The serial number refers to the Chinese version of the textbook.
Lightning Protection Guide
It is not recommended to spend too much time on questions 1-14. These are all concept questions in English, not after-school calculation questions, so don’t worry.
Questions 15 and 18 have major mistranslations: Ex-rights price is the price after ex-rights, Ex=excluding instead of "before".
The last question of the 15th question is not about trading strategy, but about proving that allotment of shares is irrelevant. The Chinese translation of "how can" misinterprets the original text.
Question brushing guide
Key topics:
Question 15 combines the ex-rights reference price of the rights issue, the value of the rights issue per share, and the proof that the rights issue is irrelevant. It is worth doing.
For the proof of the formula, please see Question 16 at the end of the English version.
Question 16 examines the nature of investment bank underwriting fees and the calculation of the amount of capital a company intends to raise.
Question 17 not only tests dilution, but also reviews the financial reporting formula in Chapter 2 and the digestion process of NPV in the balance sheet.
Concept questions
1【English concept 1】
//Ideas: external financing needs, debt capacity of large and small companies, capital structure and WACC
First, only big companies borrow money. Small companies mostly raise equity or private loans and do not issue securities. Large companies can also raise funds internally if they are profitable.
Secondly, for issuers, on the one hand, the cost of debt capital is lower than the cost of equity capital, which helps reduce the overall weighted average capital cost of the enterprise; on the other hand, the issuance costs of borrowing and bond issuance are lower, the issuance review cycle is shorter, and financing More convenient. Additionally, debt issuance does not dilute equity.
Therefore, debt financing is more popular.
2【English Concept 2】
//Idea: issuer + underwriter + investor
As far as issuers are concerned, demand for bond issuance is stable. Generally, they are large and powerful companies that will borrow money on a large scale in order to maintain their target capital structure. This creates economies of scale.
As far as underwriters are concerned, on the one hand, the number of bond buyers is small and stable, mostly institutional investors such as pension funds and insurance companies; on the other hand, fixed-income products are easily and transparently priced and easy to sell.
//Hint: This answer is summarized from the US capital market. China needs to answer more questions from investors.
As far as investors are concerned, loans and bonds are fixed-income products with stable cash flow and investors can obtain certain returns. The risks mainly come from liquidity and the possibility of default. Stocks do not provide shareholders with the promised dividend income. Secondly, when a company goes bankrupt, shareholders only have residual claims. According to the second proposition of the tax-included MM theorem, Rs=R0+(B/S)*(R0-RB)*(1-tc), the higher the debt, the higher the cost of equity.
//One problem: incomplete angles
First of all, loans and bonds are fixed-income products with stable cash flow and investors can obtain certain returns. The risks mainly come from liquidity and the possibility of default. Stocks do not provide shareholders with the promised dividend income. Secondly, when a company goes bankrupt, shareholders only have residual claims. From the second proposition of the tax MM theorem, Rs=R0+(B/S)*(R0-RB )*(1-tc)The higher the debt, the higher the cost of equity.
3【English Concept 3】
//Idea: issuer + underwriter + investor
The general formula of interest rate is R=R*+IP+DRP+LRP+MRP
The main risk with bonds is credit risk. Since investors do not participate in daily operations and there is information asymmetry with company owners, operators may experience adverse selection and moral hazard. Junk bond companies have low ratings, and their current profitability makes it difficult for cash flow to repay principal and interest, so the default risk premium is higher.
In addition, from the perspective of investment banks, junk bonds are not easy to underwrite and sell.
4【English Concept 4】
//Idea: Compare with equity IPO discount. You can use the knowledge from the two chapters on stock and bond valuation or capital cost to answer.
When determining the cost of equity capital, it is usually necessary toidentify comparable companies based on industry and business model. It is easy to disagree on the valuation, which will lead to Come to betting agreements and more risks.
When issuing bonds, the pricing is based on RB=YTM, and the reference is companies with similar credit risks, so the targets are comparable More, RB and V0 assessments are more accurate.
//Review Chapter 4: Capital Cost
| RB |
Issued corporate bonds require YTM Reference industry comparable companies Reference companies with consistent credit ratings and use RP valuation Rating using financial report data |
| RS |
DDM CAPM RB+RP |
It is generally believed that the difference between the book value and the market value of a bond has little impact because underwriting fees have been taken into account when issuance, which is usually not much different from the book value.
//Just look at the subscript and answer, no need to worry.
