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FINE 2000 Chapter Notes - Chapter 14-15: Private Placement, Initial Public Offering, Underwriting

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silvercrow205
23 Apr 2016
School
York University
Department
Finance
Course
FINE 2000
Professor
Anthony Mayadunne

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Document Summary

Chapter 14 introduction to corporate financing and governance. Issued shares: shares that have been issued by the company. Outstanding shares: shares that have been issued by the company and are held by investors. Authorized share capital: maximum number of shares that the company is permitted ot issue as specified in the firm"s articles of incorporation. Par value: value of security shown on certificate. Additional paid-in capital: difference between issue price and par value of stock, also called capital surplus. Retained earnings: earning not paid out as dividends. It tells us how much capital the firm has raised from shareholders in the past. It does not measure the value that investors put on those shares today. The market value of firm is forward-looking; it depends on the future dividends that shareholders expect to receive. Majority voting: voting systems in which each director is voted on separately.

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Related Questions

Analyzing and Interpreting Equity Accounts and Comprehensive Income
Following is the shareholders’ equity section of the 2013 balance sheet for Procter & Gamble Company and its statement of shareholders’ equity.

June 30 (In millions, except per share amounts) 2013
Shareholders' Equity
Convertible Class A preferred stock, stated value $ 1 per share
(600 shares authorized) $ 1,137
Non-voting Class B preferred stock, stated value $ 1 per share
(200 shares authorized) --
Common stock, stated value $ 1 per share
(10,000 shares authorized; shares issued: 2013-4,009.2) 4,009
Additional paid-in capital 63,538
Reserve for ESOP debt retirement (1,352)
Accumulated other comprehensive income/(loss) (7,499)
Treasure stock, at cost (shares held: 2013-1,266.9) (71,966)
Retained earnings 80,197
Noncontrolling interest 645
Total shareholders' equity $ 68,709
Consolidated Statement of Shareholders' Equity



Dollars in millions;
Shares in thousands

Common
Shares
Outstanding


Common
Stock


Preferred
Stock

Additional
Paid-in
Capital

Reserve for
ESOP Debt
Retirement		 Accumulated
Other
Comprehensive
Income
(Loss)


Treasury
Stock


Retained
Earnings


Noncontrolling
Interest



Total
Balance June 30, 2012 $ 2,748,033 $ 4,008 $ 1,195 $ 63,181 $ (1,357) $ (9,333) $ (69,604) $ 75,349 $ 596 $ 64,035
Net earnings 11,312 90 11,402
Other comprehensive income 1,834 1,834
Dividends to shareholders:
Common (6,275) (6,275)
Preferred, net of tax benefits (244) (244)
Treasury purchases (84,234) (5,986) (5,986)
Employee plan issuances 70,923 1 352 3,573 3,926
Preferred stock conversions 7,605 (58) 7 51 —
ESOP debt impacts 5 55 60
Noncontrolling interest, net (2) (41) (43)
Balance June 30, 2013 $ 2,742,327 $ 4,009 $ 1,137 $ 63,538 $ (1,352) $ (7,499) $ (71,966) $ 80,197 $ 645 $ 68,709


(a) What does the term convertible (in reference to the company's Class A preferred stock) mean?

Convertible means the holder of the security has an obligation to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to surrender the security and to receive cash at any time.

Convertible means the holder of the security has an option to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to sell the security at any time.



(b) How many shares of common stock did Procter & Gamble issue when convertible Class A preferred stock was converted during fiscal 2013?


Answer

thousand shares

(c) For "employee plan issuances," at what average price was the common stock issued as of year-end 2013? (Round your answer to two decimal places.)

$Answer



(d) What is the accumulated other comprehensive income account?

The accumulated other comprehensive income account reflects the cumulative profit recognized by the company less the cumulative dividends that have been paid to shareholders.

The accumulated other comprehensive income account reflects the cumulative change in net assets (defined as assets less liabilities) for transactions other than net income transactions and transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative profit on transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative amount by which the company's common stock has increased or decreased since issuance.



