Exam

Question 1

Sin Stocks?

Answer 1

Sin stocks are stocks of companies that are involved in industries considered to be morally questionable or controversial, such as tobacco, alcohol, gambling, and adult entertainment. These stocks are called “sin stocks” because they are perceived to be indulging in “sinful” or socially irresponsible activities.

Despite their controversial nature, sin stocks can be attractive to some investors because they often generate high profits and may be resistant to economic downturns. Companies in these industries typically have a loyal customer base and can maintain stable revenue streams even during times of recession.

However, investing in sin stocks can be a sensitive issue for some investors due to ethical considerations. Some investors may choose to avoid these stocks entirely based on their personal values and beliefs.

It is important to note that investing in any stock involves risks and rewards, and investors should carefully consider their investment goals, risk tolerance, and values before making any investment decisions.

Mutual funds and Hedge funds hold more sin stocks compared to e.g., pension funds.

Question 2

EMH?

Answer 2

Weak, semi and strong.

Weak: “You cannot study past or current stock prices in order to predict future prices, since price changes are independent.”

Semi strong: Current and past events can give signal about the future. Good investors could use this for their advantage and get abnormal returns.

Strong: If markets are characterised by strong efficiency, all information is reflected in stock prices. You cannot win over the market due to every piece of information are already calculated into the share price (no abnormal returns).

With EHM shouldn’t be able to pick stocks that beats the market.

Question 3

Negative screening process?

Answer 3

Temporarily lower demand and price —>
Creates an arbitrage opportunity —>
“Unethical” investor buys more —>
Pushes prices back up.

Question 4

Positive screening process?

Answer 4

Temporarily raises demand and price —>
Creates an arbitrage opportunity —>
Unethical” investor sells more —->
Pushes prices back down.

Question 5

Negative screening?

Answer 5

– Reject securities from your portfolio, based on moral preferences (tobacco, porn, fossil fuels…)
– “Don’t do bad”
– “Boycott” – the same as in product markets?

Question 6

Positive screening?

Answer 6

– Include only securities in your portfolio based on some moral goal function.
– “Charity”
– Sometimes argued to be better in the long-term

Question 7

Stranded assets ?

Answer 7

You have the assets, but you will not be able to extract and use them. This risk is not fully reflected in the security prices. Current asset pricing models does not account for downside-risks.

This is due to increased regulations.

Assets that have lost their value due to:

• regulation
• competing technology
• consumer pressure

Question 8

Hazards/Limitation for compensation contracts?

Answer 8

• Managerial power view = The CEO has a non-trivial influence on the compensation package (beyond productivity).
• The more power the CEO has, the more use of an “arms length” strategy the CEO use.
• It’s not certain that the manager will seek to maximise shareholders utility.

Question 9

How can a manager affect a project?

Answer 9

A manager doesn’t choose if a project will be successful or fail. But they can affect the probability for success or fail - based on what effort they choose to put on the project (asymmetric information for the outsiders). Outsider can only observe the outcome but not the effort.

Question 10

Why put in low effort in a project?

Answer 10

Managers need compensation to put in effort.

Question 11

What is needed for a manager to put in high effort?

Answer 11

You need to fufill (Ph)C > (pL)C+B (whereas C is compensation och B is private benefit). pH pL is probability of high and low success.

Question 12

Executive compensation for managers (short and long term) ?

Answer 12

Short term or Long term incentives.

• Salary, Annual bonuses (short term)
• Defined pension plans, Benefits, Stock options (long term)

Question 13

Differences in terms of compensation?

Answer 13

Countries pays different amount in compensation (for example does US managers get “payed” more than the UK managers in terms of for example option payed bonuses).

Question 14

Bebchuck and fried (2003) Optimal contracting and managerial power ?

Answer 14

Aligning shareholder and managerial incentives (to overcome the agency problem). Incentive contracts!

The main problem is that political constraints prevent companies to implement incentives that are sufficiently high-powered.

“The higher the price they get for you - the higher compensation” - where is the margin ? “Managers does also want to go home to their kids.” To find correct incentives to work the extra hours is important.

Question 15

Power-pay relationships: Executive compensation is higher when?