5【English concept 5】
The IPO discount means that the company has lost part of its own assets, so it should be disappointed.
6【English Concept 6】
meeting. Given that the company's financing amount is close to its entire revenue and its sustained profitability is limited, the investment risk is high and should correspond to a higher cost of equity capital. Therefore, setting a lower issuance price is reasonable and will help attract more equity investors.
7【English concept 7】
//Standard answer: Only new stocks are undervalued, and the valuation of old stocks is correct.
meeting. On the one hand, the support of venture capital means that there are multiple rounds of financing in the early stage, and capital and technology resources should be relatively in place; but on the other hand, in order to launch as early as possible, venture capital may mature the invested companies so that they can be launched in the near future. The investment risks were not reflected in the prospectus due to premature listing under mature circumstances. Second, insiders hold 1550/3968 = 39.06% of the shares, compared with 51.67% before. They still have a considerable proportion of controlling shares. There is reason to believe that the company's executives will continue to focus on the company's operations.
8【English concept 8】
Choose rights issue. Allotment of shares to old shareholders does not involve a public offering, so a lot of underwriting fees and regulatory legal fees can be saved.
9【English concept 9】
//Tip: You cannot say that stocks are "good or bad". This is not like what someone who has studied mathematics would say. It should be translated as overpriced/underpriced, or explained from excess return.
According to the winner's curse theory, the assistant's low return is normal.
There is information asymmetry in the IPO market. For overvalued stocks, people with more information will avoid them. Only people who don't know why will "pick up" and buy them. For stocks that are undervalued and worth investing in, people with more information will increase their positions. When oversubscription occurs, they will be allocated more good stocks. The final result is that the stocks he can buy are not satisfactory, and good stocks either cannot be subscribed or cannot be subscribed in full.
10【English concept 11】
//Generally, investment banks and investors choose companies. This question tests the company's choice of investment banks.
A competitive offer means that the issuer accepts quotes from multiple investment banks at the same time and chooses the deal with the highest offer, which makes the company's IPO discount cost the lowest.
A negotiated offer means that the issuer only negotiates with one investment bank, and the due diligence cost will be much higher. However, after the investment bank obtains more information, the probability of a successful issuance will be greatly improved.
//The answer is exactly the opposite...
competitive offer means the issuer faces different underwriters at the same time and chooses the highest offer to close the deal;negotiated offerThe issuer faces different underwriters individually and negotiates individually.
The advantage of bidding issuance is that investment banks have more knowledge about the company, so the issuance fee is low and the success rate is high; the advantage of negotiation issuance is that the issuer has more bargaining power, but the due diligence cost of investment banks is high and the success rate is low, so it is not Too common.
11【English concept 12】
//Summary using textbooks
There are three explanations for the company's stock price falling after the SEO announcement came out.
One is managerial cost. Management tends to announce new paychecks when stocks are overvalued, so price drops are a normal adjustment in market expectations.
The second is debt capacity. The market believed the company was in financial trouble, so it issued new shares to pay off debt.
The third is issue cost.
//This kind of answer is not systematic enough. It's obvious that I didn't memorize the textbook well.
The market has expected that earnings per share and price per share will be diluted as the number of shares increases. The current price is the expectation for the future, so IC will also fall.
12【English concept 13】
//Bad answer analysis ideas: 1. Issues of issuance costs and discounts. 2. The issue of control. 3. Beneficiary issues.
If you want to maximize the wealth of existing shareholders, you should adopt a rights issue for the following reasons:
First, the issuance fee is low and the discount problem is not obvious. Second, it does not involve the joining of new shareholders and the transfer of control rights. Third, benefits will not flow to outsiders.
//Answer to the question: Additional issuance can only be at par or at a premium. If it is issued at a par price, the wealth will indeed remain unchanged; if it is issued at a premium, the wealth will actually be transferred from the new shareholders to the old shareholders.
In order to maximize shareholder wealth, public issuance of new shares should be chosen. The proof is as follows:
Suppose the company adopts allotment of shares. The reference price for rights issue ex-rights is:
(Proportional ratio+Proportional ratio*< /span>)/(1+distribution rate*participation ratio*Participation proportion)
For old shareholders, if they participate and consider new investment, their wealth will not change.
If you do not participate, the number of shares will remain unchanged but the price per share will be diluted, which means your wealth will shrink.
If additional shares are issued, as long as the additional issuance price and number of shares are reasonable, shareholder wealth will not change.
