Chapter 3 – Financings
Q1. What type of securities offerings do not need to be registered with the SEC?
A. 144A private placements to QIBs
Q2. List the three types of bank participants in an underwriting syndicate and their core
responsibilities, in order of compensation received, from high to low.
A. Lead bookrunners; co-managers; selling group
Q3. W hat are league tables and why are league tables important in investment banking?
A. Record of underwriting volume and M&A advisory volume. They keep score on
Q4. Describe the function of the equity capital markets group, including the two major
divisions they directly work with and the two types of clients they indirectly work
with.
A. They are an intermediary between the trading division and the investment
banking division, providing information regarding the equity market, including
Q5. Describe the unique process utilized by Google in its IPO, intended advantages and
potential disadvantages.
A. Google utilized a Dutch auction where the highest bid that allows a company to
sell all the shares it wants to sell is the price at which all shares are sold. A
i. Advantages: obtain higher offering price; enable greater “retail” investor
ii. Disadvantages: winners curse – pushing price too high, reducing demand
and dropping share price; poor participation by large institutional
iii. In addition, with li7le input on pricing from institutional investors,
Q6. What is a shelf registration statement and what securities can be included in it?
A. An S-3 registration with the SEC that enables issuers to sell either debt, common
shares, preferred shares or warrants anytime during a 2-year period, without any
Q7. Why might a younger high-tech company select equity over debt when raising
capital?
A. These companies tend to have a smaller asset base, less stable cash Eows, and
Q8. A BBB-/Baa3 rated company is looking at acquiring a smaller (but sizeable)
competitor. Discuss considerations the company should take into account when
deciding whether to fund the acquisition with new debt, equity, or convertible
securities.
A. The company needs to look at what debt will do to leverage ratios and whether
that would lead to a potential ratings downgrade. On the equities side, the
company needs to determine how much potential dilution there is to current
Q9. Suppose a company issues a $180 million convertible bond when its stock is trading
at $30. Assuming it is convertible into 5 million shares, what is the conversion
premium of the convertible?
A. $180 million / 5 million shares = $36. $36 / $30 = 1.2 20% conversion
Q10. How many shares will be issued by a convertible issuer if conversion occurs for a
$200 million convertible with a conversion premium of 20%, which is issued when
the issuer’s stock price is $25? (show your calculation).
Q11. Why did the SEC delay declaring Google’s IPO registration effective?
A. An interview with the CEO was published during the quiet period preceding
Q12. Provide seven reasons that an investment bank might give to support their advice
that a private company should “go public”.
A. The seven reasons include:
i. Access to a vast, continuing source of capital
ii. Liquidity and non-cash compensation for employees (give employees
iii. Wealth creation – principals can sell their shares in a secondary offering
Q13. List six characteristics of companies that are good targets for an equity issuance.
A. The characteristics include:
i. In favor sector, strong stock performance or supportive equity research
ii. Large insider holdings or small Eoat/illiquid trading
Q14. How does a negotiated (best efforts) transaction differ from a “bought deal”?
A. In a negotiated transaction, the lead underwriter will “explore” the appropriate
price for a securities offering based on input from prospective investors, resulting
Q15. What are some methods used by investment banks to help equity issuers mitigate
price risk during the marketing process?
A. Accelerated offering, block trade, over the wall offering, green shoe option
Q16. Explain what a “green shoe” is.
A. Green shoe is the industry term for a 15% overallotment option: the name came
from a company with this name that was the <rst user of this option.
Q17. When a company has agreed to a green shoe, who does the underwriter buy shares
from if the share price drops? Who do they buy shares from if the share price
increases?
A. If, a6er issuance, the share price drops, the underwriter can stabilize the price by
buying stock from investors to cover the short. If the share price increases, the
Q18. Calculate the investment bank’s fees and pro<t for a 5 million share equity offering at
$40/share, with a 15% green shoe option (fully exercised) assuming a 2% gross
spread, assuming the issuer’s share price decreases to $38/share a6er the offering.
A. Total fees and short pro<t of $3.5 million:
–Investment bank (IB) sells 5 million shares @ $40/share = $200 million in
proceeds.
–IB shorts 750,000 shares at $40/share = $30 million in proceeds.
Q19. What is the tradeoff for having a stabilizing green shoe option in a common equity
offering?
A. Additional dilution from the extra shares