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Initial Public Offering Scenario

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Pick a company that had an initial public offering in the past 5-10 years. Identify the IPO terms and answer the following questions:

1) Did this company need to go public to in order to meet its financial needs?

2) As an investor, would you have been willing to purchase the company's stock at the offering price? Why or why not?

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Solution Preview

Please see the attached PowerPoint file.

Overview of IPO:

IPO is an Initial Public offer to an investor, which mean it is the first issue of equities by the company to the general public at large. Among the most popular reasons a company might choose to go public are to: raise capital to expand its business, finance acquisitions, pay debt and have greater and easier access to capital in the future. Thus financing issue is how much to raise the funds from the equity offer. What should be the optimal capital structure in order to minimize the cost of capital.

Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the SEC.

Registration:

Company can become "public" in one of two ways - by issuing securities in an offering registered under the Securities Act or by registering the company's outstanding securities under Exchange Act requirements. Both types of registration trigger ongoing reporting obligations for your company
If you decide on a registered public offering, the Securities Act requires your company to file a registration statement with the SEC before the company can offer its securities for sale. It has got two parts:

- Additional information
- Reporting and Fiduciary Responsibilities

Public companies must continuously file reports with the SEC and the exchange they list on. They must comply with certain state securities laws, NASD and exchange guidelines. If your company registers a class of securities under the Exchange Act, it must file the same annual, periodic, and current reports that are required as a result of Securities Act registration

Record Keeping:

Companies need to require audited financial statements for the last three years before they can go public. These need to be provided separately for each significant (>20%) unconsolidated subsidiary.

Case of Google:

Google is one of the most successful new dot com companies presently. Their success is based on innovation, rapid growth, and an obsession to be the best search engine in the Wide World Web. Listed hereunder are excerpts from their main page website (http://www.google.com/corporate/index.html) which describes its vision, mission, and values.

Organization Background:

Google is one of the biggest Internet Company. According to Saul Hansell, of the New York Times; Google is "… one of the biggest advertising vehicles the world has ever seen. Google is a public and profitable company focused on search services. Named for the mathematical term "googol," Google operates web sites at many international domains, with the most trafficked being www.google.com. Google is widely recognized as the "world's best search engine" because it is fast, accurate and easy to use. The company ...

Solution Summary

This tutorial is 1,852 words plus two references. Slides are also shown in PowerPoint (a ppt. file is attached) in order to answer the question related to IPO and the company's financial needs and stocks.

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[3](10) There is a saying about initial public offerings (IPOs) of stock: "If you want it, you can't get it; if you can get it, you don't want it." This is because it is often difficult for the general public to obtain shares initially when a "hot" new company first goes on sale. Instead, most of us have to wait until it starts trading on the open market, often at a substantially higher price. Suppose that, given that you can obtain shares at the initial offering, the probability of the stock performing well is 0.35. However, given that you are unable to initially purchase shares, the probability of the stock performing well is 0.80. Overall, assume that you can obtain shares in about 15% of IPOs.
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b) Find the probability that the stock turned out not to perform well if you were unable to obtain such shares.

c) How much access to successful IPOs do you have? That is, what is the probability that you can purchase successful IPOs?

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