Answer 15

-Boards are weaker.
-No large outside shareholder is present.
-Institutional ownership is less concentrated.
-Takeover defences are stronger (golden parachutes etc).

Question 16

What is stopping the power relationships?

Answer 16

Outrage factor. (Shareholders outrage)

• If you pay the CEO too much, people will be upset. You want to avoid this because of the bad publicity.

Shareholders become less inclined to support managers and directors in proxy contests or takeover bids.

Question 17

Rational respons to the outrage factor?

Answer 17

Camouflage!

• Managers want to avoid or minimise the outrage of outsiders recognition of rent extraction.
• Incentives to obscure or legitimize rent extraction.

Question 18

Camouflage in practice examples?

Answer 18

Compensation consultant, Stealth compensation and Non-contracted goodbye contracts.

Question 19

Compensation consultant?

Answer 19

Outside consults often used in designing and communicate compensation packages.

Incentives to justify executive compensation rather than optimising it.

• Provide data that justifies higher compensation.
• Make use of consultants afterwards to justify compensations.
• Compensation often set at or above the median.

Question 20

Stealth compensation?

Answer 20

Firms use pay practices that make total compensation and pay-performance ratio more opaque. (You hide more visible compensation such as salary and uses the alternative below).

• Pension plans
• Deferred compensation
• Post retirement perks
• Consulting contracts

Question 21

Executive loans?

Answer 21

Not allowed anymore.

Question 22

Gratuitous goodbye payments (part of camouflage) ?

Answer 22

Give the CEO a lot of money when firing him/her (a lump sum). Makes no sense - but it’s inline with managerial power. The board of directors does this to look good - for future people to know that they treat their CEO’s good.

Question 23

Suboptimal pay structures?

Answer 23

Pay without performance.
- Large cash components
- Stealth compensation
- Call for more equity based comp in the 1990s.

At-the-money options.

Question 24

Unintended consequences from incentives (Vann 2023)?

Answer 24

Vann (2003) - Rat-hunt example. Compensation by for every rat they kill - they get an award. Incentives was that people began to breed rats and cut off their tails and get the compensation.

Question 25

Earnings management (unintended consequences from incentives)?

Answer 25

Expectation management:

Earnings forecasts

Accruals management:

Earnings smoothing, clean-bath accounting (big bath), Steering accounting ratios.

Real earnings management:

Manipulation operative activates with the purpose of changing the outcome of the accounting system.

-Reducing discretionary spending (cuts R&D, sales, admin etc).

-Discount to boost sales.

-Overproduction to increase COGS.

Question 26

Conclusion for the Compensation-lesson?

Answer 26

See pic.

Question 27

What did CEO’s say about long-term earnings?

Answer 27

They rather focus on the short-term earnings - by using earnings management.

“If the share price goes bananas, the weekend for the CEO is lost” - Conny 2023.

Thus, they want to avoid this and manipulates the accruals etc.

Question 28

Measurement problems of ESOs?

Answer 28

Illiquidity = Employees can generally not trade options and they are thus illiquid.

Vesting period =
- Makes the option worthless if the owner exit in the vesting period.
- A mix of vested and non-vested options; The non-vested options should be worth less than the vested options.

Which stock price? The current stock price? But we are valuing these options to arrive at a value per share. We need the option value to estimate value per share, and the value per share to estimate the option value!

Taxation -when the option is exercised firms can pay relatively less in tax.

Question 29

Universal Ownership?

Answer 29

Universal ownership is large owners with well diversified portfolios with a long investment horizon and will therefore be affected by external events. Example is pension funds.

In theory - the value of the firms is the PV of future cash flows. We don’t know how e.g., hazard environmental changes will affect future cash flows and therefore the value.

Universal owners want to mitigate these negative externalities as much as possible.

Question 30

Reasons behind M&A?

Answer 30

Could be horizontal, vertical or conglomerate.

Horizontal integration = Economies of scale - larger volumes and thus lower average costs and more efficiency.

Economies of scope.

Conglomerate reason could be e.g., managerial incentives and building an empire.

More examples could be expertise transfers, monopoly gain (SF for example).

