RWJ15

MKTG (with Marketing CourseMate with eBook Printed Access Card)

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CHAPTER 15 RASING CAPITAL Answers to Concepts Review and Critical Thinking Questions1. A company’s internally generated cash flow provides a source of equity financing. For a profitablecompany, outside equity may never be needed. Debt issues are larger because large companies have thegreatest access to public debt markets (small companies tend to borrow more from private lenders).Equity issuers are frequently small companies going public; such issues are often quite small. 2. From the previous question, economies of scale are part of the answer. Beyond this, debt issues aresimply easier and less risky to sell from an investment bank’s perspective. The two main reasons arethat very large amounts of debt securities can be sold to a relatively small number of buyers,particularly large institutional buyers, such as pension funds and insurance companies, and debtsecurities are much easier to price. 3. They are riskier and harder to market from an investment bank’s perspective.
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Unformatted text preview: 4. Yields on comparable bonds can usually be readily observed, so pricing a bond issue accurately ismuch less difficult. 5. It is clear that the stock was sold too cheaply, so Eyetech had reason to be unhappy. 6. No, but, in fairness, pricing the stock in such a situation is extremely difficult. 7. Its an important factor. Only 6.5 million of the shares were underpriced. The other 32 million were, ineffect, priced completely correctly. 8. He could have done worse since his access to the oversubscribed and, presumably, underpriced issueswas restricted, while the bulk of his funds were allocated in stocks from the undersubscribed and, quitepossibly, overpriced issues. 9. a . The price will probably go up because IPOs are generally underpriced. This is especially true forsmaller issues, such as this one. b. It is probably safe to assume that they are having trouble moving the issue, and it is likely that theissue is not substantially underpriced...
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