Chapter 10: Stock Offerings and Investor Monitoring.

Questions and Applications:

Q3. IPOs (Initial Public Offerings).
- An IPO is a first-time offering of shares by a specific firm to the public.
- It is used to obtain new funding and to offer venture capital firms a way to cash in their
investment.
 Firms engage in IPOS when they want to expand but are near their debt
capacity.
- The issuing firm typically pays 7 percent of the funds raised to the lead underwriter and
its syndicate.
- Depending on business and market conditions:
o During booming economic conditions, firms may wish to expand to capitalize on
the favourable economic conditions.
o Since a firm issuing equity through an IPO would expect a higher price for its
stock and keener investor interest during such periods.
o During recession or when the stock market falls, firms usually stay away from
launching IPOs.
Q4. Venture Capital.
Many VC firms sell their shares in the secondary market between 6 and 24 months after
the IPO. Thus, the IPO serves as an exit route to the VC firm, which cashes out.
Q11. Asymmetric Information.
- “Asymmetric information” is a term that refers to when one party in a transaction have
more information than the other (Information that known by the firm but not by
investors).
- If the firm feels that the shares are under-valued by the market, it may act on asymmetric
information and announce a repurchase of shares.
Q12. Stock Repurchases.
- Stock repurchases: transaction whereby a firm buys back its own shares from the
marketplace since they are considered undervalued.
- Stock prices respond favorably to stock repurchase announcements.
 This action reduces the number of outstanding shares, which increases both
the demand for the shares and the price.
Advanced Questions:
Q21. IPO Dilemma.
- Dilemma: whether Denton Company should sell the shares for a high offer price of $14
or sell at $12 to ensure that all the shares will be easily sold.
- Advantage: Ensure that the IPO issue will be fully subscribed and that all the shares will
be sold.
- Disadvantage: Give up the difference amount in order to avoid the risk.
- The securities firm’s incentive to place the shares is aligned with that of Denton
Company to the extent that it ensures that the issue is fully subscribed at the offer price.
The securities firm’s incentive is therefore more towards sale of all shares than in a high
sale price or higher fees.
Q30. Pricing Facebook’s IPO Stock Price.
Chapter 12: Market Microstructure and Strategies.

Point-counter-point: Is a Market-Maker Needed?

Problems:
Q1. Buying on Margin.

SP = $60
INV = $30
LOAN = $22
D = $1
$ 60−$ 30−$ 22+ $ 1
 Return = = 0.3 = 30%
$ 30
Q2. Buying on Margin.
SP = $90
INV = $50
LOAN = $33.6
D = $2
$ 90−$ 50−$ 33.6+ $ 2
 Return = = 16.8%
$ 50
Q3. Buying on Margin.
SP = $65
INV = $25
LOAN = $24.84
D = $0.80
 $ 65−$ 25−$ 24.84+ $ 0.80
 Return = = 63.84%
$ 25
If only personal funds are used:
$ 65−$ 48−$ 0+$ 0.80
Return = = 37.08%
$ 48
If only personal funds are used, and you sell stock for $40:
$ 40−$ 48−$ 0+ $ 0.80
Return = = -15%
$ 48

Flow of Funds Exercise: Shorting Stocks.

a)