shares) (VND) mobilized (VND) type
ABC JSC. 20,000,000 12,000 240,000,000,000 All or None

Underwriter: Vietcombank securities JSC. (VCBS)

 Situation 1: VCBS could sell 20 million shares
 Situation 2: VCBS could sell 18 million shares
Pros and cons of this commitment (who bears the
risk)?
Mini-Maxi

Maximum if
Sell possible
The
under-
writers Reach a
Sell
commit Minimum
proportion
to
 Mini-Maxi
Amount Price Expected Capital Commitment
Issuer
(shares) (VND) mobilized (VND) type
ABC JSC. 20,000,000 12,000 240,000,000,000 Mini-Maxi

Underwriter: Vietcombank securities JSC. (VCBS).

ABC JSC. requires VCBS to sell at least 80% the
amount of issuing shares (=16 million shares).
 Situation 1: VCBS could sell 17 million shares
 Situation 2: VCBS could sell 10 million shares
Pros and cons of this commitment (who bears the
risk)?
 The Greenshoe Option

 Greenshoe option (over allotment option) is the

option that allows the underwriters to issues up to
15% more shares than originally planned.
 The option can be exercised within 30 days of the
offering and does not have to be exercised on the
same day.
 It takes the name from the first company that use it:
Green Shoe Manufacturing Company
 The Greenshoe Option

 Greenshoe option allows the underwriter to

stabilize the price of security issued.
 If the underwriter determines that the demand for
shares will be high, it will exercise and issue all or
some of the additional shares to increase the supply
 If the underwriter determines that the demand for
shares will be low, it will well the issued shares + the
additional 15%, then buy back 15% at the offering
price to reduce the supply and prop up share price
 The Greenshoe Option

 Some of the company IPOs that used Greenshoe

option (over-allotment option):
 in 2012, The IPO of Facebook Inc. Initially, 421
million shares were offered at $38. After the
greenshoe option was exercised, 484 million shares
were sold
 In 2014, The IPO of Alibaba Group Holding Ltd.
https://www.forbes.com/sites/ryanmac/2014/09/22/al
ibaba-claims-title-for-largest-global-ipo-ever-with-ext
ra-share-sales/#
2addebff8dcc
Underwriting syndicate
Corporations
(Issuers)
Underwriting
syndicate
Main underwriter(s)

Member Member Member Member

1 2 3 4

Investors
 Top 10 Global Underwriters in 2003
(Source: www.publicbonds.org)
Rank Underwriters Underwriting Market share No. of deals
value (%)
(in mil USD)
1 Citigroup Inc 52362.7 13.8 690
2 UBS financial service 44845.8 11.8 842
Inc
3 Merrill Lynch 29421.4 7.8 304
4 Morgan Stanley 26529.1 7.0 274
5 Lehman Brothers 24518 6.5 230
6 Bear Stearns&Co 22402.6 5.9 183
7 J.P Morgan Sec 21377.5 5.6 193
8 Goldman Sachs 20447.2 5.4 176
9 BOA securities 12780.1 3.4 357
10 RBC Dain Rauscher 10735.8 2.8 658
Total Top 10 265420.2 70 3907
World total 379098.2 100 14584

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 Top 10 Underwriters
Underwriter Value ($ 2008 2007
mil)
Rank Market No. of Rank Market
share (%) deals share (%)
J.P. Morgan 394.181 1 9 1.056 2 10
Barclays Capital 378.325 2 9 990 1 10
Deutsch Bank 287.633 3 7 705 4 7
Citigroup 267.722 4 6 852 3 8
RBS 209.119 5 5 663 5 7
Merrill Lynch 203.745 6 5 736 6 6
Credit Suisse 183.497 7 4 574 10 4
Goldman Sachs 182.983 8 4 462 8 5
Morgan Stanley 182.898 9 4 533 7 6
Bank of America 178.870 10 4 468 9 4
Total 2.468.973 57 7.039 67
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Global 4.244.212 100 11.478 100
 Top 10 Underwriter 2010 (source: the IPO review -
Douglas Campbell)
TOP 10 GLOBAL UNDERWRITERS 2010

53.92% Ranked by Market Share (%)

 Underwriting commitment in VN

 In Securities Law (2010): translated by SSC

Underwriting an issue means the underwriter
provides an underwriting to the issuing
organization to conduct procedures prior to an
offer to sell securities, and to receive some or
all of the securities of the issuing organization in
order to resell them or to purchase residual
securities not completely distributed by the
issuing organization or to assist the issuing
organization to distribute securities to public.
 Underwriting commitment in VN

