MFIN1021 Chapter Notes - Chapter 15: Discounted Cash Flow, Stock Trader, Underwriting
11 Jun 2018
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Chapter 15:
Definition:
Venture capital: Money invested to finance a new firm
IPO: first offering of stock to the general public
Underwriter: Firm that buys an issue of securities from a company and resells it to the public
spread: difference between public offer price and price paid by underwriter.
Firm Commitment: buy the securities from the firm and then resell them to the public
Best efforts: agrees to sell as much of the issue as possible but does not guarantee the sale of
the entire issue.
Prospectus: formal summary that provides information on a issue of securities
underpricing: issuing securities at an offering price set below the true value of the security
Flotation costs: the cost incurred when a firm issues new securities to the public
Seasoned offering: sale of secruites by a firm that is already publicly traded.
rights issue: issue of securities offered only to current stockholders
General cash offer: sale of securities open to all investors by an already-public company
Shelf registration: a produce that allows firms to file one registration statement for several
issues of the same security
Private placement: Sale of securities to a limited number of investor with a public offering
Rule:
1. Underwriters are investment banking firms that act as financial midwives to a new issue.
Usually they play a triple role—first providing the company with procedural and financial
advice, then buying the stock, and finally reselling it to the public.
2. Underpricing represents a cost to the existing owners since the new investors are
allowed to buy shares in the firm at a favorable price.
3. Thus shelf registration offers several advantages: 1. Securities can be issued in dribs
and drabs without incurring excessive costs.2. Securities can be issued on short
notice.3. Security issues can be timed to take advantage of “market conditions”
(although any financial manager who can reliably identify favorable market
conditions could make a lot more money by quitting and becoming a bond or
stock trader instead).4. The issuing firm can make sure that underwriters compete
for its business.
4. The tendency for stock prices to decline at the time of an issue may have nothing
to do with increased supply. Instead, the stock issue may simply be a signal that
well-informed managers believe the market has over priced the stock.
All Formulas
Chapter 8:
Formulas:
NPV= Cash flow – investment::: C0 + C1/(1+r)+ C2/(1+r)2 + C3/(1+r)3 …
IRR: Profits/ Investment= (Cash flows- investment)/ Investments.
Discounted cash flow rate: IRR=OCC
Profitability index: NPV/Initial Investment
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Venture capital: money invested to finance a new firm. Ipo: first offering of stock to the general public. Underwriter: firm that buys an issue of securities from a company and resells it to the public spread: difference between public offer price and price paid by underwriter. Firm commitment: buy the securities from the firm and then resell them to the public. Best efforts: agrees to sell as much of the issue as possible but does not guarantee the sale of the entire issue. Prospectus: formal summary that provides information on a issue of securities underpricing: issuing securities at an offering price set below the true value of the security. Flotation costs: the cost incurred when a firm issues new securities to the public. Seasoned offering: sale of secruites by a firm that is already publicly traded. rights issue: issue of securities offered only to current stockholders. General cash offer: sale of securities open to all investors by an already-public company.
