Initial Public Offerings

FIN5SLP01 – 3 page paper to include reference page (on page 4) with citations apa format 12 pt font courier new double spaced

Initial public offerings

The main purpose of an initial public offering (IPO) is to raise capital for the corporation. While IPOs are effective at raising capital, being listed on a stock exchange comes with heavy regulatory compliance and reporting requirements which are expensive.

The session long project (SLP) for the course will be performed using information on a company that is listed on the New York Stock Exchange (NYSE). To complete Module 1 SLP, please choose a company that is publicly traded in the stock market. If you are unsure which company to choose, you can look through this list of companies in the S&P 500 (http://finance.yahoo.com/q/cp?s=%5EGSPC). The company can't be a financial institution such as a bank, insurance company or a trust company.

NOTE: Cannot use Intel Corporation.

The company that you choose will be “your SLP Company” for the entire course. Please state the name of that company in each of the Session Long Project reports.

You are to search for the company's web site, approach the section called "Investors relations" in order to obtain the financial information of the company over the past several years. Your deliverables for the first Module are to write a two to three page paper with the following:

1) Provide a brief description of the company you chose, its main business and operational activities and a short synopsis of the main developments of the company over the past few years of the company. Include some financial information such as the stock price, its profitability, and other financial information you find relevant.

2) Explain why you chose this company (e.g., what makes it interesting to you personally).

3) This is the main part of the assignment. Find out what you can about your SLP company's IPO. If it is a newer corporation, this should not be too difficult. But if it is an older company this might be difficult. So if you cannot find any information about your company's IPO, instead discuss how you would go about taking your company public using what you've learned from the background materials.

Session Long Project (SLP) Expectations:

In Module 1 SLP, you are expected to:

►Describe the purpose of the paper and conclusion. An introduction and conclusion are important because many busy individuals in the business environment may only read the first and the last paragraph. If those paragraphs are not interesting, they never read the body of the paper.

►Answer the SLP questions clearly and provide necessary details.

►Provide a quality argument; that is, no poor sentence structure, no spelling and grammar mistakes or run-on sentences.

►Provide citations to support your argument and references on a separate page. Please use APA format to provide citations and references.

►Answer all the SLP questions in an essay format instead of point format. Please do not type questions in the paper.

►Type and double space the paper.

►The following criteria will also be used to assess your paper:

>Focus

>Breadth (comprehensive quality of written paper)

>Depth (deepness of thought)

>Precision (doing what asked to do)

>Clarity (clearness of thought)

►Critical thinking (application of logic and intellectual criteria such as clarity, creditability, accuracy, precision, relevance, depth, breadth, and significance)

SLP Readings:

Investopedia (2011) IPO Basics: Introduction. Retrieved February, 2011, from http://www.investopedia.com/university/ipo/

Clinton, L. (2011). Traditional IPO vs. auction-based IPO. Retrieved February, 2011, from http://www.essortment.com/home/traditionalauct_sibt.htm

Investopedia.com (2011). What Does Initial Public Offering - IPO Mean? Retrieved February, 2011, from http://www.investopedia.com/terms/i/ipo.asp

FIN5SLP2 - 3 page paper to include reference page (on page 4) with citations apa format 12 pt font courier new double spaced

Time value of money

Time Value of Money is one of the most important concepts in the financial world. The principles of time value analysis have many applications, ranging from setting up schedules for paying off loans to decisions about whether to acquire new equipment for a company. Time value of money is also called discounted cash flow analysis.

Your task for this module is to apply the concept of present value to your chosen SLP company. Suppose your company is selling a bond that will pay you $2,000 in one year from today. Keep in mind that if your company has financial difficulties in one year you might not get your full $2,000 back. Given that a dollar one year from now is always worth less than a dollar today, you most certainly would not pay a full $2,000 for this bond.

If you are highly risk averse or strongly prefer having money today to having money tomorrow, then you would pay significantly less than $2,000 for this bond. Higher inflation or high interest rates would also lead you to pay less for the bond. Also, the greater the chance of bankruptcy of your company the less you should be willing to pay for the bond.

Given the concepts of the time value of money, answer the following questions in a two to three page paper:

1) How much would you pay for this bond today? Take into consideration your own personal risk preferences, interest rates, inflation, and the probability your company will not be able to pay you back in one year. Note: no need for any math equations for this part. Just explain how much you would personally pay for a $2,000 bond from this company.

2) Based on your answer to the previous question, what would be your discount rate for this bond? Use the present value formulas from the background materials and show your work.

3) Pick two other companies in the same industry as your SLP company. One should be one that you would pay less for a $2,000 bond than you would from your SLP company and another one that you would pay more for a $2,000 bond from your SLP company. Explain why you would pay more or less for their bonds.

Session Long Project (SLP) Expectations:

In Module 2 SLP, you are expected to:

►Answer the SLP questions clearly and provide necessary details. Also please review Tips for Good Writing to write a well structured paper.

►Provide a quality argument; that is, no poor sentence structure, no spelling and grammar mistakes or run-on sentences.

►Provide citations to support your argument and references on a separate page. Please use APA format to provide citations and references.

►Answer all the SLP questions in an essay format instead of point format. Please do not type questions in the paper.