13【English concept 14】
There are two advantages to temporary registration: first, it can issue stocks independently as needed, without increasing issuance costs due to over-issuance of too many stocks; second, the procedure is simple.
//The advantage is not to issue it in advance, but to issue it at the right time.
The advantage of shelf registration is that it can simplify the application procedures and issue stocks in advance.
14【English concept 15】
//Actually, it summarizes the content of this unit.
IPO has the following rules:
One is the IPO discount, which generally opens at a higher price on the first day of public trading, which means losses for the company.
Second, the two underwriting methods run in parallel. Agency sales for small IPOs and underwriting for large IPOs.
Third, investment banks have the role of price stabilizers in the market outlook. Due to the interconnected interests, they will use underwriting more often and buy the issuer's stocks at above parity prices to prevent plummeting.
//undewriter price stablization of the aftermarket green shoe clause front
Fourth, among the two investment bank selection methods, most choose negotiation issuance, although the cost of bidding issuance is lower.
Calculation problems
15【English Basics 2】
1)
//Q: What is the 5,000 yuan review fee used for?
//Answer: Just kidding, it’s a distraction and has nothing to do with the rights issue.
//Q: Why are there upper and lower limits for exams? What is the standard?
//Answer: The textbook proves that if Px exceeds P0, old shareholders will not exercise their rights.
Since the rights option can be treated as a call option, the rights price cannot exceed the current share price.
∴The upper limit of the allotment price is 28 yuan, and the lower limit is 0 yuan.
2)
The number of additional shares to be issued is 2600/25=1.04 million shares
There are 2.9 million shares originally, so the subscription ratio is: 2.79 shares subscribe for one share
3)
//Q: Is this question related to the previous question? What is the relationship between the ex-rights reference price and the upper and lower bounds of the stock price?
//Answer: It does matter. If you don’t consider the subscription price in the second question, you cannot bring it into the ex-rights reference price formula.
//Tip: The formula in Roth's textbook is the same as that of CPA, except that it considers 2.79 shares to 1 share and does not convert it into a rights issue ratio of 1/2.79.
//Tip: The Chinese version is translated as price before ex-rights. It should be because I didn’t think carefully after seeing Ex. It is speculated that it was translated by computer or by a liberal arts student. It’s the ex-rights reference price, and anyone who studies financial management can understand it~
Based on 2), when the subscription price is set at 25 yuan per share, 2.79 shares need to be used to subscribe for one new share. Therefore:
ex-rights price per share=(2.79*28+1*25)/(2.79+1)=27.21元
//In fact, it can be directly substituted into the CPA formula to calculate the share change ratio.
Ex-rights reference price = (28+25/2.79)/(1+1/2.79)=27.21 yuan
value of a right=ex-rights reference price-rights price=28-27.21=0.79 yuan
//Mathematical proof of the irrelevance theory
The economic essence of the ex-rights reference price formula:
If an investor chooses to exercise the option to subscribe for new shares, it is an equivalent transaction to giving up the option and selling the allotment subscription option separately, and his wealth value will not change. (Irrelevant theory of rights issue)
In other words, the ex-rights reference price for rights issue, like the ex-dividend reference price Px, is the price when the market is in equilibrium.
First, calculate the shareholder’s wealth before decision-making = original number of shares * price before ex-dividends①
If shareholders participate in the rights issue, wealth after ex-rights = (number of original shares + number of subscribed shares) * price after ex-rights②
If you give up the exercise, wealth after ex-rights = original number of shares * price after ex-rights + income from selling warrants ③
Proceeds from selling warrants = Original number of shares * Value of rights per share = Original number of shares * (Price before ex-rights - Price after ex-rights)④
Substitute ④ into ③ and find that it is equal to ②.
If subtracted from ① and simply calculate the change in wealth, the result is the same.
Evidence so far.
Attachment: From ③ to ④, you need to use the other two formulas in Ross's textbook.
1.number of new shares
The number of shares that need to be issued = financing requirements / subscription price, where the subscription price is determined by the company itself.
2,number of rights needed for a share of stock
The number of warrants required for each new share = the number of old shares / the number of new shares, which is actually the number of old shares required to subscribe for one new share.
For example, if the original 1 million shares require the issuance of 500,000 shares, then 2 warrants are needed to purchase a new share.
Actually, Ross's book is very convoluted - usually one share corresponds to one warrant, so this formula actually calculates not the number of warrants, but the cost of purchasing one new share. The required number of old shares. In this example, 2 old shares correspond to one new share.
