Problmes 5:
a) Cash offering (best efforts and the bought deal), private placement, andrights offer.
Answer
Cash offering (best efforts and the bought deal), private placement, and rights offer.
Cash offering, Private placement and Right offer are the forms of financial arrangement made by Companies for raising the money from the market by issuing equity share.
Cash Offering:
Cash offering is issuing the share/securities in cash to the public or investor. A Company who want to offer share to public or want to bring an IPO approach to a middle man that will be typically an Investment banker or a Finance house. A company prefer to issue its share via Investment banker or Finance house as it save Company from lot of hassle and paper work which is require while making public offering i.e. IPO.
So Company enter into an agreement with the Investment banker or Finance house, which is called an underwriting agreement where Investment banker or Finance house agrees to help Company in raising money by issuing shares in the market. Now this agreement may structure in various ways.
Best efforts and Bought deal are two of the famous ways of underwriting share agreement.
1)Best efforts- An underwriting agreement between issuing Company and an Investment banker or a Finance house, acting as an agent, in which later agrees to do their best to sell the offering of Company to the public, but does not buy the securities left unsold and does not guarantee that the issuing Company will receive any set amount of money from the underwriting arrangements.
In this type of arrangement, Investment banker or a Finance house not give any guarantee to the issuing Company on number of share and price at which securities will get sold. The risk associated with unsold or overpriced securities falls strictly on the issuing Company.
2)Bought Deal- An underwriting agreement where an Investment banker or a Finance house, acting as an agent, bought entire share of issuing Company on a fixed commitment amount and then resell them in market. Here the issuing Company get advantage that it will raise the intended amount of money from share issue. However the Investment banker or a Finance house will be at risk if they didn’t able to sell all securities in the market or if they sell securities at a price less then what they have committed to the issuing Company. An Investment banker or a Finance house usually enters in such agreement when they are sure of making the money by issuing share in the market.
Private Placement
A private placement is a direct private offering of shares or securities to a limited number of private investor. This is opposite to a public offering and securities are issue privately. An issuing Company directly or through an Investment Banker or Finance House reach out to few groups of investor likes insurance companies, pension funds, mezzanine funds, stock funds and trusts and privately held an arrangement of selling of securities.
Since this is a private placement, there is no need to get this registered with SEC (Securities and Exchange Commission) and even need of prospectus is also waived off.
Rights offer
A right offer is generally made by the issuing Company to its existing investor or shareholder. Under right offer, a shareholder gets the right to buy additional share of the Company in proportion to their existing shareholding. The Company generally offer share at discounted price to the existing investor under right offering.
Right offering generally give privilege to existing shareholder to buy additional share of Company before Company will go out and allots share in market. This enables the existing shareholder to maintain their stake in Company.
Sr. No. / Cash Offering / Private Placement / Right offer1. / Securities are issue to public via IPO (Initially Public Offering) / Securities are issue to few small number of private institutional investor. / Securities are issue to existing investor of the Company.
2. / IPO need to get registered with SEC (Securities and Exchange Commission) / Since this is a private offering of share, no SEC registration will required. / No SEC registration will require.
3. / Company need to draft and issue prospectus to the public for public offering of securities. / In this case, no formal prospectus is not required however Private investor may ask for few information from the issuing Company. / No Prospectus will require as shares are issue to existing shareholder.
4. / Company incurred huge amount of issuing cost. / Company incurred very minimal amount of issuing cost. / Company incurred very minimal amount of issuing cost.
5. / Public Company issue share via Cash Offering. / Generally private Company issue share via Private placement. / Public Company issue share via Right issue.
References:
b) Ground Floor and Mezzanine Floor venture capital firms.
Answer
Ground Floor and Mezzanine Floor venture capital firms
Venture capital pool fund from high net worth individuals, institutions, university endowments and governments etc and then invest same with the new and start up Companies with the high risk but strong growth potential.
Investor who are looking for a stake in small and medium-size enterprises prefer to invest in venture capital. Since many of these investors do not have the expertise or resources to find and manage these investments themselves, they work with venture capital firms. Venture capital firms raise the funds, identify suitable targets for investment, perform research and due diligence on target companies, and manage the investment on behalf of their investors
Ground Floor and Mezzanine Floor are the two forms of Venture Capital investment in early stage or set-up Companies.
Ground Floor Venture Capital Firm –
Venture capital firms who are looking for those future entrepreneur who don’t have a company but merely an idea or a new invention to start up a business. Most venture capitalists are willing to invest in what they call “seed” capital. Seed capital as its name suggest is investing in the initial stages of a new idea. As it is new and innovative ideas that can lead to the most significant returns, venture capitalists are always on the lookout for ground floor opportunities that can return ten or twenty times their investment.
In short, an initial stage of investment in any idea or promising business is called ground funding. When a Venture capitalist provides initial capital to any business then that venture capitalist may be termed as Ground floor Venture Capital firm.
Mezzanine Floor Venture Capital Firm-
When a Venture Capitalist invest money in the business or Companies that is going to raise IPO in coming year or so then it will be termed as Mezzanine Floor funding.
