CF How Corporations Issue Securities - Opdrachten

19 important questions on CF How Corporations Issue Securities - Opdrachten

What is a Rights issue?

A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings

What is a 144a Issue?

A 144A bond offering is a U.S. based offering, and typically is considered an alternative to the timely and costly initial public offering.

What is a private placement?

.A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market. It is an alternative to an initial public offering (IPO) for a company seeking to raise capital for expansion.
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What is meant with shelf registration?

A shelf registration sets up later sales, or tranches, under the same registration document.

What is venture capital?

Investors with capital that take high risks for the financing of start-up companies

When are the proportionate underwriting and administrative costs lower?
Large/small Issue
Bond/ common stock issue
IPO/Subsequent issue
Small private placement of Bonds/ a small general cash offer of bonds

1. Large issue
2. A bond issue
3. Subsequent issue of stock
4. A small private placement of bonds

Is it true that venture capitalists typically provide first-stage financing sufficient to cover all development expenses. Second-stage financing is provided by stock issued in an IPO.

No, that is false. There are typically multiple stages of financing not just two. First stage financing is normally provided by family funds and bank loans. Second stage financing is sometimes provided by angel investors or venture capital firms, but venture capital firms rarely provide funding for all development expenses up front.

Is it true that underpricing in an IPO only a problem is when the original investors are selling part of their holdings?

False. Underpricing can happen for various reasons. First, it is very difficult to judge how much investors will be willing to pay for a stock. Second, some investment bankers say that underpricing raises the price when it is subsequently traded on the market, thereby making it easier for the firm to raise further capital. Third, is the concept of the winner's curse.

Is it true that stock prices generally fall when the company announces a new issue of shares? This is attributable (toe te schrijven) to the information released by the decision to issue.

This is true. This may happen for various reasons. Market participants tend to assume that the firm's management is timing the market meaning that they consider the stock to be overvalued. Management wasn't convincing enough when presenting how the additional financing would be used for value increasing purposes.

What is meant with Zero-stage vs first- or second- stage financing?

Zero-stage financing represents the savings and personal loans the company's principals rais to start a firm. The first stage and second stage financing come from funds provided by others( Often venture capitalists) To supplement the founders' investment.

What is carried interest?

Carried interest is the name for the investment profits paid to private equity or ventures capitalist partnership (I.E. It is a share of the profits)

What is a rights issue?

A rights issue is a sale of additional securities to existing investors; it can be contrasted with an at-large issuance (Which is made to all interested investors.

What is a road show?

A road show is a presentation about the firm given to potential investors in order to gauge their reactions to a stock issue and to estimate the demand for the new shares.

What is a qualified institutional buyer?

A qualified institutional buyer is a large financial institution which, under sec rule 144A, is allowed to trade unregistered securities with other qualified institutional buyers.

Why are the costs of debt issues less than those of equity issues?

There are several possible reasons why the issue costs for debt are lower than those of equity examples:
  • The cost of complying with government regulations may be lower for debt.
  • the risk of the security is less for debt and hence the price is less volatile. This decreases the probability that the issue will be mispriced and therefore decreases the underwriter's risk.

What are the three reasons that a common stock issue might cause a fall in price?

  • The price fall is needed to absorb the extra supply.
  • The issue causes temporary price pressure until it has been digested.
  • Management has information that stockholders do not have

What could be the reasons that there are differences in costs for an IPO?

  • Large issues have lower proportionate costs.
  • Debt issues have lower costs than equity issues.
  • Initial public offerings Involve more risk for underwriters than issues of seasoned stock. Underwriters demand higher spreads in compensation.

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Why do venture capital companies prefer to advance money in stages?

Venture capital companies prefer to advance money in stages because this approach provides an incentive for management to reach the next stage, and it allows the company to check at each stage whether the project continues to have a positive NPV.

Explain the difference between a uniform-price auction and a discriminatory auction

  • In a uniform price auction, all successful bidders pay the same price. In a discriminatory auction, each successful bidder pays a price equal to his bid.
  • The differenc: A uniform-price auction provides for the pooling of information from bidders and reduces the winner's curse.
  • You may prefer to sell according to uniform-pricing auction because it is more attractive to shareholders. On the other hand, if you assume sufficient shareholders to have a positive view of the firm's shares you may opt for discriminatory auction as it may lead to larger cash flow.

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