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ch17boc-model

# ch17boc-model - Worksheet for Chapter 17 BOC Questions IPOs...

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1 of 10 Worksheet for Chapter 17 BOC Questions. IPOs, Investment Banking, and Financial Restructurin 3/18/03 Introduction This file contains four models: I. Pricing a new issue, II. Analyzing a rights offering, III. Analyzing a zero coupon bond, and IV. Analyzing a bond refunding decision. The various models can be accessed by pressing the TAB keys at the bottom of the screen.

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Chapter 17, BOC Model, Part I 3/18/03 I. Pricing a New Stock Issue Funds raised: \$10,000,000 Total earnings: \$10,000,000 P/E 20 Book value: \$70,000,000 M/B 3 Desired price: \$15 Shares outstanding 1,000 Flotation cost: 7% 1. Based on the P/E multiple, the company's value is: Value = \$200,000,000 2. Based on the M/V multiple, the company's value is: Value = \$210,000,000 Average = \$205,000,000 There would also be a DCF valuation, but we will work with the \$205 million. 3. Next, the company will have to have a stock split to get the price down to the desired range; use \$15/share. Shares = Value / Price/share = 13,666,667 Split ratio = new shares / old sh = 13,666.67 new for 1 old. If D'Mello had this number shares outstanding, here's the resulting EPS and book value per share: Resulting EPS \$0.7317 check: \$14.63 Resulting book value per share \$5.12 check: \$15.37 \$15.00 4. The company will have to raise \$10,000,000 / 0.93 = \$10,752,688 5. Now the company mustl sell these new shares at \$15 to raise the required funds: Funds needed / Price/sh = 716,846 As noted above, the company and its investment bankers would undoubtedly also do a DCF analysis, and they would privide lots of information in the prespectus. Still, the above analysis shows the essential outline of the procedures that would be followed. Of course, if the company and the bankers could convince investors that the new funds could be invested to earn more than the rate of return currently being earned, then the stock might be sold at more than \$15 per share, but if investors were worried about the offering--think asymmetric information--then the price might be lower. If rather than an IPO, the company was already publicly traded, the market price would be the basis for the offering The offering price would probably be lower than the current market price, but it might be higher if investors though great things would be done with the proceeds. A company wants to have an IPO and raise \$10 million to finance a new plant. Currently it has 1,000 shares of stock outstanding, its last reported earning figure was \$5 million, and its book value is \$70 million. Comparable companies sell at a P/E of about 20 and have a Market/Book ratio of about 3 times. The investment bankers want to price the shares at about \$15 per share. How should the company proceed?

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ch17boc-model - Worksheet for Chapter 17 BOC Questions IPOs...

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