...issue new bonds when the current bonds mature. From the previous question, economies of scale are part of the answer. Beyond this, debt issues are simply easier and less risky to sell from an investment bank’s perspective. The two main reasons are that very large amounts of debt securities can be sold to a relatively small number of buyers, particularly large institutional buyers such as pension funds and insurance companies, and debt securities are much easier to price. They are riskier and harder to market from an investment bank’s perspective. Yields on comparable bonds can usually be readily observed, so pricing a bond issue accurately is much less difficult. It is clear that the stock was sold too cheaply, so Eyetech had reason to be unhappy. No, but, in fairness, pricing the stock in such a situation is extremely difficult. It’s an important factor. Only 6.5 million of the shares were underpriced. The other 32 million were, in effect, priced completely correctly. The evidence suggests that a non-underwritten rights offering might be substantially cheaper than a cash offer. However, such offerings are rare, and there may be hidden costs or other factors not yet identified or well...
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...Rights Offerings An often overlooked means of raising new capital is through a rights offerings or rights issuance. Rights issues occur when a firm sells new shares to those investors who have "rights." Rights give their holders the right to buy the new shares at the subscription price. To see how these work, an example is necessary. The first step is to determine how much the firm needs to raise. For our example suppose a firm needs to raise $50 million dollars. Currently they have 22 million shares outstanding at a price of $25 a share. The next step is to determine a subscription price. The subscription price is the price at which the rights holders purchase the new shares. In this case let the subscription price be $15/share. In the United States it is common to give a right for each share. So there will be 22 million rights granted. How many shares must you sell? Number of new shares = (Amount you need to raise) / (subscription price) So in this case: $50,000,000/$15=3,333,334 new shares How many rights will be needed to buy a single new share? (Number of rights granted) / (Number of shares being sold) 22,000,000 / 3,333,334 6.6 rights / new share The next logical question is what each right is worth. Unfortunately that is not quite as easy to answer. The first thing that must be done is to calculate the price of the stock after the issue and...
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...capital, due to direct costs such as underwriters’ fees and indirect costs such as under-pricing. * Using internal capital is much easier for managers because the cost of capital is lower and investment decisions do not need to be scrutinised by investors. * Reliance on internal capital/funds is the cheaper source of financing. However, it does not indicate that external markets are less efficient than internal markets in any way. (b) “The stock price of a company paying out a regular dividend can be expected to fall on the payment date, not on the record date or the ex-dividend date.” This statement is false. Investors begin to trade their shares on the ex-dividend date after a company has declared its dividend policy, and this is when the stock price of a company can be expected to change or fall. Thus, stock prices fall on the ex-dividend dates to reflect the dividend payment. On the contrarily, on the payment date, dividend checks are mailed to shareholders, and it is unlikely for the stock price to change any further. Problem 2 ANSWERS (a) Profit = 1000 (8) + 1000 (-6) = €2000 (b) Expected profit = 500 (8) + 1000 (-6) = - €2000 (c) The principle that has been illustrated is the Winner’s Curse. Thus, if IPOs are not...
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...Sensitivity of quantity demanded to price. Sensitivity of quantity supplied to price. Long run versus short run Effects of a sales tax. © 2009 Pearson Addison-Wesley. All rights reserved. 3-2 How shapes of demand and supply matter? The shapes of the demand and supply curves determine by how much a shock affects the equilibrium price and quantity. Example: processed pork (same as Chapter 2) Supply depends on the price of pork and the price of hogs. © 2009 Pearson Addison-Wesley. All rights reserved. 3-3 1 Figure 3.1 How the Effect of a Supply Shock Depends on the Shape of the Demand Curve This shift of the supply curve causes a movement along the demand curve… (a) A $0.25 increase in the price of pork causes the supply of pork to shift to the left. e2 e1 (b) A $0.25 increase in the price of pork causes the supply of pork to shift to the left p, $ per kg D2 p, $ per kg D1 3.55 3.30 S2 S1 3.675 3.30 e2 S2 S1 e1 0 176 215220 0 176 220 Q, Million kg of pork per year Q, Million kg of pork per year and a reduction in quantity. © 2009 Pearson Addison-Wesley. All rights reserved. But equilibrium quantity does not change since consumption is not sensitive to price 3-4 Figure 3.1 How the Effect of a Supply Shock Depends on the Shape of the Demand Curve (cont’d) p, $ per kg When demand is very sensitive to price… a shift in the supply curve to S2… has no effect on the equilibrium price and a substantial effect on the...
