Describe the role that the “winners curse” may play in the under pricing of IPOs..
Describe the role that the “winner’s curse” may play in the under pricing of IPOs.
(5 marks)
(5 marks)
Does a rights offer cause a share price decrease? Why or why not?
How are existing shareholders affected by a rights offer? Illustrate your answer with an example.
TUV Guy Inc. is proposing a rights offering. There are currently 240,000 shares outstanding at $80 each. There will be 60,000 new shares offered at $60 each.
(10 marks)
What is the new market value of the company?
How many rights are associated with one of the new shares?
What is the value of a right?
What is the ex-rights price per share?
Why might a company have a rights offering rather than a general cash offer?
WXYZ Co. has concluded that additional equity financing will be needed to expand operations, and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $50 to $45 ($50 is the rights-on price; $45 is the ex-rights price). The company is seeking $12.5 million in additional funds with a per share subscription price of $25.
How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)
(10 marks)
(10 marks)
In five sentences or less, briefly explain the M&M Proposition I with taxes. Ensure that you include the appropriate formula in your explanation.
What are the two implications of M&M Proposition I with taxes?
In five sentences or less, briefly explain the M&M Proposition II with taxes. Ensure that you include the appropriate formula in your explanation.
What are the two implications of M&M Proposition II with taxes?
Under what conditions of personal and corporate taxation will there be no gain from financial leverage? Explain using the formula
VL = VU + [1 – (1-TC) x (1-TS)/(1-Tb)] x D
(5 marks)
VWX Corporation has an EBIT of $166,666.67, a corporate tax rate of 40%, debt of $500,000, and unlevered cost of capital of 20%. The cost of debt capital is 10%.
(10 marks)
What is the value of VWX’s equity?
What is the cost of equity capital for VWX?
What is the WACC?
Compare the WACC of VWX to the WACC of an unlevered firm. What is your conclusion? What principle have you proven in this case?
STU’s Disco Factory Inc. is financed solely by equity and it is considering issuing debt and using the proceeds to repurchase some of the outstanding shares at the current market price of $30. There are currently 200,000 shares outstanding. EBIT is expected to remain at $1.5 million, with all earnings paid out as dividends. The firm can issue debt at a rate of 8%, and the firm’s tax rate is 40%. Three alternative amounts of debt are being considered:
Describe the role that the “winners curse” may play in the under pricing of IPOs.