It has been structured in such a way that the Company will refund the money to venture capital from the money that will get raise from IPO issue. In this funding, Venture capital has a very less stake in the Company as this company is already in growth phase and approach venture capitalist when it’s finding difficult to raise loan via bank loan and debt funding.
At this stage, a venture capitalist has very less risk and at the same time a very less for appreciation of investment money.
References:
Ques in word file:
Chapter 11
Concept Review and Critical Thinking Questions
7.At one time at least, many Japanese companies had a “no layoff” policy (for that matter, so did IBM). What are the implications of such a policy for the degree of operating leverage a company faces?
Introduction:
Employee lay-offs are a traditional method of dealing with reduced firm profitability due to economic recessions. However, some Companies offer job security and offer a “no layoff” policy.
A “no layoff” policy is the policy, where Company is not terminating any employees on account of economic slowdown or bad performance of Company. “No layoff” policy boosts up the moral of the employees as they have no fear of losing job even if economy is going down. It is always admirable for any Company to follow a “no layoff” policy but sometime it also lead to problem for the Company as Company may lose their competitive edge in rough or difficult times and need to follow other various measure to cut down cost to maintain margin in difficult time.
A “no layoff” policy also has a positive bottom line payoff for the Company. Following a “no layoff” policy will result in higher productivity, happy employees and saving in layoff costs i.e. severance pay and early retirement costs to the Company.
Implication of “no layoff” policy:
Japanese followed this policy very strategically. They provide job security to their employees and further follow the below the practise of training the employees to perform a variety of tasks, reassigning workers to other duties in slack periods, hiring temporary workers, and so on.
There are very less number of Companies who follow no layoff policies, the reason is as firing employees is the easiest way to maintain profit in difficult time. However research says that the Company may deal with economic slowdown situation without firing employees and may look for other opportunities to reduced cost and maintain profit.
“No layoff” policy has the below mentioned benefit:
1)Employees are more loyal as they are protected by job security
2)Employees are more motivated
3)Saving in cost associated with layoff of employees
4)Strengthens organizational performance
5)Employees are more productive as they get job security
6)Providing a job security will maintain a positive image of firm in market
Effect of “no layoff” policy on degree of operating leverage of the Company
Degree of operating leverage is the measurement of the effect of fixed cost on the profit of the Company. DOL is derived by using the given formula:
Degree of operating leverage (DOL) = Total Contribution
Total contribution – fixed cost
It is evident from the formula that lesser the fixed cost, the lower the DOL and better for the future prospectus of the Company and higher the fixed cost, the higher the DOL and hence higher the potential risk for the Company. In an ideal situation the DOL should be closer to 1, which denotes that the Company has the least fixed cost.
If a Company is following a no-layoff policy, it indicates that in case of economic slowdown, if the revenue goes down, the Company fixed cost will remain constant and hence the DOL will go up.
This may lead to a cash crunch salutation for the Company.
References:
8. (LO4) Airlines offer an example of an industry in which the degree of operating leverage is fairly high. Why?
Answer:
Airlines industry is capital intensive industry having huge fixed costs such as fixed labor, pension, costs for operating hubs and spoke system, cost of aeroplanes, high interest costs and it has very small percentage of variable cost compare to its fixed costs. When contribution margin per unit is very small compared to fixed cost then it will have very high breakeven point. Thus high fixed cost leads to high operating leverage.
As operating leverage = Contribution / (contribution – fixed cost)
Chapter 15
5.No Zipcar should not be upset about the under pricing because IPO jumping 50% on the first day were common in the late 90’s and even loss making companies were also getting that price hike on their first day of IPO. Zipcar was founded in 1999 when the stockmarket was in boom and we foundthat even during the recession in 2009 stocks like Open table’s even got hike of 60% on its first day of IPO. It was also due to mismatch in demand-supply as large number of people applied for its share but it was ten times oversubscribed. So the demand supply mismatch, market expectations of the company and stock market boom period were all added reason for such a hike in Zipcar’s price hike on first day of IPO by 50%.
(Source:
6. No my answer would not change even if the Zipcar was only 10 years old, had only $186 million in revenues in 2010, and had never earned a profit and even if its business model was not proved viable. It was consider as a cult IPO which means that public want the shares of this company for any price.
Source:
Ques2.
The Greensborough Corporation
(a) Maximum subscription price = current share price $ 48
Minimum is anything greater than 0.
(b) Number of new shares =30*1000000/43 =697,674.42
Number of rights needed =3.9*1000000/ 697,674.42 = 5.59
(c) Price ex-right
=((5.59*48)+(1*43)) / (5.59+1)
=$47.24
Value of a right= $48 -$ 47.24 = $0.76
(d) Before offer: 1,000 *$48 = $48,000
After offer: $48,000
12.
Let subscription price be x
Number of new shares = the amount raised divided by the subscription price = $50,000,000/x
The ex-rights number of shares (N) is equal to= Old shares outstanding/New shares outstanding
N = 24,000,000/($50,000,000/x)
N = 0.48x
The ex-rights stock price is:
$83 = [(89*0.48x) + x]/(0.48x + 1)
$83 = (42.72x +x) /( 0.48x+1)
39.84x + 83 = 42.72x +x
83 = 3.88x
X = 21.39
The subscription price is $21.39.