BFC1001 Lecture Notes - Lecture 9: Initial Public Offering, Common Stock, Dividend Policy

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goldcrocodile909

8 Aug 2018

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When a private company wants to raise equity capital through stocks, it undertakes an. Initial public offering (ipo) in the primary market. As most companies are not familiar with how to access the stock market and the regulations involved, an underwriter will often be engaged to manage the ipo. Underwriters = financial institutions who are experts at raising capital. Upon ipo, the company is considered public because members of the public are welcome to take part in ownership through its listing on the stock exchange. If the company needs more equity capital after the ipo, more shares can be issued and sold to the public in a share placement or just to existing shareholders in a rights issue. Shares (and bonds) are forms of direct financing. Even through there is a finance banker, they only act as an agent rather than an intermediary.

Related Questions

Check out ONYX Phamaceutical, Inc (ONXX). The stock went public on July 1, 2013 at $63.50 and closed on July 2nd at $135.58!!! Wow!! Unfortunately, this rarely happens with most IPO's. What's the price today?

How do stocks typically perform after their initial public offering (IPO)?

I found this quote from: http://www.teachmefinance.com/IPO_Initial_Public_Offerings.html

"Avoiding the Hype An important point to remember is underwriters are performing a sales role in intentionally creating hype about the offer. The fact that each company will only have one IPO means that underwriters will often advertise them as âonce in a lifetimeâ chances for investors. It is true that some IPOs are very successful and the company shares continue to rise in value after the IPO, but many others will drop to values well below the initial offer price in their first year of trading. Investors need to think about the overall value of the investment, without being distracted by the IPO hype."

- What are the three primary ways in which capital is transferred between savers and borrowers? Describe each one.

- What are the two leading stock markets? Describe the two basic types of stock markets.

- If Apple computer decided to issue additional common stock and Varga purchased 100 shares of this stock from make Smyth Barry, the underwriter, would this transaction be a primary or a secondary market transaction? Would it make a difference if Varga purchased previously outstanding Apple stock in the dealer market? Explain.

- What is an initial public offering (IPO)?

- What does it mean for a market to be efficient? Explain why some stock pricesmay be more efficient than others.

Should Firms That Go Public Engage in International Offerings?

POINT: Yes. When a U.S. firm issues stock to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its stock at a higher price by attracting more investors. It will increase its demand by spreading the stock across countries. The higher the price at which it can issue stock, the lower is its cost of using equity capital. It can also establish a global name by spreading stock across countries.

COUNTER-POINT: No. If a U.S. firm spreads its stock across different countries at the time of the IPO, there will be less publicly-traded stock in the U.S. Thus, it will not have as much liquidity in the secondary market. Investors desire stocks that they can easily sell in the secondary market, which means that they require that the stocks have liquidity. To the extent that a firm reduces its liquidity in the U.S. by spreading its stock across countries, it may not attract sufficient U.S. demand for the stock in the U.S. Thus, its efforts to create global name recognition may reduce its name recognition in the U.S.

WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support?

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BFC1001 Lecture Notes - Lecture 9: Initial Public Offering, Common Stock, Dividend Policy

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