Emerging Growth Company Analysis - Case Study Example

Finance and Accounting Question One i) Intrinsic value –Benjamin Graham model V= EPS X (8.5 + 2g) X 4.4 Y EPS=net income shares = $51.9m $22.2m =$2.34/share Y= 1 + market yield 1 + inflation = 1 + 0.03 _ 1 1-0.1 =0.144 g=11% V=2.34 x (8.5 + 0.22) x 4.4 0.144 V=733 Therefore the stock was undervalued. ii) By terming themselves as an “emerging growth company” implies that the company expects to grow at about 5% to 10% per annum for the next 5 to 10 years to come. This therefore means that the growth of the company and therefore its earnings is gradual. In essence therefore, most people will invest in the company with a goal of getting higher earnings in the long-run. iii) Half for the primary and the other half for the secondary one iv) The company offered the shares towards the end of the year 2014. In light of this, the company expected that before the shares started trading in the stock market, the new year would have arrived. Most companies and opinions believe that the new year brings forth the increased earning potential of shares. In addition to this, most companies pay out bonuses and dividends as the year comes to a close. This therefore means that investors might have funds to participate in the initial public offering. v) The decision to involve the selected underwriters might have been well informed and carefully selected. The selected underwriters might have sent a positive message to the investors and therefore increasing their confidence and hope in the company’s prospective earnings. vi) In my informed opinion, the cost charged was fair bearing in mind the positive past track record of the underwriting companies chosen. This therefore could have influenced positively the decisions of the investors to participate on the public offering. Investor confidence on the parties involved is all it takes for a success in the initial public offering. I therefore believe that the compensation was fair and appropriate. vii) The overallotment offer to the underwriters acts like an incentive for them since they can use the overallotment funds to make some quick profits in the financial market as the allotment funds await to be returned back to investors. viii) The choice of the company’s listing venue was appropriate. NASDAQ is one of the leading stock markets in the world. Therefore, any company that lists there is regarded and perceived as a potential goldmine for the investors. This therefore influenced positively the decision of the investors to participate in the initial public offer. In addition, the venue has different categories where issuing companies can list according to their interests and prospects. ix) When companies issue shares to the public, the public is normally hopeful about the growth potential of the stock. This positive mindset and feedback might have resulted in an increase in the share price on the first day of trading. However, after the second day, the price of the stock decreased. This could have been as a result of certain market factors that came into play such as inflation. In addition to this, the public now might have researched more about the growth potential of the company due to the available and incoming information about the company. In this case, the feedback could have been negative thereby affecting the stock price in a negative manner. x) I would not recommend the flipping out of the IPO immediately. This is so because the factors that influence the stock price are very unpredictable due to the prevailing economic conditions and the available public information about the company. I would recommend an 80% issue and the remaining issued in bundles to capture the attention of investors with long-term investment mindsets. In addition to this, the company will be able to gather information available to the investors and use it to their advantage. xi) It is a proven fact that shares that underperform in the long-run perform better in the short-run. Having this in mind, I would recommend to the fund manager to consider investing in the initial public offering of the company in order to take advantage of the short-term gains that will arise before other economic factors fully set in to influence negatively the price. Currently, the medical industry has been experiencing tremendous growth and given much support by the government. However, this earning potential is not bound to last for a long time due to the saturation of the industry. As a matter of fact, the fund manager should consider making investment immediately in order to take advantage of the short-term gains for the benefit of his company. xii) Being one of the first companies in the health sector to consider using the strategy used by technology company places the company in a perfect position to fully take advantage of the benefits that come with this option among them being increased investor confidence and a some certainty that the company would go against the odds to achieve an increase in the share price in the long-run. Question Two i) As economic conditions enhanced in numerous markets, expanding levels of liquidity, coupled with reinforcing speculator certainty and a more positive way out environment brought about a slight increment in the worldwide aggregate of venture capital from 2013. Nonetheless, this report uncovers a captivating scope of variety in venture capital movement in diverse geographic hotbeds in 2013 that highlights some persevering truths about the venture capital business: to be specific, its capacity to always adjust and respond to changes in economic situations and reliably bolster the development of the worlds most dynamic new businesses and to convey returns for speculators. Various patterns developed or picked up force in 2013. ii) The reduction in the investor’s interests in funding start-ups has forced upcoming entrepreneurs to consider other sources of financing. For instance, they may use their savings, loans from family, friends and organized investment groups, government grants, and securing loans from banks, saccos and other financial institutions. These sources are relatively affordable. iii) Developing nations both from the Middle-East are way in front of Europe in beginning new organizations, yet few new businesses can possibly have an effect on occupations and development, and an insignificant number advantage from funding, with the larger part dependent on private financing. However, this trend is changing with some start-up owners beginning to embrace venture capital financing. The results is that more jobs are being created, and accelerated growth for these firms as they are able to cross innovation barriers and assimilation of technology in their operations to improve efficiency. iv) The government should consider reducing the barriers hindering venture capital funding from local and foreign firms. For example, the government should encourage foreign firms to assist start-ups by creating an enabling environment and cutting down the barriers to entry of such organization in the country. This intervention policy is appropriate since most foreign firms have the capability and the resources to fund and mentor the start-up and capitalize on technology to reduce inefficiencies and operating costs. Question Three i) Stage models may be fitting for portraying the innovative advancement and improvement of the spin-off firm, however are inadequate in clarifying how and why the undertaking moves starting with one stage then onto the next. However, such firms can be standalone and are able to move as usual (Churchill and Lewis, 1983; Galbraith, 1982; Scott and Bruce, 1987; Vohora et al., 2002). ii) a)When the spin-off occurs, the remaining company(Ebay) will have operational efficiency and decision making is bound to improve due to the reduction in the size of the firm(Lynch. 2000). iii) b) On the spin-off day, the stock cost of the guardian organization regularly drops to mirror the way that certain benefits have been expelled from its books and isolated into another separate element. When a spin-off begins exchanging, the costs of the guardian organizations and spin-offs stocks ought to indicate the cost of the old guardian organization stock before the spin-off, in any event at first. In the end the costs of the two new organizations will be set by the business sector in light of their individual values and prospects(Lynch. 2000) iv) In this case, there had been negative received publicity and most of the investors were for the spin-off. Therefore, when the spin-off occurred, it was a positive message to them and such information has a ripple positive effect on the stock price as the investor confidence was now boosted. Based on NASDAQ’s estimate, eBay is at present undervalued. Its fair value should be approximately $77 billion in market capitalization or $61 per share. v) As per NASDAQ, PayPals incomes are at a faster pace than eBays commercial center business. Upon the spin-off, it is predicted that Paypal’s proceeds may surpass eBay in business top in a couple of years. Therefore, Paypal’s may follow this trend too. Question Four The company will be sold at the face value since there are no expected changes are to take place in terms of the expected cashflows between years 2016 to 2020. References Ramamohan Rao Microeconomic Theory of Spinoff Decisions T. V. S. (Indian Institute of Technology, Kanpur, India) Volume 2, Issue 4. Copyright 2013. Aldrich, H. Organizations evolving, xv, 413 p. pp. SAGE Publications, London ; Thousand Oaks, Calif. 1999. Groh, Alexander, Liechtenstein, Heinrich and Lieser, Karsten "The European Venture Capital and Private Equity Country Attractiveness Indices," Journal of Corporate Finance, Volume 16, Issue 2,2010. Poterba J. Venture, Capital and capital gains taxation. In: Summers L (Ed), Tax policy and the economy. Cambridge; 1989.. Read More