Question 31

Event studies and abnormal return?

Answer 31

First you need to know what the normal return of a company is.

You can use different models to calculate abnormal return - for example the Constant expected mean return model - see pic.

Abnormal return is found by calculating AR = R - (Average) R.

Question 32

Constant Expected Return Model?

Answer 32

AR = R - (mean)-R.

The difference of the expected return on the event day and the expected normal return(average).

Question 33

Market Model(simplified)?

Answer 33

The difference between the return on the event day and the return of the market on the same day (following an appropriate index).

AR = R - (Market)R.

Question 34

Market model (not simplified)?

Answer 34

You use the estimation window to estimate the alpha and beta of the underlying firm against an index.

This model adjust the AR with the correlation to the market as well as the over-or under performance it should have from using the alpha.

Question 35

What can one do to prevent the Tax problem for ESOs?

Answer 35

i. Reduce tax rates on operating income to reflect employee option deductions (difficult!)

ii. Tax Effect: the exercise value of options: multiply the difference between the stock price today and the exercise price by the tax rate (only in-the-money options).

iii. Tax Effect: the fair value of options: After-tax Value of Options = Value from option pricing model (1-tax rate) (even for out of the money options!).

Question 36

Grant dating game? (Back dating)

Answer 36

Managers take advantages of the granting date to his factor and increase his compensation and therefor value of the ESOs.

Example: See pic.

Question 37

Accounting for Employees stock options?

Answer 37

IV and Fair value.

Question 38

(Aineas) Formula for raised shares with spread? IPO

Answer 38

(IPO price * “Issued shares”)*(1-underwriting spread) = Value from the IPO.

Question 39

(Aineas) Market value after IPO? Formula

Answer 39

Total shares * The market price of the share (value after the IPO, could be a success or failure) = Market value.

Question 40

Share price in perfect market and the cost for the original shareholders? Stepwise:

Answer 40

1.Market value - Capital raised.

2. Divide step 1 with the original shares before the new was issued - it’s stated in the question = The share price.
3. Cost for the original shareholders = (The share price * Original shares) - (The share price after the first day of the IPO * Original Shares)

Question 41

Expected risk premium?

Answer 41

Risk premium = rfr + Beta (return of equity - rfr)

Return of equity is calculated by using the P/E value.

(This one is easier to learn by looking at old exams!)

Question 42

Theoretical propositions of Myers (1977)

Answer 42

Firms with risky debt will, in some states, pass up valuable investment opportunities

By issuing risky debt, the market value of the firms should decrease because of the suboptimal strategy

(However, if there is a tax advantage, there is a trade-off between the PV of tax shields and the cost of a suboptimal strategy)

Question 43

Old pecking order theory

Answer 43

Firms prefer internal finance to external

Firms adapt target dividend ratios to investment opportunities

Sticky dividend policies -> internally generated cash flows first

In case of external finance needed, debt > hybrid > equity

No well defined target debt-equity mix

Question 44

Modified pecking order theory

Answer 44

Firms tend to AVOID finance real investments by issuing common stock or other risky securities
(because they don’t want to pass by positive NPV projects or issue undervalued stock)

Firms set target dividend ratios so that normal rates of equity investments can be met by internally generated funds

Firms tend to partly cover investments with debt, but they try to keep it safe (to avoid financial distress and to maintain financial slack in the form of reserve borrowing power)

Target dividend ratios are sticky and investments fluctuate, thus firms tend to exhaust their ability to issue safe debt (then turn to risky debt or convertibles, and last to common stock)

Question 45

How do you test for different forms of efficient markets?

Answer 45

Weak form tests - how well do past returns reflect future returns -> return predictability

Semi-strong form tests - how quickly do security prices reflect public information announcements? -> event studies

Strong form tests - do investors have private information that is not fully reflected in market prices

Question 46

How does equity holders differ from debt holders in terms of risky investments?

Answer 46

Because equity is like a call option, equity holders will benefit from risky investments with a hight payoff

As debt is is seen as a short put position, so debt holders will be hurt by an increased risk

This can potentially lead to an over-investment problem

Question 47

What are the three factors that has implications for optimizing captial structure according to Brennan & Schwartz (1978)?

Answer 47

Business risk - higher risk means the variance of earnings increases, which means optimal level of debt decreases

Payout policy - net investments is calculated based on stock issues minus dividends paid. Lower net investment was shown to be associated with lower optimal leverage

Time to maturity - short-term debt can be a good way to find a balance reducing the cost of bankruptcy, and at the same time keep the benefits of the tax shield

Question 48

What is the five-step procedure proposed by Bhararth & Shumway (2008) to implement Merton (1974)’s model?

Answer 48

1. Estimate volatility of equity from historical stock returns
2. Choose forecasting horizon and a measure of face value for debt
3. Collect values of the risk-free rate and market equity value
4. Solve equity equation numerically for total value and volatility of the firm
5. Calculate distance to default and implied volatility

Question 49

Why does firms set target debt ratios in terms of book value rather than market values?

Answer 49

Book values refer to assets in place.

Question 50

The main idea of Black & Scholes?

Answer 50

Options should be highly correlated with the underlying asset price

We should therefore be able to cancel out randomness by balancing the option and the portfolio -> earning a riskless return of K. I.e., You can create a risk-neutral portfolio by going short on the underlying asset and long on the option.

In the absence of arbitrage K = r

Question 51

Difference between financial and operating lease?

Answer 51

Operating lease
- Not fully amortized
- Lessee reports payments as OPEX
(- Lessor maintains and insures asset)
(- Cancellation option)

Capital (financial) lease
- Fully amortized
- Lessee reports lease on balance sheet
(- No maintenance or service)
(- Lessee has right to renew lease at expiration)
(- Cannot be cancelled)

Question 52

Valid arguments for leasing?

Answer 52

Tax differences
Reduce resale costs
Efficiency gains from specialization
Reduced distress costs
Increased debt capacity
Transferring risk
Mitigating debt overhang
Improved incentives

Question 53

New ventures are hard to finance because?

Answer 53

At first, not profitable investments

Characterised by high failure rates

Risky, uncertain, and capital intense investment decisions

Lack tangible assets (lack of collateral, and hard to value)

High levels of asymmetric information (moral hazard & adverse selection)

Question 54

Lemon model in the market for equity

Answer 54

Owner of a startup offers 70% of his stake because he wants to diversify

You suspect the owner might try to cash out before negative information becomes public
If this happens often, even at smaller stakes, the market for new ventures may collapse.

The venture capital system, and in turn the exit of a VC-backed company through an IPO, can be viewed as a solution to this problem.

Question 55

How to finance a new venture?

Answer 55

1. Entrepreneur’s own money is always cheapest - no conflict of interest and no asymmetric information problem
2. Do not seek financing to early - it is costly in terms of value and control, especially when the risk is high (using own resources shows commitment)
3. If external financing is needed, then start with government funds or subsidies and turn to equity last

Question 56

IPO puzzles (we lack the theory to explain them)

Answer 56

1. Underpricing - a substantial price jump on the first day of trading.
2. Cyclicality - when times are good, the market is flooded with new issues; when times are bad, the number of issues dries up
3. Cost of an IPO - all IPOs have typically the same spread (7%), one possible explanation is that by charging lower fees, an underwriter may risk signalling that it is not of high quality
4. Long run under-performance - newly listed firms appear to perform relatively poorly over the following three to five years after the IPO. However, VC backed tend to outperform non-VC backed, even though this should be incorporated in the price.

“IPO puzzles refer to the phenomenon where initial public offerings (IPOs) of certain companies experience abnormally high initial returns followed by subsequent underperformance. This pattern is often referred to as the “IPO puzzle” because it is difficult to explain using traditional finance theories.

One explanation for the IPO puzzle is that investors tend to be overly optimistic about the growth prospects of new companies and therefore bid up the price of the stock in the initial offering. Once the initial hype subsides and the company fails to meet the high expectations, the stock price may decline.

Another possible explanation is that the IPO market is characterized by information asymmetry, meaning that insiders have more information about the company’s prospects than outside investors. Insiders may take advantage of this information asymmetry to sell shares at an inflated price during the initial offering.

Regardless of the cause, the IPO puzzle suggests that investors should be cautious when investing in newly public companies and should carefully consider the risks associated with such investments. It is important to conduct thorough due diligence and to avoid being caught up in the hype surrounding a new IPO.”

Question 57

Winners curse?

Answer 57

You “win” when demand for the shares by others is low, and the IPO is more likely to perform poorly. And loose when the demand and likely performance is reversed

Question 58

What’s the difference between Venture capital and Private equity?

Answer 58

Venture capital is capital invested in intellectual assets (patents, copyrights, trademarks etc).

Private equity is capital & intellectual assets invested in assets in place

Question 59

What are the strategic rationales for an incumbent to invest in outside projects?

Answer 59

Forming of alliances
Exploiting synergies
Exploit open-source platforms
Threat of new entrants
Increase sales and markets

Question 60

Four ways to invest in CVC according to Chesbrough?

Answer 60

1. Driving (strategic, operations) - tight link firm’s business model & technology
2. Enabling (strategic) - boosting sales by creating new markets for existing technology
3. Emergent (financial, operations) - investments in new markets and business
4. Passive (financial) - only looking for financial returns

Question 61

RBV factors for CVC activity?

Answer 61

Industry technological change - rapid technology change is a high-risk environment; CVC activity allow firms to spread risks among multiple commitments

Industry competitive intensity - strong competition results in low margins, incumbents engage in CVC to increase margins

Industry appropriability - how can a firm extract value from R&D and other knowledge-based resources

Firm resources - technological (CVC allows for access to existing technology), marketing resources (strong brand and market position will favour CVC)

Question 62

Findings in Basu et al (Resource based view) - CVC

Answer 62

CVC is a mean to quickly adapt to technological changes

Incumbents engage in CVC when:
- Operating in a dynamic environment
- High competitive intensity
- Weak appropriability in the industry
- Strong firm level resources
- Diversity of earlier CVC experience
- Syndication of CVC projects is common (pooling resources to share risk)

Question 63

Seasoned equity offering?

Answer 63

• The sale of stock by a company that is already publicly traded
• It follows many steps as for the IPO
• Market prices already exists, so the price-setting process is not necessary

Question 64

Mechanics of a SEO?

Answer 64

1. Primary shares - new shares in the equity offering
2. Secondary shares - shares sold by existing shareholders
3. Fully underwritten or cash offer - firm offers the new shares to investors at large
4. Rights offer - firm offers the new shares only to existing shareholders (protects them from underpricing)
5. Private placement - firm directs the offer to a few new and/or existing institutional investors

Question 65

Corporate lifecycle theory?

Answer 65

Young firms with high market/book ratios and low operating cash flows will sell stock to fund investment

Mature firms with low market/book pay dividends and fund investment internally

Question 66

Reasons to acquire?

Answer 66

Economies of scale and scope
Vertical integration (governance, se screetshot)
Expertise
Monopoly gains
Tax saving (take advantage of operating losses)
Takeovers as a corporate governance mechanism (adding value by replacing bad management)
Empire Building

Question 67

The free-rider problem (M&A)?

Answer 67

Any profit a raider can make in the form of share price increases represents a profit the individual investor can make by not tendering her shares

Question 68

Mitigating the free-rider problem?

Answer 68

Dilution - du späder ut mindre aktieägare (helst så de har mindre än 10% så du tvångsinlöser dem).

Large Shareholders - Om du är större aktieägare så är sannolikheten större att det inte finns så många andra aktieägare.

Toeholds - Toehold du köper aktier över börsen till en gräns på typ 4,9% så du slipper registrera så när du lägger budet har du redan ett försprång.

Laws and by-laws - 90 % tvångsinlösen.

Question 69

What drive due diligence?

Answer 69

Screening - adverse selection, DD mitigates this, trade-off between cost and benefit

Screening & legal principles - only the buyer know what she wants, responsibility to screen rest on her

Matching - question whether the target and buyer are a good match (synergies)

Transfer of responsibility - legal and auditing firms used mainly because of liability insurance. Due diligence then becomes a vehicle of risk transfer rather than a tool for screening

Fishing expectations - DD information is sensitive, however, it is rare that competitors can use this information without seriously considering buying the firm

Unfair contracting - DD is meant to form a basis for negotiating transaction price. A tactical buyer could prefer to use some information until after the transaction and claim damages

Question 70

Commercial due diligence

Answer 70

Can the commercial goals of the transaction succeed?
Strategic and long-term processes
External factors (market, customers, competition)

Question 71

Financial due diligence

Answer 71

Financial analysis, valuation, auditing

Provide information to the buyer for price negotiation

Question 72

Legal Due diligence?

Answer 72

An investigation of the legal information and documentation

Question 73

Due diligence and investor performance conclusion (Cumming & Zambelli, 2017)

Answer 73

In a PE setting, DD is a source of value

Overall, an extra week of DD results in higher ROA statistically

Consistent with previous findings that DD is a source of Alpha

Especially when DD is performed internally in the PE firm -> implying agency costs when delegating DD

Question 74

What does event studies study?

Answer 74

Investors reaction to events, according to EMH, information from events should be incorporated into the price instantly

Question 75

Cross-sectional tests?

Answer 75

The most common tests in event studies

Tests how stock price effects are related to firm characteristics

Question 76

Explain how abnormal returns are determined in event studies

Answer 76

The key is to know the normal return, however, what is normal?
There are three models commonly used:
- Constant expected returns model
(abnormal return = return - average return before event)
- Market adjusted returns
(abnormal return = return - market return)
- Market model
(a variation of CAPM)

Question 77

Takeover defences?

Answer 77

Poison pills - give existing shareholders right to buy shares at a discount under certain conditions

Staggered boards - prevent raider to get board candidates

White knights - a “white knight” is a friendly third-party that comes to the rescue of a target company by offering a counter-bid to a hostile takeover bid made by an unfriendly acquirer.

Golden parachutes

Recapitalization

Question 78

Optimal contracting view?

Answer 78

Aligning shareholder and managerial interest

Question 79

Limitations to optimal contracting?

Answer 79

There is no certainty they (managers) will seek shareholder value maximisation (little equity interest)

Question 80

Different risk types (sustainability finance)?

Answer 80

Systematic risk - Risk that are perfectly correlated and affects all securities.

Independent risks (firm-specific risk) - Uncorrelated and affects single securities.

Question 81

§Estimation and event window?

Answer 81

3 day event window is common. Estimation window -240 to -40 is common since event effects can rise before and cause abnormal returns earlier, leaks and speculation.

Question 82

Merton Model (as a variant of black & scholes)?

Answer 82

Merton is using the same method as B&S to show how the equity of the firm can be valued with the total value of the firm and the exercise price of the debt (i.e. total debt).

The equity value increases if the value of the firm increases and is zero if the value of the firm is below exercise price (total debt). This is the same as B&S when evaluating the call option price with the strike price.

The five steps and variables:

Equity of the firm = Call price

The underlying value of the firm = Stock price (Same as in B&S).

The value of debt = Strike price

1. First you need to estimate the volatility of equity (use historical data)
2. Estimate the face value of outstanding debt and time to maturity.
3. Find the risk-free-rate and value of equity.
4. Solve the equation.
5. After you are done with the equation- calculate the DD and implied volatility.

Question 83

Alternative source of capital for IPOs?

Answer 83

–Academic funds, including government grants ($100 000 - $1M)

–Family, friends, bank loan/credit card ($100 000s)

–Angel investors ($100 000s -$1M)
–Venture capital ($5M - $20M)

–Corporate investors - invest on behalf of their shareholders:
*CVC (i.e., Volvo Ventures)

Question 84

Angel investors vs. Venture Capital?

Answer 84

–Angel investors provide capital at a much earlier stage:
*Generally provide few post-investment support services.
*For example, only 24% of the angels surveyed assist in the identification and recruitment of the top management team (Wong, 2002).
*However, angels serve an important networking role in helping firms to receive subsequent VC funding (Wong, 2002).

