Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 15, Problem 9CRCT
Summary Introduction
To determine: Whether the assistant professor had a bad luck or should the professor have expected to do worse than the average initial public offering.
Introduction:
The private companies offer their stock for the first time to the public and this offering is termed as the initial public offerings. The private company that desire to become a publicly traded company usually offers the initial public offerings. The sale of the stocks below the true value is the underpricing.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Question A
Dusty Corporation is issuing an IPO with an issue price of $15 per share that is expected to raise about $100 million. Which of the following is likely to be true?
A.The cost of the IPO to Dusty will be about $7 million.
B.The price of the stock will be less than $15 at the close of the first trading day.
C.The stock will perform very well in the three to five years after the issue.
D.None of the above is likely to happen
.Full explain this question and text typing work only We should answer our question within 2 hours takes more time then we will reduce Rating Dont ignore this line.
Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After 3 months,
my investment record is as follows:
IPO
A
B
С
Shares
Allocated
to Me
580
200
1,000
Price per
Share
$10
20
8
12
Initial
Return
7%
12
- 2
23
a. What is the average underpricing in dollars of this sample of IPOs? (Do not round intermediate calculations. Round your answer to
2 decimal places.)
Answer is complete but not entirely correct.
Average underpricing
0.10
Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After 3 months,
my investment record is as follows:
IPO
A
B
C
D
Shares
Allocated
to Me
500
200
1,000
0
Average underpricing
Price per
Share
$10
20
8
12
a. What is the average underpricing in dollars of this sample of IPOs? (Do not round intermediate calculations. Round your answer to
2 decimal places.)
Average initial return
Initial
Return
7%
12
2
23
b. What is the average initial return on my "portfolio" of shares purchased from the four IPOs that I bid on? When calculating this
average initial return, remember to weight by the amount of money invested in each issue. (Do not round intermediate calculations.
Enter your answer as a percent rounded to 1 decimal place.)
%
Chapter 15 Solutions
Fundamentals of Corporate Finance
Ch. 15.1 - Prob. 15.1ACQCh. 15.1 - Prob. 15.1BCQCh. 15.2 - What are the basic procedures in selling a new...Ch. 15.2 - What is a registration statement?Ch. 15.3 - Prob. 15.3ACQCh. 15.3 - Why is an initial public offering necessarily a...Ch. 15.4 - Prob. 15.4ACQCh. 15.4 - Prob. 15.4BCQCh. 15.5 - Prob. 15.5ACQCh. 15.5 - Suppose a stockbroker calls you up out of the blue...
Ch. 15.6 - What are some possible reasons why the price of...Ch. 15.6 - Explain why we might expect a firm with a positive...Ch. 15.7 - What are the different costs associated with...Ch. 15.7 - What lessons do we learn from studying issue...Ch. 15.8 - Prob. 15.8ACQCh. 15.8 - What questions must financial managers answer in a...Ch. 15.8 - Prob. 15.8CCQCh. 15.8 - When does a rights offering affect the value of a...Ch. 15.8 - Prob. 15.8ECQCh. 15.9 - What are the different kinds of dilution?Ch. 15.9 - Is dilution important?Ch. 15.10 - What is the difference between private and public...Ch. 15.10 - Prob. 15.10BCQCh. 15.11 - What is shelf registration?Ch. 15.11 - Prob. 15.11BCQCh. 15 - Prob. 15.1CTFCh. 15 - Smythe Enterprises is issuing securities under...Ch. 15 - Prob. 15.4CTFCh. 15 - Prob. 15.7CTFCh. 15 - Debt versus Equity Offering Size [LO2] In the...Ch. 15 - Debt versus Equity Flotation Costs [LO2] Why are...Ch. 15 - Bond Ratings and Flotation Costs [LO2] Why do...Ch. 15 - Underpricing in Debt Offerings [LO2] Why is...Ch. 15 - Prob. 5CRCTCh. 15 - Prob. 6CRCTCh. 15 - Prob. 7CRCTCh. 15 - Prob. 8CRCTCh. 15 - Prob. 9CRCTCh. 15 - Prob. 10CRCTCh. 15 - Prob. 1QPCh. 15 - Prob. 2QPCh. 15 - Rights [LO4] Red Shoe Co. has concluded that...Ch. 15 - Prob. 4QPCh. 15 - Calculating Flotation Costs [LO3] The Valhalla...Ch. 15 - Prob. 6QPCh. 15 - Prob. 7QPCh. 15 - Prob. 8QPCh. 15 - Dilution [LO3] Eaton, Inc., wishes to expand its...Ch. 15 - Prob. 10QPCh. 15 - Dilution [LO3] In the previous problem, what would...Ch. 15 - Prob. 12QPCh. 15 - Value of a Right [LO4] Show that the value of a...Ch. 15 - Prob. 14QPCh. 15 - Prob. 15QPCh. 15 - Prob. 1MCh. 15 - Prob. 2MCh. 15 - Prob. 3MCh. 15 - Prob. 4M
Knowledge Booster
Similar questions