►Type and double space the paper.

►The following criteria will also be used to assess your paper:

>Focus

>Breadth (comprehensive quality of written paper)

>Depth (deepness of thought)

>Precision (doing what asked to do)

>Clarity (clearness of thought)

►Critical thinking (application of logic and intellectual criteria such as clarity, creditability, accuracy, precision, relevance, depth, breadth, and significance)

Finally, this paper will be graded with the following criteria in mind

A. Provide a direct answer to all three assignment questions, focus only on these three questions.

B. Reference all of your sources of information, both within the text as well as with a bibliography at the end.

C. For all calculations, show all of your work and demonstrate that you understand the steps.

SLP Readings:

Basic concepts of present and future value:

One of the most common questions I get concerns "Where can I find the present value formula?" While almost all of the links in this Module include the formula, here is a link where the formula is presented very prominently:

FinanceProfessor.com (n.d.). Present value. Retrieved February, 2011, from http://www.financeprofessor.com/financenotes/introductoryfin/presentvalue.htm

However, do not just fixate on the formulas. While you need to know the formula for the assignments, you also need to understand the logic and intuition behind the formulas. The following links are important not only for the formulas but also to help you understand the material.

Econedlink.org (2011). The time value of money. Retrieved February, 2011, from http://www.econedlink.org/lessons/index.cfm?lesson=EM37

Studyfinance.com (2011). Time value of money: Self paced overview. Retrieved February, 2011, from http://www.studyfinance.com/lectures/timevalue/index.mv

Biger, N. (2008). Explanation of present values and net present values.

FinanceProfessor.com (n.d.). Future value. Retrieved February, 2011, from http://www.financeprofessor.com/financenotes/introductoryfin/futurevalue.html

For the following link make sure to check out the sections on present and future values of annuities as these sections will help you with the case assignment:

Cedar Springs Software (2002). Future value. Retrieved February, 2011, from http://www.getobjects.com/Components/Finance/TVM/fv.html

FIN5SLP03 -3 page paper to include reference page (on page 4) with citations apa format 12 pt font courier new double spaced

Risk and return, portfolio diversification and the Capital Asset Pricing Model; The cost of equity

In this section of the Session Long Project you'll estimate the cost of equity or the rate of return that your company's shareholders “require.” This is an important piece of information that every top manager must be able to estimate because it will be an important input in any effort to determine whether any particular course of action by the company will or will not add value to the shareholders.

We are going to use the Capital Asset Pricing Model (CAPM) in order to estimate the rate of return that our shareholders require on their investment. This is the minimum rate of return that these shareholders require. As stated above - we call this rate “the cost of equity” and it is expressed in percentages or in a decimal format.

The CAPM states the following equilibrium relationship between the (excess) rate of return that shareholders of a particular company "j" require (or actually in some sense 'deserve' if they fully diversify their investments) and the (excess) expected rate of return on the market portfolio:

Rj - RF = βj [RM - RF]

It follows that the rate of return that shareholders require or expect to earn on their investment in the shares of the company, or 'the cost of equity' is:

Rj = RF + βj [RM - RF]

In order to estimate the cost of equity for your company, you need to obtain an estimate of the company's “beta” or systematic risk coefficient, on the annual rate of return on a risk-free investment, and on the expected rate of return on the “market portfolio.” You can easily find that information by going to the following web site: http://finance.yahoo.com and insert the name of your company. The beta of the company is reported on that web site.

Click on the "key statistics" link on the left hand side of the screen to find the beta and other information.

First out what is the present Yield to Maturity (YTM) on a US Government bond that matures in one year. That rate is the “risk-free rate.”

Next, it is customary to assume that the difference between the expected rate of return on the “market portfolio” and the risk-free rate of return is about 7.0%. This is the expression [RM - RF]. So, if for example, the risk-free rate of interest is, say, 3% per year, than the expected rate of return on the “market portfolio,” RM, is 10%. So, multiply the “beta” of your SLP Company by 7.0%. That will be the equivalent of your company's βj [RM - RF]. Then add to that number the current yield to maturity on a US Government bond [see step (1) above]. You are free to try to research and find more up to date values of RM and RF, but to simplify this assignment you can also assume that RF = 3, RM =10 and [RM - RF]= 7.

The above procedure provides you with an estimate of the rate of return that the shareholders of your SLP Company require on their investment. This rate is called the cost of equity of your company.

After going through these calculations, write a two to three page paper with the following information:

1) Show your work that you used to obtain the cost of equity for your SLP company.

2) Is this cost of equity higher or lower than you expected? The average cost of capital for a firm in the S&P 500 is 10.2 percent. Would you think your firm should have a lower or a higher cost of capital than the average firm?

3) Look up the betas for some of the other companies that you compared your SLP company to for your Module 2 SLP. These are the companies that you had to explain had a higher or lower discount rate than your SLP company. Using these betas, compute the cost of equity for these firms. How do they compare to your SLP company? Are you surprised that some firms have a higher or lower cost of equity than your SLP company?

4) How would you go about finding the cost of equity using the dividend growth model or the arbitrage pricing theory for your SLP company? Don't worry, you don't actually have to do any calculations - just explain how you would go about doing these calculations and explain what kind of additional information you might need.