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...largest temporary help company in the world, Manpower. The bid was to be made by a cash tender offer funded by a fully underwritten rights issue of £837 million. In this report we calculate the value of one right and the value of the underwriter's put as of August 3 by using the Black-Scholes and put-call parity valuation approach. In addition we assess the sensitivity and validity regarding these calculations, and discuss the fee charged by the underwriter. The detailed assumptions regarding our calculations are: o The rights are issued on August 3; one right can be converted into 2.5 shares with an issue price of £1.66 per share. o The rights issue closes on September 28 o Everyone is fully informed about the issue and acquisition Assuming a successful acquisition price of $82.50 per share, or £51.56 per share, we end up with the following estimates for the value of one right and the underwriter's put. In our calculation we have adjusted the market value of equity as of August 3 by subtracting total issuing fees. Since our calculations depend critically on the NPV of the Manpower acquisition, we also calculated different values assuming reasonable NPV for the acquisition. Our valuation technique, the Black-Scholes model, is furthermore sensitive to changes in volatility, time to maturity (or risky days), risk free rate and the issue price. All of these variables, except the volatility, are set and there is therefore little uncertainty connected with them. The underwriting...
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...corporate bonds to the issuance of rights in an effort to raise funds for growth, working capital and new investment while at the same time reigning in the cost of accessing such funds. A rights issue is an option that a company opts for to raise capital under a seasoned equity offering of shares to raise money. McClure (2005) defines a right issue as an invitation to existing shareholders to purchase additional new shares in the company. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A shareholder is an individual or institution (including a corporation) that owns one or more shares of stock in a public or private corporation. Fama (1980) observes that shareholders own stock, but not the corporation. Shareholders wealth is basically the wealth shareholders get to accrue from their ownership of shares in a firm. Shareholders wealth increases either by increase in share prices that bring about capital gain or increase in dividend payments. Ng’ang’a (1999) argues that the expectation of shareholders will push the management to maximize their returns and increase the market value of the firms. There are two types of rights issue namely the public issue and privileged/private issue. The rights issue gives the existing shareholders securities called “rights”. These are rights to purchase new shares at a discount to the market price on a stated future date. According...
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...1+0.5r1+r - SDTD+r x 1(1+r)n - NPV = Calculator Initial Investments and Cash Flows then Add PVCCATS Chapter 14 - Cost of Equity = RE = D0x (1+g)P0 + g - Dividend Growth Model Approach: P0 = D0x (1+g)RE-g = = D1RE-g - RE = D1P0 + g - First do D1 = D0 x (1 + g) then RE = D1P0 + g - To find g, you can compound growth rate (Geometric Mean) by: Dyear 1 (1 + g) year5 = Dyears , or g = Retention ratio x ROE - Using SML Approach: - E(RE) = RF + BE x [E(RM) – RF] RE = RF + BE x (RM – RF) - (RM – RF) = Market Premium - Cost of Debt - YTM = Cost of Debt - After-tax Cost of Debt = I%(1-T) - Cost of Preferred Stock: RP = DividendP0 = Dividend Yield - Capital Structure Weights - E = Equity = # of shares outstanding x Price Per Share - Dm = Debt = Market price single bond x # of...
