Chapter 11 - financing + listing securities

Question 1

what are the 3 basic forms of business organization

Answer 1

proprietorship
partnership
corporation

Question 2

what’s a proprietorship

Answer 2

the most basic form of business ownership
exits for very simple, one-person business
proprietor is owners and operator of business
proprietor is owner and operator of business
the business is not a separate legal entity - therefore owner is personally liable from a legal perspective
difficulty for owners to generate/obtain capital to grow business

Question 3

what’s a partnership

Answer 3

similar to proprietorship except that there’s 2 or more owners

Question 4

define a limited partnership

Answer 4

must include 1 general partner who has to be involved inthe business an dhas personal liability
- limited partners cannot be involved in the running of business and liability is limited to their investment
- many hedge fund are structured as limited partnerships

Question 5

define general partnerships

Answer 5

partners have unlimited liability and partners are liable for the actions all partners
- most partnerships have moved away from this model in recent years given the liability issues

Question 6

what’s a corporation

Answer 6

most domoniant form of organization when measured by dollars of assets or sales

ownership is separate from management
-ownership is transferred by the buying and selling of shares
- separate legal entity - therefore owners do not have legal liability for the actions of the corporation or its employees
- much easier to corporations to access capital vs other forms of organization

Question 7

what happened to the organization of investment banks?

Answer 7

many went from partnerships to corporation for capital

Question 8

who governs the regulation of corporations

Answer 8

government act of incorporation
the corporation’s charter - original act of incorporation setting out basic rules + regulation
by-lay (subsequent to chart, these are rules and regulations set by the corporation’s board of directors and approved by shareholders

Question 9

how are most decisions made within a corporation?

Answer 9

most are decided by BOD and/or management

Question 10

which decisions require shareholders approval

Answer 10

significant events - electing directors, selling the coporation
- most decisions are passed with a 50.1% approval from shareholders

Question 11

define a proxy

Answer 11

allows someone else to vote on behalf of a shareholder - if that shareholder gives that person the right to do so

Question 12

define activist investors

Answer 12

investors influencing the actions of the firm/senior management team

Question 13

have more activist investors engaged in proxy fights?

Answer 13

yes they have to influence boards or management teams

Question 14

is the CEO typically on the board?

Answer 14

yes

Question 15

why do shareholders have the ultimate say in how a company is run

Answer 15

bc they own the corporation

Question 16

what are board of directors

Answer 16

elected by shareholders to ensure that corporate decisions are made that are in the best interests of shareholders

Question 17

define independent directors

Answer 17

directors who are not management or aligned with a very large sharholders

Question 18

why would shareholder insist on a minimum number of independent directors?

Answer 18

not influenced by management, and stay clear and focused on protecting shareholders interest

Question 19

who are the “go-between” to facilitate the raising of capital

Answer 19

investment firms/investment dealers/brokerage firms

Question 20

what’s the government’s cost of capital

Answer 20

the investor’s return

Question 21

what’s raising of capital

Answer 21

a negotiated process

Question 22

what’s the financing procedure for private placements ( not done on public markets)

Answer 22

sale of corporate debt or equity to private investors
not available to the general public
managed by investment dealers
typically do not require a prospectus

Question 23

why are private placements controversial?

Answer 23

retail investors aren’t given access, fear that large institutions are given preferential access, valuation for securities

Question 24

what’s the financing procedure for public offerings?

Answer 24

the sale of securities to the public from corporations
investment dealers manage the process
a prospectus sets out the terms of the offering - lengthy legal document
a greensheet (or bluesheet if you work at rbc) is a marketing document that summarizes the offering and is used by the investment dealer to sell the offering

Question 25

how is the share price for an IPO determined?

Answer 25

based on PV from due diligence of future financial projections
- other similar companies are reviewed to se how they are valued, other similar IPOs are reviewed to see how they were valued
- a total value of the company is estimated
- a discount to this total value may be applied given that equity in the corporation is being sold for the first time

Question 26

how much % of ownership is sold in an IPO

Answer 26

only a certain percentage

that value is dividend by a certain number of shares to get a to a price range

Question 27

how does an investment dealer
“build a book”

Answer 27

after the company management goes on a road show to meet prospective investors to gauge interest

investment dealer will gather feedback to build the book
- investors will indicate interest at various prices

Question 28

how is the value per share set to balance?

Answer 28

1. high enough to maximize proceeds for corporation
2. low enough to ensure that all shares are sold and that there is positive buying in the market after the IPO

Question 29

how are secondary issues done?

Answer 29

done under the short-form prospectus distribution system (SFPD)

Question 30

what’s the SFPD?

Answer 30

allows the companies to issue short form prospectuses which are much shorter than prospectuses for IPOs, saves a great amount of time, hassle + money
- most often used for “bought deals”
- investment dealers/underwriters “buy the deal”, hence the name
- corporation is guaranteed proceeds

investors will buy the stock after the market close and sold to other investors that evening or in the morning before the market opens at 9:30AM
investors are contacted and asked about the number of shares they would buy and at what price
the investment dealer will want to get rid of all the number of shares at the highest price

Question 31

how to protect against declines in a share price after an IPO or equity issue

Answer 31

several after-market stabilization procedures
underwriters sell more shares than was originally intended
penalize other underwrites whose customer sell share in aftermarket
establish a stabilizing bid to purchase shares less than the offering price