Finance and Accounting - Khan Unlimited - Assignment Example

Finance and Accounting al Affiliation Khan Unlimited is an old but little company that is planning to issue acommon stock worth 15 million dollars. The investment bankers advised the company to either provide a right offering with a percentage of 1.4 per cent as out of pocket cost or underwrite with a cost of 7 per cent. Khan Unlimited chose the option of underwriting. The paper discusses the reasons why the option is considered to be the most feasible option. Khan Unlimited signed an agreement with a condition of 7 per cent of the capital as a new out of pocket cost to subscribe to the common stock of the body. Underwriting of the common stock will provide a clear insurance issued by the underwriter to Khan Unlimited that the common stock offered to the public and shareholders will be subscribed in a full amount. Underwriting is also a perfect option since it ensures that Khan Unlimited in case the common stock offered by the company are not subscribed by public to the degree, the share balance will be taken by the company. Additionally, the alternative is perfect since, the underwriter will have a lower net worth and the total obligation of the writer will not exceed 20 times the net worth of the underwriter. Consequently, the company chose the option since the alternative will undertake in guaranteeing the whole or section of the issued common stock as the public will not take the common stock. Therefore, the company will be relieved from the pressure of security marketing and market uncertainty. The underwriting option will help Khan Unlimited to fulfill the statutory guidelines of reduced subscription. The underwriting alternative guarantees the capital adequacy and helps the organization to raise capital. Subsequently, most investors believe in issuing securities when guaranteed by established underwriters. The underwriting will assure that there is quick sale of common stocks in the market. The underwriter will stimulate the industrial development and subsequently create opportunities in the nation. This option relieves the organization the uncertainty and risk of marketing the common stock. The underwriters have a specialized knowledge in the market. The underwriters offer valuable advice to Khan Unlimited when preparing the prospectus, floatation time, and security prices. The experts also offer publicity services to the organization which they are in agreement with. This option also assists in financing the new enterprise and expanding the existing projects. Khan Unlimited used this alternative in building the confidence of investors when issuing the common stock. The underwriters association lends the brand prestige to the organization. Additionally, the common stock underwritten by the reputed underwriters get better response from the shareholders. The Khan Unlimited will be assured of funds when they embrace such an option since the crucial projects will not be delayed by the funds. The company chose the second alternative because the choice facilitated the geographical dispersal of common stock since the underwriter maintains the contact with prospective investors in the entire country. 2. An organization anticipates in rising =50 million dollars in bonds. The selling concession will be =7 dollars per bond, Administrative expense 200,000 dollars. Manager’s fee =10% of total spread Commission net of expensed and manager’s fee=20% of total spread Total cost as net proceeds percentage Total cost 4. Jet Blue is an airline that carries passengers operating on terminal to terminal route with their fleet of A320 aircraft, 49 EMBRAER, 190 aircraft, and 120 Airbus. The airline was launched in July 1999 with intent of bringing the humanity back to air industry. The airline industry had recorded failure over the last two decades, the founder was certain that his innovation commitment in technologies, people, and policies could place his planes moving and full. The vision of the airline is commonly shared by a team of new management and a rising group of investors. The airlines vice president became the president of the airline and John Owen left his vice presidency to fill the position of a CFO. The company received funds from his proposal from the venture of capital community, seven months after it was established the company secured a 320 Aircraft. The strong capital base, made the airline acquire a fleet of aircrafts. The secret behind their success includes fuel efficiency, reliable, and economies of scale. The airline has made progress in developing a strong foundation by seeking to be recognized as low-fare airline, reliable, and safe. The airline is well positioned in the country with approximately 21M customers in the airline serve strategic area. Most of the airlines; client service relies on developing a strong morale of the employee through communication and generous compensation to the employees. The airline has a destination or origin in New York, Los Angeles, Boston, Puerto Rico, San Juan, Orlando, and Fort Lauderdale. The company operates at seven hundred daily flights. In 2011, the company had an eight takeoff and landing sections for each New York’s port. The operation of the company primarily entails transporting passengers on their aircraft with local operations of United States that includes the Puerto Rico that accounted three quarter of the company’s capacity. IPO can be defined as the selling a stock by an organization to the public. IPO are normally issued by companies seeking fund and capital to expand. It can also be conducted by multinational companies that need to be publicly traded. The right time for offering IPO is when the investors seem bullish on the airline just like in other airlines like Ms. Unger. IPO for the airline is always inappropriate after a tragic occurrence, for instance the Sept 11 tragedy delayed the IPO which was planned to fall. Consequently, the tragedy normally causes turbulence for the IPO of the airline; due to rise in the fuel prices which accumulate the cost thus affecting the revenues negatively. The right time for offering the IPO is when the investor’s level of interest is higher than the supply. For instance the Thursday before the Sept 11th incident, the share prices were 27 dollars above the intended price of 25 dollars and 26 dollars up from the 22 dollar to 24 dollar range. This led to an increase number of shares from 5.5 to 5.87 Million. These are normally the appealing periods for the airline to become IPO. Before the company embarked on the best pricing policy for the shares there was a heated debate among the management. The decision was over described by the investors. The offering was received with high enthusiasm. The rise in demand made management members to be worried on the current range in prices that left a lot of money on the table. The felt that when the price is raised a stronger confidence signal will be sent to the market. Conversely, when the price is increases the success of the deal might easily be compromised. From the view of managers, when the offering is a success the capital requirements will be raised, at the same time maintain accessing the capital market that was important in the growth plan. Therefore, the IPO price undergoing a discount seemed a reasonable concession in making sure that the deal is successful and a given level of the investor buzz is maintained. In 2002, the economy of US was already two years in recession. The Federal Reserve attempted stimulating the economic activity by lowering the interest rates to the minimum level in a generation. The present US long-term treasuries traded a 5% as the short term rates were at 2%, while the market risk premium was 5%. 5. Assuming to be holding a big position with an investment firm. When engaging in an investment acquisition candidate, a profit of million dollars will be realized within a short period of time. The acquisition has a likelihood of going through with a probability of. When the plan is revealed an option of termination is certain with a return of the earned profit. Assuming the probability to be discovered is. Job termination will cost dollars per year. Assuming the time before retirement is, opportunity cost is. In case the deal goes through; Assuming the deal is discovered the amount earned will be The Value of the firm assuming he is staying with the job In case the deal is discovered From the above present value computation is advised to stay with the job. Reference Draho, Jason. The IPO decision: why and how companies go public. Cheltenham, UK: Edward Elgar Pub., 2004. Print. Read More