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...Productivity and Comparative Advantage: The Ricardian Model Copyright © 2012 Pearson Addison-Wesley. All rights reserved. Preview • • • • • • • • Opportunity costs and comparative advantage Production possibilities Relative supply, relative demand & relative prices Trade possibilities and gains from trade Wages and trade Misconceptions about comparative advantage Transportation costs and non-traded goods Empirical evidence Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-2 Introduction • Sources of differences across countries that lead to gains from trade: – The Ricardian model (Chapter 3) examines differences in the productivity of labor (due to differences in technology) between countries. – The Heckscher-Ohlin model (Chapter 5) examines differences in labor, labor skills, physical capital, land, or other factors of production between countries. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-3 Ricardian Model Assumptions 1. Two countries: domestic and foreign. 2. Two goods: wine and cheese. 3. Labor is the only resource needed for production. 4. Labor productivity is constant. 5. Labor productivity varies across countries due to differences in technology. 6. The supply of labor in each country is constant. 7. Labor markets are competitive. 8. Workers are mobile across sectors. Copyright © 2012 Pearson Addison-Wesley. All rights reserved. 3-4 Comparative Advantage • Suppose that the domestic country has a comparative advantage in...
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...Axia College Material Appendix A Answer the following questions. 1. If the price of a good increases, what happens to the quantity demanded? When Prices increase people tend to buy less. 2. If the price of a good decreases, what happens to the quantity supplied? When prices decrease then so does the supply because they don’t want people to buy at the lower cost. 3. Does a change in price create curve shifts? Explain. Honestly I’m not sure; I would think that if a price goes up then yes it would but if a price went down it wouldn’t. Complete the following matrix. An example is provided. |Event |Market affected by event |Shift in supply, demand, or |Change in equilibrium (P&Q) | | | |both. Explain your answer. | | |Frozen orange crops in California |Orange juice |Supply (left)—Not as many |Price will increase and | | | |available oranges to offer |quantity will decrease. | | | |consumers. | | |Hurricanes in the Gulf Coast |Gulf Coast tourism |Demand (Left), less people will |Price will decrease and | | | |be likely to travel...
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...following | | | | | | prices: $40, $20, and $10. What will be the effect of the alternative offering prices on the existing price per | | | | | | share? | | | | | | | Solution | | | | | | | | | Using the assumptions shown below, calculate the current price of the stock using this formula: | | | P = (Market value of equity + proceeds from offering)/total number of shares | | | | | | | | | | | | Assumptions | | | | | | | | Number of shares of stock | | 10 000 | | | | | Market value of equity | | $400 000 | | | | | Number of shares issued at each issue price | 5 000 | | | | | Total number of shares issued | | 15 000 | | | | | | | | | | | | | Issue | Current | | | | | | | Price | Price | | | | | | | $40 | FORMULA | | | | | | | $20 | FORMULA | | | | | | | $10 | FORMULA | | | | | | 19.12 Superior, Inc. is a manufacturer of beta-blockers. Management has concluded that additional equity financing | is required to increase production capacity, and that these funds are best attained through a rights offering. | It has correctly concluded that, as a result of the rights offering, share price will fall from $50 to $45 ($50 is | the rights-on price; $45 is the ex-rights price, also known as the when-issued price). The company is seeking | $5 million in additional funds with a per-share subscription price equal to $25. | | | a. How...
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...Edition EUN / RESNICK 7-0 Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Futures and Options on Foreign Exchange Chapter Objective: This chapter discusses exchange-traded currency futures contracts, options contracts, and options on , p , p Fourth Edition currency futures. EUN / RESNICK INTERNATIONAL FINANCIAL MANAGEMENT Chapter Seven 7 7-1 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 1 9/25/2010 Chapter Outline (Material to be Covered in Class) Futures Contracts: Preliminaries Currency Futures Markets Basic Currency Futures Relationships Eurodollar Interest Rate Futures Contracts Preliminaries Currency Options Markets Currency Futures Options Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Options Contracts: NOT E O ti C t t Exam Material M t i l 7-2 Futures Contracts: Preliminaries A futures contract is like a forward contract: It specifies that a certain currency will be exchanged for another at a specified time in the future at prices specified today. Futures are standardized contracts trading on organized exchanges, with daily resettlement through a clearinghouse (providing guarantees) More importantly, positions can be closed (side bet?) Right A futures is different from a forward contract: of offset futures...