(e) What cash dividends did Procter & Gamble pay in 2013 for each class of stock?


Common dividends =Answer

($ millions)
Preferred dividends =Answer($ millions)

Mutt.com was founded in 2006 by two graduates of the University of Wisconsin with the help from Georgina Sloberg, who had built up an enviable reputation for backing new start-up businesses. Mutt.com's user-friendly system was designed to find buyers for unwanted pets. Within 3 years the company was generating revenues of $3.4 million a year and, despite racking up sizeable losses, was regarded by investors as one of the hottest new e-commerce businesses. The news that the company was preparing to go public therefore generated considerable excitement. The company's entire equity capital of 1.5 million shares was owned by teo founders and Ms Sloberg. The intial public offering involved the sale of 500,000 shares by the three existing shareholders, together with the sale of further 750,000 shares by the company in order to provide funds for expansion. The company estimated that the issue would involve legal fees, auditing, printing, and other expenses of $1.3 million, which would be shared proportionately between selling shareholders and the company. In addition, the company agreed to pay the underwriters a spread of $1.25 per share (this cost would also be shared). The roadshow had confirmed the high level of interest in the issue, and indications from investors suggested that the entire issue could be sold at a price of $24 a share. The underwriters, however, cautioned about being too greedy on price. They pointed oot that indications from investors were not the same as firm orders. Also, they argued, it was much more important to have a successful issue than have a group of disgrunted shareholders. They therefore suggested an issue price of $18 a share. That evening Mutt.com's financial manager decided to run through some calculations. First, she worked out the net receipts to the company and the exsisting shareholders assuming the stock was sold at $18 per share. Next, she looked at the various costs of the IPO and tried to judge how they stacked up against the question of underpricing. When she had raised the matter with the underwritters that morning, they had dismissed the notion that the initial day's return on an IPO should be considered part of the issue costs. One of the members of the underwriting team asked: "the underwritiers want to see a high return and a high stock price. "Would Mutt.Com prefer a low stock price? Would that make the issue less costly?" Mutt.Com's financial manager was not convinced but felt that she should have a good answer. She wondered wheather unerpricing was only a problem because the exsisting shareholders were selling part of their holdings. Perhaps the issue price would not matter if they had not planned to sell.

Please answer the following questions after reading the attached MiniCase: 1. Calculate all flotation (issue) costs of IPO for Mutt.Com 2. Calculate the three ratios (Direct Cost Ratio: Direct Costs/Funds Raised) and (Indirect Cost Ratio: Underpricing Costs/Funds Raised). Compare these two ratios to the numbers in Figure 15.3 and Figure 15.5 in Chapter 15. 3. Calculate the spread cost ratio (Spread Cost Ratio: Total Spread Cost/Funds Raised). Compare this ratio to the numbers in Table 15.3 in Chapter 15. 4. Calculate another ratio known as total flotation cost ratio (Total flotation costs/Value of Shares issued). Please note that the value of shares issued is based on the non-underpriced value of the issue. Do you think that issuing equity is a cheap process? Use your answer to justify your opinion. 5. Answer the following questions in the MiniCase focusing on whether underpricing should be considered as a part of total flotation cost: a. Would Mutt.Com prefer a low stock price? b. Would that make the issue less costly?

_________________ is the capital supplied by common stockholders--capital stock, paid-in capital, retained earnings, and, occasionally, certain reserves. _______________ is the difference between the stock’s par value and what stockholders paid when they bought newly issued shares. ______________ is the portion of the firm’s earnings that have been saved rather than paid out as dividends.

The __________________ shows how much of the firm’s earnings were retained in the business rather than paid out in dividends. Firms retain earnings primarily to expand the business, not to accumulate cash in a bank account. The ______________ __ reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

______________________ is a firm’s net income as reported on its income statement. Net cash flow, as opposed to accounting net income, is the sum of net income plus non-cash adjustments. ______________ is the cash flow actually available for distribution to investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations.