w6 : equity & debt financing

Question 1

what are the four IPO puzzles?

Answer 1

• underpricing
• cyclicality
• cost of issuing IPO
• long run underperformance

Question 2

what is an SEO?

Answer 2

seasoned equity offering

Question 3

what is the mechanics of an SEO?

Answer 3

same steps as an IPO, but no need for price-setting since companys stock is already listed

Question 4

what are the two kinds of SEO offering?

Answer 4

• cash offer (new shares to investors at large)
• rights offer (new shares to existing investors)

Question 5

what are the different kinds of debt?

Answer 5

short term vs long term
fixed rate vs floating rate
coupon vs zero coupon
callable vs puttable
straight vs convertible
domestic vs international
public issues vs private placements
unsecured vs secured

Question 6

state the two types of issue of public debt.

Answer 6

• bearer bonds
• registered bonds (every owner registered, all transactions electronic)

Question 7

state four types of public corporate debt.

Answer 7

• notes (unsecured short term debt)
• debentures (unsecured long term debt)
• mortgage bonds (secured by real property)
• asset-backed bonds (secured by any kind of asset)

Question 8

what is senior and junior debt?

Answer 8

senior - priority in claiming assets when in default
junior - in event of default the holders receive what is left after senior debt is paid off

Question 9

state and explain the four types of public debt bond markets.

Answer 9

• domestic bonds (issued & traded locally, open to foreign investors)
• foreign bonds (issued by foreign firms in local market, bought local investors)
• eurobonds (intl bonds, not in local currency)
• global bonds (combo of domestic, foreign & eurobonds)

Question 10

what are junk bonds?

Answer 10

bonds with high probability of default, therefore high yields.
often used by small risky companies to avoid hostile takeovers.

Question 11

state and explain the two types of private corporate debt.

Answer 11

• term loans (loan that lasts a specific term and is funded by either one bank or a group of banks)
• private placements (bond issue sold directly to small group of investors. less costly to issue since it is not registered)

Question 11

what are restrictive covenants?

Answer 11

rules that prevent company from increasing chances of default. rules apply to new issues of debt and dividends

Question 12

what is a callable bond?

Answer 12

call option that allows firm to pay back debt early

Question 13

what is a puttable bond?

Answer 13

put option that allows bondholder to demand early repayment