XYZ Ltd.’s IPO was severely under-priced based on the first day’s closing price. How would it affect your thinking to know that at the time of the IPO, XYZ was only looking for gold and did not have any revenue from its operations?
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it affect your thinking to know that at the time of the IPO, XYZ was only looking for gold and
did not have any revenue from its operations?
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Solved in 2 steps
- 13. XYZ Ltd.’s IPO was severely under-priced based on the first day’s closing price. How would it affect your thinking to know that at the time of the IPO, XYZ was only looking for gold and did not have any revenue from its operations?If a company’s market price rises above the IPO price, does that suggest that the company left money on the table and thus received less for the shares than it should have received? If most companies do leave money on the table, does that indicate the IPO market is inefficient? explainSome in the financial press were critical of seagram’s management for selling Du Pont stock for below current market price. Specifically, commentators said that Seagram;s management sold the Du pont stock at $4.50 per share less than market value, which damaged the wealth of seagram shareholders. Do you agree? Why or why not?
- Which of the following statements is true? a. High liquidity means a company is short on cash and may be unable to pay its debts.b. When a company decides to go public through an IPO, it is typically targeting to sell its shares to only a handful of shareholders. c. If the company has a higher than expected extremely high profit this year, equity holders will benefit more than debt holders as debtholders are the residual claimers for the cash flows of the company.d. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy.e. Equity holders expect to receive dividends and the firm is always legally obligated to pay them.Which of the following statements is NOT CORRECT? a. The cost of retained earnings is less than the cost of new common stock due to flotation costs. While retained earnings may appear to be free money on the surface, there is an opportunity cost to them as these funds could be invested elsewhere and earning a return for shareholders. Due to the lower cost of retained earnings, companies generally prefer to use retained earnings to finance their projects, and only issue new common stock when they absolutely must. b. There are two ways to raise common equity. One source is retained earnings that involves bringing in new funds from outside the company, which represents external equity. The second source is new stock issues that involves bringing in new funds from current stockholders of the company, which represents internal equity. c. Flotation costs reduce the amount of capital the firm receives from a new stock issue. The company must make each…The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
- Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The times-interest-earned ratio will decrease. b. Net income will decrease. c. Taxable income will decline. d. The ROA will decline. e. The tax bill will increase.. On the day an IPO comes out, the market pricecan rise above the offering price or fall below thatprice. Is it more common for the market price toclose above or below the offering price on the dayof an IPO? If a company’s market price rises abovethe IPO price, does that suggest that the companyleft money on the table and thus received less for its shares than it should have received? If mostcompanies do leave money on the table, does thatindicate the IPO market is inefficient? How mightsystematic underpricing be explained? Has theamount of underpricing been constant over time?Explain.Shavir has decided that the stock of Gentle Bidders is overvalued at $7 a share and short sales cannot be executed on margin, so Shavir must put up the entire value of the stock when it is sold short. (a). What is the percentage loss if the price of the stock rises to $13?(b). What is the percentage gain if the company goes bankrupt and is dissolved?(c). What are the maximum percentage gain the short seller can earn and the largest percentage loss the short seller can sustain?(d). From the short seller’s perspective, what are the best and worst casescenarios?
- In recent years Constable Inc. has suffered losses, and its stock currently sells for only $0.50 per share. Management wants to use a reverse split to get the price up to a more "reasonable" level, which it thinks is $21 per share. How many of the old shares must be given up for one new share to achieve the $21 price, assuming this transaction has no effect on total market value?In an article that appeared in Business Review Weekly on 4 March 2004 (entitled ‘Share options trap’), it is stated that under AASB 2 ‘companies must value and record as an expense any options granted to employees in exchange for their services. Previously, Australian companies recorded share-based payments in the notes to financial statements, arguing that share-based payments did not cost the company anything’. REQUIRED Do you think that there is any logic to the argument that ‘share-based payments did not cost the company anything’?The cost of retained earnings is less than the cost of new outside equity capital.Consequently, it is totally irrational for a firm to sell a new issue of stock and to pay cashdividends during the same year. Discuss the meaning of those statements.
