a)
To determine: The definition of going public, new issue market and IPO (Initial public offering).
a)
Explanation of Solution
If it sells products to the general public, a tightly owned company goes to the public. Going public increases asset liquidity sets a market value, encourages the raising of new equity, and enables diversification of the original owners. Going public, however, raises the cost of operation, needs disclosure of operating details and decreases control of the owners. The new issue market is the capital market for public-going businesses, and the issue is considered an initial public offering (IPO).
b)
To determine: The definition of public offering and private placement.
b)
Explanation of Solution
A public offering is an offer to the general public of new common stock. A private placement is only one or a few investors, generally institutional investors, selling the stock. Private placement benefits include lower flotation costs and higher speed, as the issued securities are not subject to SEC registration.
c)
To determine: The definition of venture capitalist, roadshow and spread.
c)
Explanation of Solution
The director of a venture capital fund is a venture capitalist. The fund increases much of its money from institutional investors and invests for equity in start-ups. The venture capitalist has a seat on the boards of directors of the companies.
Person X make presentations over a span of two weeks in 10 to 20 cities, with 3 to 5 presentations a day. The spread is the variance between the price at which an underwriter sells the stock in an IPO and the proceeds passed on to the issuing company by the underwriter. In other words, it is the fee that the underwriter collects, and it is typically 7% of the bid price.
d)
To determine: The definition of Securities and Exchange Commission, registration statement, shelf registration, margin requirement, and insiders.
d)
Explanation of Solution
The Securities and Exchange Commission (SEC) is a government agency that oversees new securities transactions and stock exchange operations. Together with other government agencies and self-regulation, the SEC is helping to confirm stable markets, sound brokerage firms, and lack of stock manipulation. The SEC includes the registration of securities before the securities can be sold to the public.
The statement of incorporation is used to outline the company's different financial and legal details. Companies also file a master registration statement and then amend it with a short-form statement just prior to a bid. This practice is called shelf registration, as businesses are "on the shelf" putting new shares and then selling them when the price is right. Blue sky laws are laws that prevent the sale of securities with little or no support for assets. The margin is the percentage of the value of a stock lent by an investor to buy the stock.
The SEC sets requirements for margins, which is the maximum debt percentage that can be used to buy a stock. The SEC also monitors transactions among the company's corporate insiders, who are the company's officers, administrators, and major shareholders.
e)
To determine: The definition of prospectus, red herring prospectus.
e)
Explanation of Solution
A prospectus contains details about the issuing company and a new security issue. Before the SEC accepts the registration statement, a "red herring" or draft prospectus may be circulated to potential buyers. After the registration has become active, the securities may be offered for sale, followed by the prospectus.
f)
To determine: National association of securities dealers(NASD).
f)
Explanation of Solution
The National Association of Securities Dealers (NASD) is an industry group mainly focused with the process of the over-the-counter (OTC) market.
g)
To determine: The definition of best efforts arrangement, underwritten arrangement.
g)
Explanation of Solution
A possible plan against an underwritten sale applies to two methods of selling new stock issues. The investment banker is only committed to making every attempt to sell the stock at the cost of the deal to make the best efforts. In this situation, the issuing company is at risk of not being completely subscribed to the new issue.
The investment banker agrees to buy the entire issue at a set price if the issue is underwritten and then resells the stock at the value of the bid. Therefore, the investment banker is at risk of selling the issue.
h)
To determine: The definition on project financing, securitization, maturity matching and refunding.
h)
Explanation of Solution
Project financing is preparations used mainly to finance huge capital projects such as fuel explorations, oil tankers, refineries, power plants, etc. Mostly, one or more companies (sponsors) will provide the project's required equity capital, while creditors and lessors will provide the rest of the project's assets.
The most important aspect of project financing is that creditors and lessors do not turn to investors; they must be compensated from the cash flows of the venture and the sponsors ' equity buffer.
Securitization is the mechanism by which previously thinly traded financial instruments are transformed into a form that provides more liquidity. Securitization often refers to the case in which particular assets are lent as collateral for bonds, thereby producing asset-backed securities. Junk bonds are one example of the former; the latter is mortgage-backed securities.
Refunding happens if a firm concerns debt at present low rates and utilizes the profits to repurchase one of its current high coupon rate debt issues. Frequently these are callable issues, it means the firm can buy the debt at a less-than-market price.
Maturity matching states that matching the maturities of debt utilized to finance assets with the lives of the assets themselves. The debt might be amortized like that the outstanding amount dropped as the asset lost value because of
Want to see more full solutions like this?
Chapter 18 Solutions
INTERMEDIATE FINANCIAL MGT LL
- You are a consultant working with various companies that are considering incorporating and listing shares on a stock exchange. One of your clients asks you about the various acronyms she has been hearing in conjunction with financial analysis. Explain the following acronyms and how they measure different things but may complement each other: EPS (earnings per share), EBITDA (earnings before interest, taxes, depreciation, and amortization), and NOPAT (net operating profit after taxes).arrow_forwardYou are a CPA who has been hired by DEF Company to assist with their initial public offering. Prepare a memo to the president of DEF outlining the two most significant values, market value and par value, associated with stock.arrow_forwardInvestment bankers perform which of the following role(s)? A. Provide advice to the firms as to market conditions, price, etc. B. Design securities with desirable properties C. Market new stock and bond issues for firms D. All of the options E. None of the optionsarrow_forward
- Define each of the following terms:d. Securities and Exchange Commission (SEC); registration statement; shelfregistration; margin requirement; insidersarrow_forwardThe Securities and Exchange Commission (SEC) A) regulates only initial public offerings, or IPOs. B) regulates only primary market transactions to ensure investors are provided with adequate and accurate information on new securities. C) regulates both primary and secondary markets. D) regulates initial public offerings, but not seasoned equity offerings, in the primary market.arrow_forwardWhat is a STO Group of answer choices A security token represents an investment contract into an underlying investment asset such as equity shares, debt (ie bonds), funds and real estate investment trusts (REIT) A share token that represents shares in the product sold A share of a stock traded opinion A sale of a soft token opinionarrow_forward
- Indicate whether the following statements are (True) or (False) and correct the false statements: Primary and secondary markets are markets for short-term and long-term securities, respectively. Public offering is the sale of a new security issue, typically bonds or preferred stock, directly to an investor or group of investors. When considering each financial decision alternative or possible action in terms of its impact on the share price of the firm's stock, financial managers should accept only those actions that are expected to increase the firm's profitability.arrow_forwardWhich of the following is an appropriate goal for the firm? Select one: a. All of these b. In secondary markets, outstanding shares of stock are bought and sold among investors. c. An active secondary market causes firms to sell their new debt or equity issues at a higher cost of funds. d. A secondary market allows investors to share their risk and return e. For an investor, the function of secondary markets is to provide profitability for the shares of securities they own.arrow_forwardWho determines the offer price in an IPO O a SEBI O b. Lead Merchant bankers O C. Employees O d. Stock exchangearrow_forward
- a) What are the basic ways for the analysis of investment in equity securities in stock market? b) How does CSE select 30 companies for CSE-30 stock index? c) “Fundamental Analysis provides an analytical framework for rational investment decision making.” Explain.arrow_forwardDifferentiate between an IPO and a seasoned equity offeringarrow_forwardD4) list the pros and cons to both a venture capitalist investor and the company’s management team of exiting via a trade sale and via a stock market flotation / IPO.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College