Discuss how investment banks stabilize the price of an IPO in the first days of trading?

Module Code: 7FNCE030W Page 1 of 4
Q1.
1) Analyse how shares are allocated to investors in an IPO?
(5 Marks)
2) Discuss how investment banks stabilize the price of an IPO in the first days of
trading?
(7 Marks)
3) In raising funds in an IPO, distinguish between firm commitment, best efforts,
private placement and shelf registration?
(8 Marks)
(Total 20 Marks)
Q2.
Suppose that you are working in brokerage services and one of your clients had bought
100 shares on the margin. You are given the following information:
Share price $100
60% Initial Margin
30% Maintenance Margin
100 Shares Purchased
Initial Position
Stock $10,000 Borrowed $4,000
Equity $6,000
1) If the stock price drops to $70 per share, what would be the new position? What
is the percentage of margin in the account?
(5 Marks)
2) Where the price should go before the client receives a margin call?
(5 Marks)
3) Discuss the purpose and mechanics of short sales?
(5 Marks)
(Total 15 Marks)
Module Code: 7FNCE030W Page 2 of 4
Q3.
Suppose that your client had established a short exposure to Dot Bomb Company and
you were given the following information about the established position.
Dot Bomb 1000 Shares
50% Initial Margin
30% Maintenance Margin
$100 Initial Price
1) Compute the profits if the price of shares drop to $70? At what price the client
will receive a margin call?
(5 Marks)
The limit order book for a security is:
Unfilled Limit Orders
Buy Orders Sell Orders
25.12 100 25.36 300
25.20 500 25.38 200
25.23 200 25.41 200
The market receives the following, in order:
a. Market order to sell 300 shares
b. Limit order to buy 100 shares at 25.38
c. Limit order to buy 500 shares at 25.30
2) How, if at all, are these orders filled? What does the limit order book look like
after these orders?
(5 Marks)
3) An employee retirement fund manager believes he has special information about
a particular company. Based on this information, he believes the company is
currently undervalued and decides to purchase 50,000 shares of the company.
The manager decides that he will not place a large single order for 50,000 shares
but will instead place several medium-sized orders of 2,500–5,000 shares spread
over a period of time. Why do you think the manager chooses to follow this
strategy?
(5 Marks)
(Total 15 Marks)
Q4.
Discuss the pros and cons of comparable transaction method to value companies?
(15 Marks)
Module Code: 7FNCE030W Page 3 of 4
Q5.
A company issues $200.0 million of equity and uses the proceeds to repay debt
(excluding fees and expenses).
1) Show the necessary adjustments and pro forma amounts by filing the table below.
(7 Marks)
($ in millions)
Issuance of Equity to Repay Debt
Actual
2012
Adjustments
+ –
Pro forma 2012
Equity Value $1,200.0
Plus: Total Debt 750.0
Plus: Preferred
Stock
100.0
Plus: Minority
Interest
50.0
Less: Cash and
Cash Equivalents
(100.0)
Enterprise Value $2,000.0
In 2012, the Royal Company incurred $10.0 million restructuring charges as well as an
inventory write-down of $5 million. These expenses are unusual for the company. The
company reported following income statement
($ in millions, except per share data)
Income Statement
Reported 2012
Sales $1,000.0
Cost of Goods Sold 625.0
Gross Profit $375.0
Selling, General & Administrative 230.0
Restructuring Charges 10.0
Operating Income (EBIT) $135.0
Interest Expense 35.0
Pre-tax Income $100.0
Income Taxes @ 40% 40.0
Net Income $60.0
Weighted Average Diluted Shares 30.0
Diluted Earnings Per Shares $2.00
2) Adjust the income statement above for these non-recurring items and Compute
the adjusted net income, EBITDA, and EPS? Assume $50 million of Depreciation
and amortization.
(8 Marks)
(Total 15 Marks)
Module Code: 7FNCE030W Page 4 of 4
Q6. You collected the following information about Khan’s company:
Current
unlevered free
cashflows
£100 million
Diluted shares
outstanding
300 million
WACC 10%
Long Term
Value of Debt
£400 million
Moreover, after carefully investigating the company you have crafted the following
assumptions regarding the future growth of Khan’s company unlevered future cash flows
1) Use the free cash flow method to estimate the enterprise value of Khan’s
company?
(8 Marks)
2) Compute the implied equity value and the price per share?
(7Marks)
3) All else being equal, if WACC increases, does enterprise value increase or
decrease? Why?
(5 Marks)
(Total 20 Marks)
[END OF TIMED ONLINE ASSESSMENT]
Year Unlevered Free
Cash flow
growth
1-3 30%
4 24%
5 12%
6 and thereafter 5%