5) Equity Capital Markets

Question 1

Why would a business want to go public
(4 reasons)

Answer 1

1) requires financing for expansion
2) stakeholders get better understanding of company valuation
3) share price is better defined, and thus can be more effectively used as currency to acquire another firm
4) exit opportunity for investors

Question 2

Why do companies give stocks to senior leaders

Answer 2

Unify goals and use stocks as incentives for performance

Question 3

What are the three kind of investors in an IPO

Answer 3

Retail investors, institutional investors, hedge funds

Question 4

what are retail investors

Answer 4

private individuals with low disposable income

Question 5

what are institutional funds

Answer 5

specialized knowledges, solid reputation (like blackrock)

Question 6

what are hedge funds

Answer 6

looking to profit from underpriced or overpriced securities. Very high risk profile

Question 7

what do investors look for in IPOS

Answer 7

growth potential, competitive position, stable financing position, visibility and liquidity and discounted valuation

Question 8

who do investment bankers prefer for IPOS

Answer 8

retail investors and institutional investors

Question 9

what is a DCF model

Answer 9

calculating the present value of all cash flows the company is expected to produce in the future (uses historical results and business plan)

Question 9

which kind of investor holds stock the longest

Answer 9

retail investors

Question 10

what is multiples valuation

Answer 10

finding similar companies based on industry, size, geography and strategy, find ratio of the prices of these companies and operating results, and multiply it by own companies operation results to find price

Question 11

what is book building

Answer 11

asking other investors how many shares they want to purchase and how much they’d purchase it for

Question 12

What is the difference between pricing offerings for retail investors and institutional investors

Answer 12

retail investors offer a maximum price, not a range

institutional investors offer a price range

Question 13

what is the roadshow

Answer 13

group of 1 on 1 and group presentations to pitch stock pre IPO

Question 14

what goes into share allocation criteria (5)

Answer 14

1) quantity of shares purchases
2) timing of submission (early or late)
3) involvement during process
4) chemistry and vibe with organization
5) IPO track record

Question 15

why would a company not nescerarily pick the highest share price that would still result in all shares being sold before an IPO

Answer 15

because they want investors to feel happy with their purchase, the price should be set at a discount to allow the price of the stock to rise within the first few hours

Question 16

share allocation pecking order

Answer 16

1) retail investors
2) institutional investors
3) investors who placed orders early
4) investors who understand the business
5) investors with solid IPO track record

Question 17

What are the pre launch steps for the IPO

Answer 17

process starts 6 months pre IPO
1) Hire advisors
2) define key issues prior to IPO
3) Pre-IPO research report
4) issuance of IPO prospectus
5) roadshow
6) bookbuilding
7) listing and allocation

Question 18

what kind of advisors are hired pre IPO launch

Answer 18

legal advisors, financial advisors, tax advisors and commercial advisors

Question 19

what goes into pre-IPO research report (3)

Answer 19

1) announces IPO to public
2) preliminary assessment of company’s business
3) begin of pre-marketing efforts

Question 20

what goes into IPO prospectus

Answer 20

1) cumbersome and exhaustive
2) describes all aspects of companies business
3) aims to protect investors who may not have the resources to fully audit an organization

Question 21

why do companies work with multiple banks prior to IPO

Answer 21

higher chance of attracting investors

Question 22

what is the syndicate hierarchy

Answer 22

1) one or two banks (global coordinators)
2) 2 or 3 banks (book runners - run marketing)
3) co lead managers (help w marketing and sales)

Question 23

what are the average IPO fees

Answer 23

3%

Question 24

what is underwriting

Question 25

what is stock price stabilization

Answer 25

keeping stock price stabilized after IPO

Question 26

explain shorting a stock

Answer 26

borrow stock, sell it, buy it back later and return it.

profit is made if stock price decreases during this span.

Question 27

what is overallotment/greenshoe option

Question 28

what is the difference between SEO and IPO

Answer 28

SEO, shares are already listed, but company needs to list more shares for fresh capital

Question 29

what are private placements

Answer 29

sale of security directly to a private investor as opposed to a pubic investor

Question 30

what is the quickest way to raise capital

Answer 30

private placement