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IPO price, derivatives, liquidation value

Answer the attached questions with short answers.

1. Should all companies use leverage to boost their valuation? Why or why not?

2. What message does a company send to the financial markets when it changes its capital structure?

3. When should companies consider advertising and a change of company name and logo in an attempt to boost corporate valuation?

4. Traditionally, IPOs are priced at levels below what it is believed the market can bear. Do you think this makes sense, or are companies losing out on potential gains?

5. How might the choice of financing strategy affect the performance of a company?

6. Under what circumstances should companies use derivatives to hedge financial risk?

7. When should you use liquidation values as opposed to going-concern terminal values for a company?

8. How might the strength or weakness of a foreign economy affect the valuation of business operations of a U.S. firm in that foreign country?

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1. Should all companies use leverage to boost their valuation? Why or why not?
All companies should not use financial leverage. The reason is that if it increases shareholder's return on investment it should be used. In addition, if it gets the company substantial savings by way of taxes it should be preferred. Remember interest is tax deductible, whereas dividends are not. On the other hand if the company faces a risk of not being able to pay back its debts it should not go in for leverage. Also there is a danger that the company may be liquidated because of bankruptcy if a company is highly leveraged.

2. What message does a company send to the financial markets when it changes its capital structure?
The message a company sends to the financial markets when it changes its capital structure is that there is a change in the company's strategy. This is the general message. However, in particular there are several different messages. For instance, if a company begins favoring debt, the message may be that the company may have difficulty in raising share capital. In general the change is that a company which had most of its capital equity begins borrowing heavily from banks. It sends the message that there will be a long term negative impact on the cash flow of the company. Further, the flexibility of the company is compromised because it limits the flexibility of the company from making value-creating investments like capital expenditure, acquisitions and R&D.

3. When should companies consider advertising and a change of company name and logo in an attempt to boost corporate ...

Solution Summary

IPO price, derivatives, liquidation value are discussed in great detail in this solution.

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