Stock Flipping Investments
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1.What is stock flipping? Do investment banks encourage this kind of practice among their clients? Explain.
2.What are American Depositary Receipts (ADR's) and why have they proven so popular with U.S. investors?
3.What is a debenture? Why do you think that this is the most common form of corporate bond in the United States? Is it is much less commonly used elsewhere?
4.What are the key advantages of leasing as compared to borrowing to acquire an asset? What are the key disadvantages of leasing?
1.Rights offerings are seldom used in the U.S. to raise equity capital, but they are often used in Europe. How might you explain that fact?
2.If you were an investment banker, how would you determine the offering price of an IPO?
3.Why are most bonds callable? Who benefits from this feature, and what is the cost of adopting a call provision in a public bond issue?
4.What elements must be included in a lease in order for it to be considered a financial (capital) lease?
How do you explain the highly politicized nature of share issue privatization (SIP) pricing and share allocation policies? Are governments maximizing offering proceeds, or are they pursuing primary political and economic objectives?
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Solution Summary
The stock flipping investments are examined. The key advantages of leasing compared to borrowing to acquire an asset is determined.
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1. Stock flipping is the practice where investors purchase stock at lower prices and selling them immediately the price rises, usually to gain a profit. The purchase of these stock is often influence not with where a company is going in the future but the position of the company currently and the -potential of the stock rising in price. Stock flipping is therefore a strategy that works with the assumption that stock markets are liquid in the short term. Investment banks do not encourage this kind of practice among their clients as most companies seek for long term investors and not daily traders. When flipping is done by a large number of investor over and over it may lead to speculations in the market (Boehmer, 2002).
2. American Depository Receipts (ADRs) are the securities owned by foreign companies but issues by US banks and traded in US stock markets. These ADRs often come to be when stocks of a foreign company are bought in the foreign country and then transferred to custodian bank in the US which issues certificates that represent the shares. In essence therefore the shares represented by the ADRs are held in the foreign country but can be traded in the US. The ADRs have proven very popular with the U.S. investors as it allows the investors to diversify their portfolio beyond borders on a much global scale. ADRs are the most cost effective and convenient way for the US investor to purchase stock of an overseas company (Clark, 2012; Investor, 2012).
3. Debentures are loan certificates or bonds with no collateral issued by companies and backed by the creditworthiness of the company rather than by its physical assets. They are therefore acknowledgement of debt and promise to pay. They are usually long term loans taken by companies to secure capital and repayed at a fixed rate of interest. Debentures are the most common form of corporate bond in the United States not only because they have no collateral and requiring no securing with physical assets, but also because bond buyers generally believe that the issuers of the bonds would default on payment (Investopedia, 2012; Lough, 2009). For instance debentures issued by the government such as treasury bills and treasury bonds are often viewed as risk-less since it is not likely that a government would default on paying these debts. No, Debentures are commonly used in a lot of ...
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