Read the summary and the most important questions on Cap Struc

• 1 Introduction

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• How is the stake in the private company sold to investors.

  Preferred stock is most commonly issued the first time part of the company is sold to investors. (Preferential dividend. Seniority in liquidation and sometimes special voting rights. Does not pay regular cash dividend. Commonly optional to convert into normal stock Convertible preferred stock
  Pre-money valuation: Value of shares outstanding at the price in the funding round
  Post-Money valuation: Value of the whole firm at the price at which the new equity is sold

• Name the Advantages and Disadvantages of a IPO

  Adv:
  - Greater liquidity and better access to capital
  - Their private equity investors now have ability to diversify
  Dis:
  - Is also advantage: Investors sell their stake and diversify their holdings, the holders become more widely dispersed. Which makes it harder to monitor management (Loss of control).
  - New requirements for public companies must be met. Costly and time-consuming

• Explain how underwriters make money of of an IPO

  Firm Commitment: The underwriter and the issuing firm agree that the underwriter will sell all the stock at the offer price. Underwriter buys the stock for slightly less and thus taking the risk.
  Underwriters underprice the IPO intentionally to minimize their losses.
  Greenshoe provision: Allows the underwriter to issue more stock up to 15% st the IPO offer price (If there is enough demand) Over-Allotment.

• Name Two other types of IPO

  Best-Efforts Bias: For smaller IPOs. A situation in which the underwriter does not guarantee that the stock will be sold. But instead tries to sell for the best possible price. All-or-none clause either all shares are sold or the deal is called off.
  Auction IPO: Online method for selling directly to the public. The markets determines the price through bids from potential investors. The price above which all shares can be sold becomes the IPO price.

• Name the four characteristics of an IPO

  1 On average, IPOs appear to be underpriced.
  2 The number of IPOs is highly cyclical.
  3 The transaction costs of the IPO are very high, and it is unclear why firms willingly incur such high costs.
  4 The long-run performance of a newly public company is poor.

• 2 Raising Equity Capital

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• Explain what a SEO is

  Seasoned Equity Offering: When a public company returns to the market and offers new shares for sale.
  Primary shares: New shares issued by a company in an equity offering.
  Secondary shares: Shares sold by existing shareholders in an equity offering
  Tombstone: Newspaper advertisement announcing the SEO. Now only  ceremonial because of roadshows.
  Cash Vs Rights offer: Cash mean new shares to all investors. Rights means shares only to existing shareholders. Rights offer occurs when the firm believes they are underpriced in the market.

• Why choose cash offers over rights offers

  The majority are cash offers. While rights offers are less costly and affect the stock price the least. The only advantage of cash offers is the more prominent role of the underwriter who can attest to the price.

• 3 Corporate Debt

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• Name the four types of secured and unsecured debt

  Unsecured: Not asset backed. Only claim of assets that are not already pledged in other debt.
  1. Notes: Maturities less than ten years
  2. Debenture: Longer than ten years
  Secured: Asset backed
  1. Mortgage bonds: Backed by real property
  2. Asset-Backed: Any kind of asset

• Explain how investors in unsecured debt claim their money

  Seniority: First claim to non-pledged assets. Every subsequent debenture becomes subordinate (lower seniority)

• What are the four International Bond Markets?

  1. Domestic Bonds: Issued by a local entity and denominated in the local currency, but purchased by foreigners
  2. Foreign Bonds: Issued by a foreign company in a local market and denominated in the local currency
  3. Eurobonds: Not denominated in the currency of the country where they are issued. Not subject to a country's regulations
  4. Global Bonds: Combines the features of the first three. Can be offered in the same currency as the country issuance.