Raising Funds and Financing Instruments - The initial public offering
7 important questions on Raising Funds and Financing Instruments - The initial public offering
What are disadvantages for a company of going public (IPO)?
o This makes it difficult to monitor management.
▪ The firm must satisfy all of the requirements of public companies.
o SEC filings, Sarbanes-Oxley, etc.
What do the key SEC filings (registration statement, preliminary prospectus, final prospectus) related to an IPO mean?
- Registration Statement: Legal document providing financial and other information to investors before issuing securities. Provides detailed information about the company’s business, financials, management, and the terms of the offering.
- Preliminary Prospectus ("Red Herring"): Early version of the registration statement (draft of final prospectus) shared before the IPO, without final pricing or share details.
- Final Prospectus: Completed version with full details of the offering, including number of shares and offer price, issued before the IPO.
What are the two ways to value a company?
o Estimate the value by examining comparable firms (recent IPOs).
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What is underpricing in IPO? How does this benefit underwriters?
o Again, research has found that 75% of first-day returns are positive.
o The average first day return in the U.S. is 17%, and there is large heterogeneity across countries.
Underwriters benefit from the underpricing because it allows them to manage their risk. The pre-IPO shareholders bear the cost of underpricing. In effect, these owners areselling stock in their firm for less than they could get in the aftermarket.
What is the hierarcy in the momorandum in terms of senior notes and subordinated?
Hierarchy - When are they getting paid
- Senior notes: Lower interest rate, gets money first
- Subordinated: Gets money last; higher risk = higher interest rat
What is a callable bond? How is the call price?
Gives the issuer of the bond the option but not obligation to retire all outstanding bonds on (or after) a specific date (call date) for the call price.
Price is generally set at or above - and expressed as a percentage of - the bond's face value.
What is conversion ratio of a bond?
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