o Under writing fees spread o Legal fees o Registration fees Long Run

O under writing fees spread o legal fees o

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o Under-writing fees (spread) o Legal fees o Registration fees - Long Run Underperformance Mechanics of Seasoned Equity Offering (SEO) - Seasoned Equity Offering (SEO): when public co offer new share for sale o Primary share: new share issue by co in equity offering o Secondary share : share sold by existing SH in equity offering o Tombstone: newspaper advertisement in which an underwriter advertise a security issuance - Two type of seasoned equity offering: o Cash Offer : type of SEO in which firm offer the new shares to investor at large o Rights Offer : a type SEO in which a firm offers the new shares only to existing SH - Slide 15 Additional E.G – Rights Issue Problem: Ivanhoe Mine C$1.2b of new equity. Market price C$24.73. Ivanhoe Mines decided to raise additional funds by offering the right to buy 3 new share for 20 at C$13.93 per share. With 100% subscription, what is value of each right? Solution: - Current market value: 20 x C$24.73 = C$494.60 - Total shares = 20 + 3= 23 - Amount of new funds = 3 x C$13.93 = C$41.79 - New share price = (41.79 + 494.60) / 23 = C$23.32 - Value of a right = 24.73 – C$23.32 = C$1.41 Basic of Leasing - Lessee : the party in lease liable for periodic payment in exchange for the right to use the asset - Lessor : party in a lease who is entitled to lease payment in exchange for lending asset - Sales-Type Lease : a type of lease in which the lessor is manufactuer (or primary dealer) of asset - Leveraged Lease : a lease in which lessor borrows from a bank or other lender to obtain the initial capital to purchase an asset, using the lease payment to pay interest and principal on loan - Special Purpose Entity (SPE): separate business partnership created by a lessee for the sole purpose of obtaining a lease - Synthetic Lease : a lease commonly uses a SPE and is designed to obtain specific accounting and tax treatments Lease Payment and Residual Value - Residual Value: an asset’s market value at end of lease. The cost of lease will depend on the asset’s residual value - E.g: Assume your business needs a new $20,000 forklift and you are considering leasing the forklift for four years. Estimated residual value of forklift in four year is $6,000. - if lease payment of amount L are made monthly, then lessor’s CF from transaction are as follows:
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- in perfect market, the cost of leasing is equivalent to the cost of purchasing and reselling the asset PV(Lease payments) = purchase price – PV(Residual Value) - slide 19 Leases vs Loan - as an alt, could obtain four year loan for purchase price and buy forklift outright - if M is monthly payment for a fully amortising loan, the lender’s CF will be as follows: - if loan is fairly priced, the loan payment would be such that: PV(Loan Payments) = Purchase Price - with standard loan, the entire cost of asset is financed - with lease, only cost of econ depn of asset during term of lease is financed. This causes loan payment to higher than lease payment - slide 21 PV(Lease Payment) + PV(residual value) = PV(Loan Payments) End-Of-Term Lease Options - Fair Market Value (FMV) Lease: a type of lease that gives the lessee the option to purchase asset at its fair market value at termination of lease -
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