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Success of IPOs, Explanation of Short Positions in Stock Markets

1. In a detailed response please explain why do firms go public?

2. What are the possible reasons for, or sources of, long run IPO underperformances?

3. You are bearish on Telecom and decide to sell short 100 shares at the current market price of $50 per share.
a. How much in cash or securities must you put into your brokerage account if the broker's initial margin requirement is 50% of the value of the short position?
b. How high can the price of stock go before you get a margin call if the maintenance margin is 30% of the value of the short position?

Please make sure answers are supported by two quality references each and all calculations.

Solution Preview

1. Going public means listing the company on stock exchange and offering stocks to public. While conventionally it is a stage of growth of a company, it has been seen that it is more of a choice rather than a rule. Other justification says that when a company sees the potential in some innovative and profitable business initiative but lacks the resources to realize it, going public is one of the most sought options by companies. This provides additional resources to finance their activities and projects.

The underlying motivation for going public can be gauged by considering that IPOs differ along many dimensions. One of the useful purposes is to identify the type of shares being offered to the public for sale. Some IPOs involve primary offerings of new shares while others consist of secondary sale of shares already held by insiders. ...

Solution Summary

The solution discusses the success of IPOs, and explanation of short positions in stock markets.