- Having heard about IPO underpricing, I put in an order to my broker for 1,110 shares of every IPO he can get for me. After 3 months, my investment record is as follows: IPO Shares Allocatedto Me Price per Share Initial Return A 610 $ 12 7 % B 310 20 13 C 1,110 10 − 2 D 0 14 20 a. What is the average underpricing in dollars of this sample of IPOs? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the average initial return on my “portfolio” of shares purchased from the four IPOs that I bid on? When calculating this average initial return, remember to weight by the amount of money invested in each issue. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)arrow_forwardIn the spring of 1984, Disney Productions stock was selling for about 3.125 per share. (All prices have been adjusted for 4-for-1 splits in 1986 and 1992.) Then Saul Steinberg, a New York financier, began acquiring it; after he had 12%, he announced a tender offer for another 37% of the stockwhich would bring his holdings up to 49%at a price of 4.22 per share. Disneys management then announced plans to buy Gibson Greeting Cards and Arvida Corporation, paying for them with stock. It also lined up bank credit and (according to Steinberg) was prepared to borrow up to 2 billion and use the funds to repurchase shares at a higher price than Steinberg was offering. All of these efforts were designed to keep Steinberg from taking control. In June, Disneys management agreed to pay Steinberg 4.84 per share, which gave him a gain of about 60 million on a 2-month investment of about 26.5 million. When Disneys buyback of Steinbergs shares was announced, the stock price fell almost instantly from 4.25 to 2.875. Many Disney stockholders were irate, and they sued to block the buyout Also, the Disney affair added fuel to the fire in a congressional committee that was holding hearings on proposed legislation that would (1) prohibit someone from acquiring more than 10% of a firms stock without making a tender offer for all the remaining shares, (2) prohibit poison pill tactics such as those Disneys management had used to fight off Steinberg, (3) prohibit buybacks, such as the deal eventually offered to Steinberg, (greenmail) unless there was an approving vote by stockholders, and (4) prohibit (or substantially curtail) the use of golden parachutes (the one thing Disneys management did not try). Set forth the arguments for and against this type of legislation. What provisions, if any, should it contain? Also, look up Disneys current stock price to see how its stockholders have fared. Note that Disneys stock was split 3-for-1 in July 1998 and 1,014-for-1,000 in June 2007.arrow_forwardIn the spring of 1984, Disney Productions' stock was selling for about 3.125 per share. (All prices have been adjusted for 4-for-l splits in 1986 and 1992.) Then Saul Steinberg, a New York financier, began acquiring it; after he had 12%, he announced a tender offer for another 37% of the stockwhich would bring his holdings up to 49%at a price of 4.22 per share. Disney's management then announced plans to buy Gibson Greeting Cards and Arvida Corporation, paying for them with stock. It also lined up bank credit and (according to Steinberg) was prepared to borrow up to 2 billion and use the funds to repurchase shares at a higher price than Steinberg was offering. All of these efforts were designed to keep Steinberg from taking control. In June, Disney's management agreed to pay Steinberg 4.84 per share, which gave him a gain of about 60 million on a 2-month investment of about 26.5 million. When Disney's buyback of Steinberg's shares was announced, the stock price fell almost instantly from 4.25 to 2.875. Many Disney stockholders were irate, and they sued to block the buyout. Also, the Disney affair added fuel to the fire in a congressional committee that was holding hearings on proposed legislation that would (1) prohibit someone from acquiring more than 10% of a firm's stock without making a tender offer for all the remaining shares; (2) prohibit poison pill tactics such as those Disney's management had used to fight off Steinberg; (3) prohibit buybacks, such as the deal eventually offered to Steinberg, (greenmail) unless there was an approving vote by stockholders; and (4) prohibit (or substantially curtail) the use of golden parachutes (the one thing Disney's management did not try). Set forth the arguments for and against this type of legislation. What provisions, if any, should it contain? Also, look up Disney's current stock price to see how its stockholders have fared. Note that Disney's stock was split 3-for-l in July 1998.arrow_forward