–VCs invest at a later stage providing supporting services:
*Hence, they are clearly active investors.
*VCs provide value-adding services (screening and selecting deals; financial contracting and structuring investments; add value to portfolio companies through monitoring, professionalization and certification).

Question 85

Going public - advantages and disadvantages?

Answer 85

–Advantages:
*Greater liquidity
*More diversification
*Better access to capital due to public markets

–Disadvantage:
*The equity holders become more widely dispersed and thus it
becomes more difficult to monitor management.
*The firms must satisfy all of the requirements of public companies, i.e., SEC filings, Sarbanes-Oxley, and so forth.
*More disclosure of information

Question 86

Venture capital and timing of funding?

Answer 86

–VC funding that would often come after the other alternative funding sources are exhausted.

–VC idea: to provide money and advise.

–VC funding is likely to be very costly for early-stage ventures in terms of giving up value and control.

Question 87

CVC - A strategic perspective including creative destruction?

CVC - A strategic perspective when we lack of efficient market for ideas?

Answer 87

See pic.

Question 88

Difference between IPO and SEO?

Answer 88

IPO (Initial Public Offering) when a private firm becomes public through an share transaction. Parties involved are underwriting syndicate, existing and new investors.

SEO is when an already public firm issues new share to raise equity. Follows many steps as in an IPO but the price is already known so setting the price is more accurate in an SEO.

Question 89

Solution to the lemon problem in the equity market?

Answer 89

Venture capital - because it mitigates the information asymmetry.

Well informed investors would stop to participate in IPO (bc they know its over-valued) and under informed investors would subsequently stop participating in IPOs because they are overvalued and the market would collaps - (Winners curse). - Hör inte riktigt till denna frågan men kan va bra.

Question 90

Which are the three forms of ordinary DD?

Answer 90

Lega, Commercial and financial.

Question 91

What are the three forms of DD (not only the ordinary)?

Answer 91

Ordinary DD (legal commercial financial)
Extended DD (Tax, organizational and technological)
Special DD (intellectual)

Question 92

What did cumming and zambelli look at?

Answer 92

DD & PE (a week extra of DD is worth a lot in terms of ROA for investors).

Question 93

What does the practice of grant dating game affect the value of ESO?

Answer 93

1. It increases the value of the ESO because you backdate the granting date to earn more.

Question 94

Brownian Motion?

Answer 94

The main idea is to determine a fair price of the option based upon several variables such as volatility, risk free interest rate, underlying asset etc. Brownian Motion is randomness and the B&S model follows the assumption of Brownian Motion “random walk” that is unpredictable but follows a consistent pattern over time.

Question 95

From the articles about corporate governance and take-overs (read only)

Answer 95

Starting with Manne (1965), takeovers are argued to serve a corporate governance mechanism. Briefly explain what is meant with that and how it functions as such a mechanism?
Acquire a mis-managed company with poor management and suboptimal strategy., replacing management and implementing discretionary measures, the acquirer increases the value of the firm and can sell for a profit.

Grossman and Hart (1980) argue that there might be an obstacle to takeovers functioning as a corporate governance mechanism. What is the problem, and what potential solutions to that problem have been suggested in the literature?
Grossman and Hart (1980) argue that smaller stakeholders can exploit the free-rider dilemma where they don’t tender their shares and instead are exposed to the subsequent profits. In order to mitigate the free-rider problem measures such as (1) dilution, (2) large shareholders, (3) toeholds and (4) laws and by-laws help.

Jensen (1988) writes that takeovers also can be a symptom of corporate governance problems, rather than solution. Briefly explain how takeovers can manifest in such problems.
According to Jensen (1988), managers can acquire companies in order to get access to larger resources which (i.e. achieve revenue and EBIT/EPS targets) and consequently trigger higher compensation which elevates the principal agency conflict and demonstrate poor corporate governance.

Question 96

From the Guest lecture?

Answer 96

SPA= Sales Purchase Agreement, binding contract which obligations a transaction to occur between the two parties.

ATA= Agreement to Agree. Does not include all necessary details for a binding contract. It is used as a placeholder for future negotiations when they need more time to work out the details. Furthermore, it builds trust between the parties and lays a solid foundation for business, going forward.