FIN 300 Lecture Notes - Lecture 8: Initial Public Offering, Dividend Yield, Dividend Tax

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17 Apr 2016

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Chapter 8 stock and the stock market. Governments and corporations borrow money for the long term by issuing and selling securities such as bonds. Corporations have alternatives; can issue and sell securities such as stocks. Investors who purchase the stock are called stockholders or equity holders or shareholders. Primary market: part of the financial markets where the sale of new stock first occurs. Initial public offering (ipo): first offering of stock to the general public. Seasoned issue (seo): sale of new shares by a firm that has already been through an ipo. Secondary market: part of the financial markets in which already issued securities are traded by investors. Ownership shares in a publicly held corporation, without priority for dividends or in bankruptcy: voting. Shareholder activism (exec. pay; independent directors, etc. ) At the discretion of the board of directors: entitled to the firm"s residual cash flow in a liquidation, as owners, share in the fortunes of the firm.

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Contemplating an Initial Public Offering

Recall that if the economy continues to be strong, Carson Company may need to increase its production capacity by about 50 percent over the next few years to satisfy demand. It would need financing to expand and accommodate the increase in production. Recall that the yield curve is currently upward sloping. Also recall that Carson is concerned about a possible slowing of the economy because of potential Fed actions to reduce inflation. It is also considering issuing stock or bonds to raise funds in the next year.

a. If Carson issued stock now, it would have the flexibility to obtain more debt and would also be able to reduce its cost of financing with debt. Why?

b. Why would an IPO result in heightened concerns in financial markets about Carson Companyâs potential agency problems?

c. Explain why institutional investors, such as mutual funds and pension funds, that invest in stock for longterm periods (at least a year or two) might prefer to invest in IPOs rather than to purchase other stocks that have been publicly traded for several years.

d. Given that institutional investors such as insurance companies, pension funds, and mutual funds are the major investors in IPOs, explain the flow of funds that results from an IPO. That is, what is the original source of the money that is channeled through the institutional investors and provided to the firm going public?

reddinosaur30

Which of the following statements is NOT CORRECT? a. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. b. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. d. It is possible for a firm to go public and yet not raise any additional new capital. e. When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."

1. (TCO D) Which of the following statements is NOT CORRECT? (a) When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held." (b) "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. (c) Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. (d) When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. (e) It is possible for a firm to go public and yet not raise any additional new capital. 2. (TCO D) Europa Corporation is financing an ongoing construction project. The firm will need $5,000,000 of new capital during each of the next three years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40 percent debt and 60 percent equity, and it wants to be at that structure in three years, when the project has been completed. Debt flotation costs for a single debt issue would be 1.6 percent of the gross debt proceeds. Yearly flotation costs for three separate issues of debt would be 3.0 percent of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in three separate issues? (a) $79,425 (b) $83,606 (c) $88,006 (d) $92,406 (e) $97,027

FIN 300 Lecture Notes - Lecture 8: Initial Public Offering, Dividend Yield, Dividend Tax

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