- A company conducts an initial public offering (IPO). At the end of the road show, the stock is priced at $100 per share and the investment bank charges $7 per share as compensation for its services under a firm commitment. The stock closes at $110 on the first day of trading and the media labels the IPO as a success. What is the "underpricing" on this IPO? Question 13 options: a) 6.4% b) 7.0% c) 10.0%arrow_forwardIf you bought 200 shares of Amazon when they issued their IPO in May 1997 for $18/share and then sold all 200 shares today for $3,284/share. What is the Cost Basis for calculating your Capital Gain and Return On Investment (ROI) O $3,600 O $3,266 O $653,200 O $656,800arrow_forwardwhich one is correct? QUESTION 11 Exhibit 1.7 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You purchased 100 shares of GE common stock on January 1, for $29 a share. A year later you received $1.25 in dividends per share and you sold it for $28 a share. Refer to Exhibit 1.7. Calculate your holding period return (HPR) for this investment in GE stock. a. 0.9655 b. 1.0973 c. 1.0804 d. 1.0086 e. 1.0357arrow_forward
- Y8 Sarah bought stock on margin 8 months ago borrowing $10,000 at 7% EAR. She has just received a margin call for $3000 and her maintenance and initial margin was 15%. What must be the current value of the assets, BEFORE THE CALL, in her margin account? [Choose closest] a) Cannot be determined with the information provided, we need the number of shares b) Cannot be determined with the information provided, we need to know the original asset value c) $0 d) $9,310.51 e) $12,310.51 The answer is d) but why?arrow_forwardC) usually with the assistance of an investment banker. D) A and B. E) B and C. 2. You purchased 100 shares of ABC common stock on margin at $70 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest on margin. A) $21 B) $50 C) $49 D) $80 E) none of the above 3. Assume you sell short 100 shares of common stock at $45 per share, with initial margin at 50%. What would be your rate of return if you repurchase the stock at $40/share? The stock paid no dividends during the period, and you did not remove any money from the account before making the offsetting transaction. A) 20% B) 25% C) 22% D) 77% E) none of the above 4. You purchased 1000 shares of common stock on margin at $30 per share. Assume the initial margin is 50% and the stock pays no dividend. What would the maintenance margin be if a margin call is made at a stock price of $24?arrow_forward10. IPO Costs. Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After 3 months, my investment record is as follows: (LO15-2) IPO Shares Allocated to Me Price per Share Initial Return A 500 $10 7% B 200 20 12 1,000 8 -2 D 12 23 a. What is the average underpricing in dollars of this sample of IPOS? b. What is the average initial return on my "portfolio" of shares purchased from the four IPOS that I bid on? When calculating this average initial return, remember to weight by the amount of money invested in each issue. c. "You have just encountered the problem of the winners' curse." True or false?arrow_forward
- R. You bought 100 shares of DataPoint for $25 per share and it is currently selling for $40 per share. Assume that the stock eventually declines to $31. In answering the following, please ignore brokerage commissions, margin interest costs, and other transaction costs Calculate your percentage Holding Period Return at the $31 price assuming that you placed a stop-sell order at $40 per share and the order executed at that price a. 60% b. 24% c. 37.50% d. 51.61%arrow_forward10. IPO Costs. Having heard about IPO underpricing, I put in an order to my broker for 1,000 shares of every IPO he can get for me. After 3 months, my investment record is as follows: (LO15-2) IPO BUD Shares Allocated to Me 500 200 1,000 0 Price per Share $10 20 8 12 Initial Return 7% 12 -2 23 a. What is the average underpricing in dollars of this sample of IPOs? b. What is the average initial return on my "portfolio" of shares purchased from the four IPOs that I bid on? When calculating this average initial return, remember to weight by the amount of money invested in each issue. c. "You have just encountered the problem of the winners' curse." True or false?arrow_forwardSuppose a Sam's company in CA, completes an $95 million IPO priced to the public at $50 per share. The firm receives $47 per share, and the out-of-pocket expenses are $480,000. The stock’s closing price at the end of the first day is $59. What is the total cost to the firm of issuing the securities? $_______arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781285867977Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningFundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781285867977
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning