Finance 401 at Universität Mannheim

Flashcards and summaries for Finance 401 at the Universität Mannheim

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Rights Issue at SEO

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Who should borrow money? (MM1)

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Corporate Bonds 
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What is Capital Structure?

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Why Rights Issues?

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Cash from investors is always expensive. Why?

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Prospectus 
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Why Underpricing: Winner‘s Curse

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Seasoned Equity Offering (SEO)
[Definition]

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Spread - Definition

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The Pecking Order Theory 
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4 most important Types of Real Options

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Finance 401

Rights Issue at SEO
Issue of securities offered only to current stockholders.
-> every share gives you 1 subscription right
-> number of rights to buy 1 share depends on ratio of old & new shares 
-> rights are traded

Finance 401

Who should borrow money? (MM1)
If investors can borrow at the same terms as firms, it does not matter who borrows and investors can replicate firm leverage with home-made leverage.

Finance 401

Corporate Bonds 
-> secured bonds backed by real assets (planes, ships,...) 
-> debentures are more risky and subordinated to secured debt, but priority over stockholders

Finance 401

What is Capital Structure?
The Capital Structure of a firm is the mix of different securities issued by the firm to finance its operations.

Finance 401

Why Rights Issues?
Protection for existing shareholders against wealth transfer.

Finance 401

Cash from investors is always expensive. Why?
-> issuance cost
-> underwriting fees
-> underpricing of securities
-> potential wealth transfers

Finance 401

Prospectus 
Formal summary that provides information on an issue of securities. [very important legal document] (what will firm do with investor‘s money, firm‘s governance structure, financial records,...)

Finance 401

Why Underpricing: Winner‘s Curse
-> uninformed investors know they will lose money if they get all the shares, as informed investors pulled out
-> if shares are profitable informed investors will eat up part of the IPO
-> uninformed investors are losing money on average 

Finance 401

Seasoned Equity Offering (SEO)
[Definition]
Equity offering of firm that has gone public before. -> need new capital

Finance 401

Spread - Definition
Difference between public offer price and price paid by underwriter.

Finance 401

The Pecking Order Theory 
-> if firm thinks stock is overpriced, it will issue equity (underpriced -> issue debt)

Consequences of asymmetric information: use sources of funding that communicate the best news possible (1. internal funds, 2. debt issue, 3. equity issue as last option)

Finance 401

4 most important Types of Real Options
Expansion Option
Timing Option
Abandonment Option
Flexibility Option

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