Summary Strategic Financial Management - Part
1 (Master TEW/Master ERB, Prof. R.
Goncharenko) - 16/20 in the first exam period
graded A+
Firms can be financed internally and externally -
correct answer-- Internally: via retained earnings
or owner's savings
- Externally: issuing debt or issuing equity
Firms can be financed externally - correct answer-
- Issuing debt: bank loans or bond securities
- Issuing equity: IPO or SPO (initial public offering
or a seasoned public offering)
What is an IPO? - correct answer-Is a public
offering where a company's shares are sold to
institutional and retail investors for the first time.
The firm is private before an IPO
4 main groups of reasons for going public -
correct answer-- To reduce the cost of capital
,- To allow insiders to cash out
- To facilitate takeover activities
- Strategic reasons: broadening the ownership
base, capturing a first-mover advantage,
increasing publicity or improving reputation
What is the pecking order of financing? - correct
answer-- Internal equity (retained earnings or
owner's savings)
- External debt (bank loan or bond issuance)
- External equity (IPO or SPO)
Assymetric info with an IPO - correct answer-The
managers of the firm know more about the state
of the firm than outsiders. By issuing external
equity they are diluting their dividends in the
future. Maybe the managers of the firm know that
the firm is not really doing well than it makes
sense to issue equity
Potential advantages of going public (IPO) -
correct answer-- Improved Market Discipline
- Improved Transparency
- Creating multiple financing opportunities
- Employee Stock Option Compensation Plans
,Disadvantages of going public (IPO) - correct
answer-- Potentially large underpricing of IPO
- Legal, accounting and marketing costs
- Disclosure requirements
- Loss of control and agency problems
- Risk of litigation
Timing of an IPO/Factors influencing IPO timing -
correct answer-IPOs often come in waves similar
to M&As, influenced by various factors:
- Managers may capitalize on bull markets to
capture attractive stock price: take advantage of
bull markets (markets where the prices of effects
are increasing)
- Attractiveness of the IPO market
- Firms may go public when reaching sufficient
maturity
The IPO process consists of 5 steps - correct
answer-- Selection of an underwrite
- Due diligence and filings
- Pricing
- Stabilization
- Transition
, What is the selection of an underwrite? - correct
answer-- IPOs involve one or more investment
banks known as underwriters
- Investment banks are financial intermediaries in
IPOs
- The company offering its shares, the issuer,
enters into a contract with a lead underwriter to
sell its shares to the public
- A large IPO is usually underwritten by a
'syndicate' (a group) of investment banks, the
largest is the 'lead underwriter'
What is the underwriting spread? - correct
answer-Upon selling the shares, the underwriters
retain a portion of the proceeds as their fee
What is a bookrunner? - correct answer-The
managing/leading underwriter, the underwriter
selling the largest portion of the IPO, takes the
highest portion of the gross spread 8%
3 different underwriting arrangements (due
dilligence and filings) - correct answer-- Firm
commitment
- Best Effort Agreement
- Syndicate of Underwriters
1 (Master TEW/Master ERB, Prof. R.
Goncharenko) - 16/20 in the first exam period
graded A+
Firms can be financed internally and externally -
correct answer-- Internally: via retained earnings
or owner's savings
- Externally: issuing debt or issuing equity
Firms can be financed externally - correct answer-
- Issuing debt: bank loans or bond securities
- Issuing equity: IPO or SPO (initial public offering
or a seasoned public offering)
What is an IPO? - correct answer-Is a public
offering where a company's shares are sold to
institutional and retail investors for the first time.
The firm is private before an IPO
4 main groups of reasons for going public -
correct answer-- To reduce the cost of capital
,- To allow insiders to cash out
- To facilitate takeover activities
- Strategic reasons: broadening the ownership
base, capturing a first-mover advantage,
increasing publicity or improving reputation
What is the pecking order of financing? - correct
answer-- Internal equity (retained earnings or
owner's savings)
- External debt (bank loan or bond issuance)
- External equity (IPO or SPO)
Assymetric info with an IPO - correct answer-The
managers of the firm know more about the state
of the firm than outsiders. By issuing external
equity they are diluting their dividends in the
future. Maybe the managers of the firm know that
the firm is not really doing well than it makes
sense to issue equity
Potential advantages of going public (IPO) -
correct answer-- Improved Market Discipline
- Improved Transparency
- Creating multiple financing opportunities
- Employee Stock Option Compensation Plans
,Disadvantages of going public (IPO) - correct
answer-- Potentially large underpricing of IPO
- Legal, accounting and marketing costs
- Disclosure requirements
- Loss of control and agency problems
- Risk of litigation
Timing of an IPO/Factors influencing IPO timing -
correct answer-IPOs often come in waves similar
to M&As, influenced by various factors:
- Managers may capitalize on bull markets to
capture attractive stock price: take advantage of
bull markets (markets where the prices of effects
are increasing)
- Attractiveness of the IPO market
- Firms may go public when reaching sufficient
maturity
The IPO process consists of 5 steps - correct
answer-- Selection of an underwrite
- Due diligence and filings
- Pricing
- Stabilization
- Transition
, What is the selection of an underwrite? - correct
answer-- IPOs involve one or more investment
banks known as underwriters
- Investment banks are financial intermediaries in
IPOs
- The company offering its shares, the issuer,
enters into a contract with a lead underwriter to
sell its shares to the public
- A large IPO is usually underwritten by a
'syndicate' (a group) of investment banks, the
largest is the 'lead underwriter'
What is the underwriting spread? - correct
answer-Upon selling the shares, the underwriters
retain a portion of the proceeds as their fee
What is a bookrunner? - correct answer-The
managing/leading underwriter, the underwriter
selling the largest portion of the IPO, takes the
highest portion of the gross spread 8%
3 different underwriting arrangements (due
dilligence and filings) - correct answer-- Firm
commitment
- Best Effort Agreement
- Syndicate of Underwriters