 Decree 58/2012/ND-CP and Decree 60/2015/ND-CP

 Underwriting commitment in VN

In Vietnam, there are currently two common types

of commitment available: Firm commitment and
Best Effort
However, other types of commitment are also
allowed
 Preparing for an offering

To-do list
Identify the securities to issue
Identify how to distribute
Prepare all necessary documents
Information disclosure and advertising for
the securities offering
 Identify the securities to issue

Determinants of the decision to issue

a specific type of securities:
 Capital structure
 Firm’s creditability
 Firms financial conditions
 Stock market conditions
Capital Structure

COMPANY
Liabilities

Assets
Shareholder’s
Equity
 Credit Rating
Rating S&P Moody’s
Investment grade
Highest grade AAA Aaa
High-grate AA Aa
Upper medium grade A A
Medium grade BBB Baa

Speculative grade (high-yield)

Lower medium grade
Speculative BB Ba
Poor standing B B
Highly speculative CCC Caa
Lowest quality, no interest CC Ca
Default C C
D

Source: Financial Risky Manager Handbook

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 How to issue
 Types of offerings
By offering
time
By No. of
• IPO investors By Issuing
• Follow-on price
• Private
Offering By Methods
placement • Fixed price
• Public • Variable
offering price • Direct
offering
• Indirect
offering

BY LAW AND REGULATIONS

 Private Placement

 The issuers sell securities for fewer than 100

investors.
 The issuers are not allowed to advertise their
offering on any social media.
 Public offering

 Disclose the offering to all media available,

especially on the Internet.
 Offer for more than 100 investors.
 Offer for an undetermined number of investors
Price Determination

Book Building
Auction
 Determining the issuing price
 One of the most important stage in a securities
offering:
1. Due Diligence
2. Securities valuation
3. Identifying a price range
(Then proceed to either one of these methods)
 Road-show and book building to determine the
final issuing price.
 Use the auction method.
 Eligibility for Public Offering

 The General eligibility criteria:

1. Capital
2. Performance
3. Clear plan to use the proceeds from the
offering
4. Number of investors intended to offer
 Private Placement criteria
(for shares)
 Issuer:
 Corporations
 Other types of company transferred to corporations (yes,
still corporation!)
 Plan to use the proceeds:
 A decision from the Stockholder’s meeting or Board of
Administrator to approve the plan to issue and deploy
the proceeds from the offering and identify the number of
investors and the type of investors offered

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 Public offering criteria
For some countries
Countries Criteria
Minimum Profitability Investors criteria Proportion of
shareholder’s public offering
equity
Thailand 2.4 mil USD 3 years >=600 15%-30%
China 50 mil RMB 3 years Each 25%, 15% if
shareholder shareholder’s
does not hold equity>400
more than0.05% mil RMB
số CP
Korea 5 bil won 3 most recent >= 1000 >= 30% or at
years>= 25% least 300.000
shares
Malaysia 50 mil RM 5 years >= 5 500-1000 >=25%
mil RM
 Public offering criteria of Vietnam
Criteria Stock Bond
Shareholder’s ≥ 10 bil VND ≥ 10 bil VND
equity
Performance Positive net income for the Positive net income for the
previous year without any previous year without any
cumulated loss up to offering cumulated loss up to offering
year year and more than 1 year
overdue debt.
Plan to issue Approved by Shareholder’s Approved by Board of Director
and use of Meeting
proceeds
No. of ≥ 100 ≥ 100
investors
Commitment Commitment to make the Commitment to fulfil any duty
securities tradable on from issuer to investors and
securities market 1 year after investor protection/
the offering
 Exercise

Exercise 1: On July, 2011, Song Hong Joint Stock

Company filed their registration with the State
Securities of Vietnam as follows:
Year of establishment: 2006
Shareholder’s equity: 7000 million VND
No. of investors: 60
They intended to issue shares for current
shareholders
Song Hong JSC is eligible to issue stocks under
which method of offering?
 Exercise

Exercise 2: PetroVietnam construction Joint Stock

Corporation (PVNC) filed a registration to the SSC on
July, 2011 as following:
Offering 50.000.000 shares at par (10.000 VND), in which:
• 44.500.000 shares for current shareholders.
• 500.000 shares for employee.
• 5.000.000 shares for strategic investors.
Other information:
PetroVietnam construction Joint Stock Corporation’s
shareholder equity is 100 billion VND
 Exercise

Exercise 2: (cont.)
The performance of the company in previous years (in
million VND))
Year 2010 2009 2008 2007

Net income 58008 26656 6310 2069

a. What kind of offering does PVNC file registration for?

b. Are they eligible to offer?
They are, and they received permission from SSC on 4th of
August, 2011
 Conditions of Stock Market

How do they affect the decision to

issue securities?
 Securities Offering Registration
Preparing documents
and issuing profile Amending the documents
Circular according to SSC’s guide
162/2015/TT-BTC by
Ministry of Finance 1
2
The Procedure
5
Permission

3
4
Quiet period(30 SSC receive the full
days of documents registration
processing by SSC)
Public offering full procedure
Phase 1 Phase 2 Phase 3 Phase 4

Sign official
underwriting Collecting
contract proceeds /
Shareholder
end of
Meeting Prepare for
offering
registration Information
disclosure
IPO File for IPO to Share price
committee Forming an SSC stabilizing
underwriting
syndicate
Selling
Chose Shares
underwriter Due End of
and sign diligence syndicate and
memorandum report the
Registration results to SSC
Document
 Public offering registration
documents
 Include:
 Application form for public offering
 Prospectus and Audited Financial Statements
 Company’s Charter
 Decision by Shareholder meeting or BoD
 Underwriting commitment (if applicable)
 Documents on land use and other documents…
6 sets of documents, 1 original and 5 copies
 Registration phase

Final decision by SSC:

 Receiving permission from SSC to start
the next phase
 If denied, receive denial from SSC in
written stating the reasons for denial
 Information Disclosure and
Marketing
The issuer and underwriter work to
prepare for the road show.
Preparing the final information to be
disclosed and advertised to the public
Meeting with important parties.
 Auction Method

Types of Other
The
Auction issues in
procedure
structure Auction

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 Procedure of Auction

• Announcement of Auction method

1

• Auction registration
2

• Deposit for the auction

3

4
• Determining the placement results

• Announcement of the results

5

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 Public Offering by Auction procedure

For stocks, 10% For

stocks,
Bidding value by maximum
reserve price of 2 bids

Fill
Receive Fill
Registration Deposit Bidding form
Bidding form
form

For bonds,
For bonds, 5% maximum of
Total bidding 5 bids; blank
for non -
value competitive
 Deposit for the auction

 Deposit (or registration deposit) to deter non-

serious bidders from attending the auction.
 Deposit to ensure the final payment by winning
bidders
 Winning bidders have their deposit applied
toward the final selling price.
 Non winning bidders have their deposit refunded
to them
 Deposit for the auction

  Example:
Mr. Smart is registering for the public offering
auction of Widget. JSC. He intended to buy 10,000
shares. The reserve price is 15,000 VND/share
Mr. Smart have to deposit:
 Deposit for the auction

  Example:
Congratulation! Mr. Smart won the bid!
He is allotted 10,000 shares at 19,000 VND/share
His final settlement?

Total winning value Deposit

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Auction structure
1 2

Dutch Discriminatory
Auction price auction
(uniform
price
Auction)
 Dutch Auction
 Fundamentals
 The allotted placement is assigned to the
bidders from the highest bids (lowest yield) down
until all of the allotted shares (bonds) are
assigned
 The price that each bidder pays is the lowest
price (highest yield) of all the allotted bidders or
last successful bid
 Dutch Auction

 Example (Shares):
Widget JSC issues 3 million shares with Dutch Auction. The
bidding are as follows:

Bidders Price per Shares (in Cumulated

share (VND) thousands)
A 20,000 800
B 19,800 1,000
C 19,500 500
D 19,100 1,200
E 19,000 1,100
F 18,500 600
 Dutch Auction

 Example:
Widget JSC issues 3 million shares with Dutch Auction. The
bidding are as follows:

Bidders Price per Shares (in Cumulated

share (VND) thousands)
A 20,000 800 800
B 19,800 1,000 1,800
C 19,500 500 2,300
D 19,100 1,200 3,500
E 19,000 1,100 4,600
F 18,500 600 10,600
 Dutch Auction

 The lowest winning price is 19,100 VND per

share in which all allotted placement is
assigned.
 Investors A, B, C, D whose bidding prices are
higher than 19,100 are winning bidders.
 The allotted shares are as follows
Winning bidders A B C D Total (in
thousands)
Amount (in 800 1,000 500 700 3,000
thousand shares)
Winning price 19,100 19,100 19,100 19,100
 Dutch Auction
 Example (Bond)
Vietnamese government issuing 300 billion VND in bonds
with Dutch Auction. The biddings are as follows (in billion
VND):
Bidder Yield (%) Value Cumulated

A 6.55 90
B 6.57 120
C 6.59 30
D 7.00 50
E 7.01 120
F 7.02 80
 Dutch Auction
 Example (Bond)
Vietnamese government issuing 300 billion VND in bonds
with Dutch Auction. The biddings are as follows (in billion
VND):
Bidder Yield (%) Value Cumulated

A 6.55 90 90
B 6.57 120 210
C 6.59 30 240
D 7.00 50 290
E 7.01 120 410
F 7.02 80
 Dutch Auction

 The highest successfully bid yield: 7.01%.

 Investors A, B, C, D, E who bid lower than
7.01% are assigned investors
 The allotted amounts:
Winning A B C D E Total
bidders
Value 90 120 30 50 10 300

Yield (%) 7.01 7.01 7.01 7.01 7.01

 Discriminatory price auction
 Fundamentals
 The allotted placement is assigned to the
bidders from the highest bids (lowest yield) down
until all of the allotted shares (bonds) are
assigned
 The price that each bidder pays is their bidding
price (yield) assume that their bids are
successful bids
 Discriminatory price auction
 Stock
Michael Yass. JSC issues 3.2 million shares under
Discriminatory price auction structure. The biddings are
as follows Price (VND per Amount (in
Bidders Cummulated
share) thousand
shares)
A 30,000 800
B 29,800 1,100
C 29,500 700
D 29,300 900
E 29,100 900
F 29,000 1,200
 Discriminatory price auction
 Stock
Michael Yass. JSC issues 3.2 million shares under
Discriminatory price auction structure. The biddings are
as follows Price (VND per Amount (in
Bidders Cummulated
share) thousand
shares)
A 30,000 800 800
B 29,800 1100 1,900
C 29,500 700 2,600
D 29,300 900 3,500
E 29,100 900
F 29,000 1200
 Discriminatory price auction

 All bidders who bid higher than 29,300 VND per

share are allotted.
 The results of the auction:
Winning A B C D total
Bidders
Amount 800 1,100 700 600 3,200
(in
thousand
shares)
Winning 30,000 29,800 29,500 29,300
price
 Discriminatory price auction
 Bond:
Sodeepin Debt. JSC issues 300 billion VND in bonds
with Discriminatory price auction structure. The biddings
are as follows (in Billion VND))
Bidders Yield (%) Value Cummulated

A 7.00 110

B 7.10 60

C 7.15 120

D 7.20 80

E 7.30 100
 Discriminatory price auction
 Bond:
Sodeepin Debt. JSC issues 300 billion VND in bonds
with Discriminatory price auction structure. The biddings
are as follows (in Billion VND))
Bidders Yield (%) Value Cummulated

A 7.00 110 110

B 7.10 60 170

C 7.15 120 290

D 7.20 80 370

E 7.30 100
 Discriminatory price auction
 All bidders that bid lower than 7.20% are allotted
bonds.
 The results of the auction:

Winning A B C D Total
Bidders
Value (in 110 60 120 10 300
billlion
VND)
Yield (%) 7.00 7.10 7.15 7.20
Other issues in Auction

0% yield bidder

Non competitive bidders

Allotment at the (winning)

lowest price (highest yield)
 0% yield bidder
 Example:
In 2005, Vietcombank (VCB) issues 1,200 billion VND in
bonds (with a right to buy shares for bond holders) under
Dutch Auction structure. The maximum yield available for
bidders is 8.25%. The bonds are sold at par
Bidders Yield (%) Value (in Cummulated
billion VND)
A 0.00 160
B 5.51 580
C 5.53 200
D 5.59 100
E 6.00 180
F 6.41 40
 0% yield bidder

 Is 0% yield bid eligible?

 How to deal with the 0% yield?
 At that time, the average deposit rate of
commercial banks is 8%. Is this Auction
beneficial for VCB?
 0% yield bidder
 Example:
In 2005, Vietcombank (VCB) issues 1,200 billion VND in
bonds (with a right to buy shares for bond holders) under
Dutch Auction structure. The maximum yield available for
bidders is 8.25%. The bonds are sold at par
Bidders Yield (%) Value (in Cummulated
billion VND)
A 0.00 160 160
B 5.51 580 740
C 5.53 200 940
D 5.59 100 1,040
E 6.00 180 1,220
F 6.41 40
 Competitive & Non-competitive
bidding
 The Abou TaG Obankrupt Government issues 400 billion
VND in bonds in which 50 billion VND was reserved for
non-competitive bidding. The biddings are as follows:

Bidders Yield (%) Value (in billion Cummulated

VND)
A 7.05 90
B 7.07 110
C 7.09 120
D 7.11 90
E Non-competitive 60

F Non-competitive 40
 Competitive & Non-competitive
bidding
 The Abou TaG Obankrupt Government issues 400 billion
VND in bonds in which 50 billion VND was reserved for
non-competitive bidding. The biddings are as follows:

Bidders Yield (%) Value (in billion Cummulated

VND)
A 7.05 90 90
B 7.07 110 200
C 7.09 120 320
D 7.11 90 410
E Non-competitive 60

F Non-competitive 40
 Competitive & Non-competitive
bidding
 Case 1: Dutch Auction
350 billion VND of bonds for competitive bidders is allotted at
7.11%, bidder D is only allotted 30 billion VND.
50 billion VND of bonds for E, F is also allotted at 7.11%, The
value is divided between those two:
E is allotted: 60/100 × 50 = 30 billion VND
F is allotted : 40/100 × 50 = 20 billion VND
 Competitive & Non-competitive
bidding
 Case 2: Discriminatory price auction
350 billion VND of bonds for competitive bidders is allotted at
each bidder’s yield, bidder D is only allotted 30 billion VND.
50 billion VND of bonds for E, F is allotted at average winning
yield:
Average winning yield =(90 × 7.05+110 × 7.07+120 × 7.09+30 ×
7.11)/350 = 7.08%
The value for E and F is as Dutch Auction:
Bidder A B C D E F
Yield (%) 7.05 7.07 7.09 7.11 7.08 7.08
Value 90 110 120 30 30 20
(billion
VND)
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 Allotment at lowest winning
price/highest winning yield
 Provided that an auction is over and here is the
result (in Billion VND)
Unit A B C D E

Yield(%) 8.00 8.02 8.04 8.05 8.07

Amount 110 90 70 100 130

 E include 2 bidders: E1, E2 who bid for the total

value of 200 billion VND (E1 bids for 90, E2 bids
for 110). E1 and E2 are allotted as follows:
 E1 = 90/200*130=58.5 billion VND
 E2 = 110/200*130=71.5 billion VND
 Public Stock Offering

 Initital Public Offering (IPO)

 Follow-on Offering:
 Secondary offering
 Capitalization Issuing (bonus stocks issuing)
 Scrip dividend (stock dividend)
 Employee Stock Ownership Plan (ESOP)
 Secondary Offering
 The company issues new shares to the public
(with the share purchase right issued to the
existing shareholders) and collect proceeds
 It is a dilutive offering.
 Formula for the share purchase right
Qm: Share purchase right
P0: Market price before the ex-date
P1: Market price on the ex-date
p: Offering price
N: No. of shares issued
n: No. of shares intended to be issued
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 Secondary Offering
 Exercise:
Valentine corporation (VLC) issue a secondary
offering in 20XX. They intend to sell 118,570
shares at 11,200 VND per share. The issuing
ratio is 5:1, The ex-date is 14/2/20XX.
On 13/2/20XX, VLC stock closed at 23,500 VND
How does VLC share price diluted on Ex-Date?
What is the fair value for the share purchase right?

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 Secondary Offering

 Our parameters:
P0 = 23,500 VND
p = 11,200 VND
N:n = 5:1
n = 118,570 shares
 Solution 1:

 We calculate the original issued shares of the firm:

N = n × N:n = 118,570 × 5:1 = 592,850
Henc, N = 592,850 shares
n = 118,570 shares
On 14/2/20XX

P1 = 21,450 VND

Qm = P0 – P1 = 2,050 VND
 Solution 2:

 We make some changes to the original formula:

Divide both numerator and denominator to N:

P1 =

Then use the new formula with our information:

P1 = (23,500 + 1/5*11,200) / (1 + 1/5) = 21,450
VND
Qm = 2,050 VND
 Capitalization Issuing

 Issue bonus shares to existing shareholders for

free (Bonus issuing) to restructure the
company’s reserves
 The reserves: Capital Surplus, Retained
Earnings and other reserves
 Capitalization Issuing
 The price dilution formula is similar to secondary
offering except for p = 0

