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oUnder-writing fees (spread)oLegal feesoRegistration fees-Long Run UnderperformanceMechanics of Seasoned Equity Offering (SEO)-Seasoned Equity Offering (SEO):when public co offer new share for saleoPrimary share:new share issue by co in equity offeringoSecondary share: share sold by existing SH in equity offeringoTombstone:newspaper advertisement in which an underwriter advertise a security issuance-Two type of seasoned equity offering:oCash Offer: type of SEO in which firm offer the new shares to investor at largeoRights Offer: a type SEO in which a firm offers the new shares only to existing SH-Slide 15Additional E.G – Rights IssueProblem: 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$1.41Basic 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 tolease 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 treatmentsLease Payment and Residual Value-Residual Value: an asset’s market value atend of lease. The cost of lease will dependon 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:
-in perfect market, the cost of leasing is equivalent to the cost of purchasing and reselling the assetPV(Lease payments) = purchase price – PV(Residual Value)-slide 19Leases 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 asfollows:-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 assetduring 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-