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...Arundel Partners – The Sequels Project After evaluation of the proposed acquisition of the movie sequel rights, we recommend to offer movie studios as a per-movie price to purchase the sequel rights for their entire portfolio of movies the studios are going to produce over the next year. Arundel should make an offer to buy sequel rights as the average NPV (on a per film basis ) is $5.51 mn (this is the value calculated using real options method). Hence, we should pay a price below $5.51mn. As per informal inquiries made by us, the studios would be tempted to accept the price of $2mn or more and would not even consider a price below $1mn. We propose that we should negotiate for the price of $2mn. This would give us a profit of $3.51 mn per film. The movie studio might (or might not) be willing to sell these rights at this price because it helps the studios mitigate the risk associated with producing the sequel. Also, the fact that there is no liquid market for rights to produce sequels will also drive the price lower on account of lack of demand. Average value of Sequel rights per film using DCF Analysis Average value of sequel rights per film across all studios 1. There are 99 films in the portfolio. Arundel Partners will only produce films for which hypothetical NPV is greater than zero. Hence, we calculate NPV of each film at Year 0. Since the exhibits state that the values are already preset values, we have not rediscounted them. NPV (At year 0)...
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...FINS3625 Applied Corporate Finance Lecture 6 (Chapter 14) Jared Stanfield April 4, 2012 14.1 Equity Financing for Private Companies • Sources of Funding: – A private company can seek funding from several potenNal sources: • Angel Investors • Venture Capital Firms • InsNtuNonal Investors • Corporate Investors 14.1 Equity Financing for Private Companies • Angel Investors: – Individual investors who buy equity in small private firms – The first round of outside private equity financing is oSen obtained from angels 14.1 Equity Financing for Private Companies • Venture Capital Firms: – Specialize in raising money to invest in the private equity of young firms – In return, venture capitalists oSen demand a great deal of control of the company Figure 14.1 Most AcNve U.S. Venture Capital Firms in 2009 (by Number of Deals Completed Figure 14.2 Venture Capital Funding in the United...
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...McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Terminology of Stocks Public Common Stock - Ownership shares in a publicly held corporation. Primary Market - Place where the sale of new stock first occurs. Secondary Market - market in which already issued securities are traded by investors. Initial Public Offering (IPO) - First offering of stock to the general public. Seasoned Issue - Sale of new shares by a firm that has already been through an IPO McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 3 6- 4 Value of a Stock Book Value - Net worth of the firm according to the balance sheet under GAAP. Market Value Balance Sheet - Financial statement that uses market value of assets and liabilities. Liquidation Value - Net proceeds that would be realized by selling the firm’s assets and paying off its creditors. (i.e., S/H get what’s left over). McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Simple Models 1. Stock Price = discounted future stream of dividends paid to Shareholders (where dividend = periodic cash distribution from the firm to the shareholders). 2. Stock Price = discounted future value of corporation (where future value is determined using expected cash flows or other estimate of value). McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved 6- 5 6- 6 Expected Return Expected Return -...
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...1. Introduction: In a transaction of sale it is not possible to avoid credit sales. In credit sales there is a risk of a debtor not paying the price of the goods even after the credit period is over. The seller of the goods therefore must possess some rights which he can use to secure payment of the price. If the recovery of the price is not possible due to the reason of bankruptcy of the buyer, he must have some other remedies. The Sale of Goods Act has made elaborate provisions regarding the rights of an unpaid seller. A seller is person who sells or agrees to sell goods. But for the purpose of Chapter V of the Sales of Goods Act, 1930 the definition of the term “seller” is widened and it includes any person who is in the position of a seller, as for example an agent of the seller to whom the bill of lading has been indorsed, or a consignor (or agent) who has himself paid or directly responsible for the price. [Sec 45(2) of the Sales of Goods Act, 1930] Unpaid seller means a person who has sold the good for a price but price has not been paid to him unpaid seller has rights against the goods and buyer. 2. Definition of unpaid seller: According to Sec 45 (1) of the Sales of Goods Act, 1930, the seller of goods is deemed to be an unpaid seller: (i) When the whole of the price has not paid or tendered, or (ii) When a bill of exchange or other negotiable instrument has been received as a conditional payment, and the conditions on which it has not been received remains...
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