8980738
Description
Flashcards by Safiya Caesar, updated more than 1 year ago
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Created by Safiya Caesar
almost 7 years ago
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| Question | Answer |
| What are the 5 steps of a IPO? | 1. Select an investment bank 2. File registration document (s-1) with SEC 3. Choose price range for preliminary prospectus 4. Go on roadshow 5. Set final offer price in final prospectus |
| STEP 1: CHOOSING AN INVESTMENT BANK important criteria to consider | Reputation and experience Existing mix of institutional + retail clients Support in the post IPO secondary market Most offers are underwritten |
| Remember step 2? | File registration document with SEC |
| STEP 3: THE 3 STEPS TO PRICE AN IPO | 1. Estimate the pre-IPO value of equity (value of the company) - A low ratio indicates undervalue 2. Decide on either: Net flotation costs or % of the company that the owners want to retain 3. Based on this info determine the offer price |
| Comparables to use when estimating the value of your company | P/E ratio Price to cash flow ratio Price to sales ratio Number of visits to web pages |
| Calculating the offer price: 5 equations | gross proceeds Post-IPO value % ownership required by investors No of shares co needs to issue Offer price (influenced by demand & other things) |
| STEP 4: ROADSHOW | The senior management team, IB and a lawyer travel to 10-20 cities in 2 weeks making 3-5 presentations a day to existing clients of the underwriter/potential institutional investors. Management cannot say anything about comapany's valuation - QUIET PERIOD |
| BOOKBUILDING | -IB speaks to potential investors asking them to indicate how many shares they wish to buy & records it in a book - IB hopes for over-subscription. Otherwise IB will have to buy the undervalued stock - Based on demand, IB sets final offer price the evening before the IPO |
| Why might demand fall | concerns about the future or a fall in the general stock market |
| FIRST DAY TRADING | 75% of prices go up on day 1 Average day 1 return = 16.8% |
| Between whom is there a conflict of interest? | The banker, who has incentive to set a low price and the firm who would like price to be high |
| List some direct costs of going public | 7% spread Lawyers Printers Accountants |
| List some indirect costs of going public | Money left on the table Time consuming for managers |
| How do you calculate money left on the table? | (Closing price - offer price) x no of shares |
| What is the purpose of an underwriter? | To take up the risk of an unsuccessful equity issue in return for a % of the proceeds and accept the shares not taken up by the market (if any) |
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