In which:
Qc: The right of bonus
P0: Market price before ex-date
P1: Market price on ex-date
N: No. of shares issued
n: No. of bonus shares
 Capitalization Issuing

 Exercise
Hoang Anh Gia Lai Group (HOSE: HAG) announces their bonus
shares issuing as follows:
 The record date: 21/1/2011
 The Ex-date: 19/1/2011
- Issuing ratio 2:1 (shareholder gets 1 bonus share for every 2 shares
he/she is owning)
 The bonus shares are issued based on 40% from capital surplus
and 60% from retained earnings.
 The market price for HAG before the Ex-date: (in thousand VND)
Date 14/1 17/1 18/1
Closing price 78.5 79.5 80
How is the HAG stock diluted?
 Stock dividend

 The company pay dividend for the shareholders but

instead of cash, they pay stocks.
 Ex: Binh Thuan Hamico Mineral (KSA) announces their
stock dividend for current shareholders.
Ex-dividend date: 16/8/2011, Record Date: 18/8/2011
Dividend ratio: 100:20
KSA shares on 15/8/2011 close at 13,600 VND
 Employee Share Ownership Plan

 In order to encourage the employees and earn

their loyalty to the company.
 Allowing the employees to earn benefit from the
company’s free cash-flow.
 Sell (at a special price) or reward shares to the
employees
 Non-dilutive

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 Special cases of follow-on
offering
1. Follow-on offering with cash dividend payment
The cash dividend is adjusted to the market price before
ex-date in the dilution formula:
In which:
The formula becomes: P1: market price on ex-date
P0: market price before ex-date
N(P0 – D) + n.p
p: issuing price (= 0 for bonus
P1 =
N+n shares)
N: No. of shares issued
Q = P0 – P1 n: No. of new shares
D: Cash dividend
Q: Value of the right
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 Exercise

Sacombank (STB) announces their offering in 2010:

Ex-date: 10/08/2011
Record date: 12/08/2011
Cash dividend at 15% on par (1,500 VND per share)
Secondary offering for existing shareholders at the rate of
15% or 100:15
Selling price: 10,000 VND
STB closing price on 09/08/2011: 15,200 VND
How was STB stock diluted on Ex-date?
 Exercise

 Solution:
P0 = 15,200, N:n = 100:15
D = 1,500 VND

N(P0 – D) + n.p
P1 = = 13,217 VND
N+n
 Special cases of follow-on
offering
Follow-on offering of different kind with the same Ex-date
Formula:

N(Po – D) + n1*p1+ n2*p2

P1 =
N + n1 + n2
Q* = P0 – P1
 Exercise

Sacombank announces a stock dividend and new shares

issuing in 2010.
Stock dividend of 2009, ratio of 20:3 or 3 dividend shares
for each 20 shares the shareholder is owning.
Issuing new shares with the ratio of 10:2 at 12,000 VND
per share
Ex-Date: 07/07/2010
Record Date: 09/07/2010
STB closing price on 06/07/2010: 20,900 VND
Price dilution?
 Bond and Debt payment plan

 Loan payment Schedule:

Principal is paid once when due
Even principal payment
Even total payment
 Even principal payment

 Size of the principal payment is the same for

every payment. The interest is charged on the
remaining principal
 Ex:
An investor with 9,000 bonds, 1 million VND face
value, annual coupon 10%, 3 year maturity.
How do the investor receive his repayment from
the issuer under the even principal payment
schedule?
 Even principal payment

 3 payments for 3 years, each principal payment

is 9000/3 =3000 bonds. The schedule:
Principal Principal
Principal Interest Total
Payment at the at the end
repayment payment payment
beginning of payment

1 9,000 3,000 900 6,000 3,900

2 6,000 3,000 600 3,000 3,600

3 3,000 3,000 300 0 3,300

Total 9,000 1,800 10,800

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 Even total payment

 Comprise of decreasing interest payment and increasing

principal payment
 The total debt payment at maturity

 Total payment each payment

 Example

 X company issues 1000 bonds at par ($1000).

Annual coupon is 10%, 5-year-maturity. How
does X repay their debt under Even total
payment schedule?
 Example
:
a = $263,797.48
 The schedule
Year Principal at a Principal Interest Principal at
the payment payment the end of
beginning period
1 1,000 263.8 163.8 100 836.2
2 836.2 263.8 180.2 83.6 656
3 656 263.8 198.2 65.6 457.8
4 457.8 263.8 218 45.8 239.8
5 239.8 263.8 239.8 24 0
Total 1,000 319
Thank you