//Derivation of the ex-rights reference price calculation formula
From ① to ②③, we only considered the stock at the beginning and end of the period, and did not consider the actual process of participating in the allotment.
In fact, the shareholder's subscription price is within the open interval of (0, P0).
Assuming that all shareholders participate in the rights issue, this process can be expressed as:
The wealth of shareholders when participating in the rights issue = original stock market value + cash invested = number of original shares * price before ex-rights + rights issue price * number of rights issues ⑤
Available in conjunction with ②⑤
Number of original shares * Price before ex-rights + Allotment price * Number of allotments = (Number of original shares + Number of subscribed shares) * Price after ex-rights⑥
Obviously, the price after ex-rights = (number of original shares * price before ex-rights + rights issue price * number of rights issues)/(number of original shares + number of subscribed shares)⑦
Evidence so far.
//Proof: The value formula of each rights issue [16 questions after the English version]
National Power Company corresponding to Ross textbooks
One is to directly calculate the difference between the current stock price and the ex-rights price.
The second is the ex-rights price, minus the subscription price, and then divided by the number of old shares required to subscribe for one new share.
certificate:
By definition, the value of the warrant removed is the difference between the old and new prices.
Transforming equation ⑥, we get the price before ex-rights = [price after ex-rights * (number of original shares + number of new shares) - rights issue price * number of new shares]/number of original shares ⑧
Substituting into the definition, we get
Value of rights issue per share = [price after ex-rights * (number of original shares + number of new shares) - rights issue price * number of new shares]/number of original shares - price after ex-rights
= [Price after ex-rights * (Number of original shares + Number of new shares) - Rights issue price * Number of new shares - Price after ex-rights * Number of original shares]/Number of original shares
= (price after ex-rights - rights issue price) * number of new shares / number of original shares
=(price after ex-rights - rights issue price) / number of old shares required to subscribe for one new share
Evidence so far.
Its corporate financial management significance is:
The stock price not only includes the value of the remaining claim rights and dividend rights, but also the value of benefits from operations such as allotment, bonus shares, and capitalization.
//Supplement: The subscription price has nothing to do with shareholder wealth
When the company allots shares, the optional range of the allotment price is the open range (0, current stock price)
Roth's textbook proved in a table that No matter the subscription price or whether to participate in the rights issue, it has nothing to do with the wealth of shareholders. (Lemma)
In other words, the subscription price is determined by the company itself, it’s arbitrary, just be happy.
4)
//Tips: The Chinese version is a mistranslation and has misinterpreted the original author's meaning. What is actually examined is the irrelevance theory of allotment, rather than recovery of losses through hedging transactions.
Assume that the shareholder holds 1,000 shares. If he does not participate in the placement, his original total wealth is
1000*28=28000 yuan
It has been proved previously that in the case of separate trading of rights issue subscription rights and stocks, shareholders can sell the warrants without exercising the rights.
Therefore, after the allotment plan is announced, shareholders’ wealth = 1000*27.12+1000*0.79=28,000 yuan
Even if the total market value of the stocks you own falls, you can use the cash proceeds from selling the warrants to hedge.
This proves the theory that allotment of shares has nothing to do with it.
16【Basic English 5-6】
//This question is very good. It tests the understanding of the essence of "underwriting fee" flotation cost. The content of Chapter 13 Capital Cost and Project Financing has been deepened.
//The underwriting fee is the price difference. The textbook example is Adamas Company. The IPO price was 16 yuan, and the company could only receive 14.88 yuan.
The price difference is 7% because the selling price of investment banks (the public buying price) is 7% higher than the buying price of investment banks.
That is to say, by subtracting 7% from the issuance financing amount in the IPO data, you can get the actual amount of funds raised by the company.
Obviously, the company needs to ensure that it can still raise the target amount of funds after deducting all issuance costs.
1) Only consider investment bank underwriting spreads
The company’s actual issuance amount*(1-price difference)=the funds required for the project
Solve the actual issuance amount=55000000/0.93
Since the public can only buy stocks from investment banks at a price of 32 yuan, the number of shares the company must issue is 55,000,000/0.93/32=1848118 shares
2) Consider other issuance costs
The company’s actual issuance amount*(1-price difference)-other expenses=funds required for the project
Solve the actual issuance amount = (55000000+1900000)/0.93
Since the public can only buy stocks from investment banks at a price of 32 yuan, the number of shares the company must issue is (55000000+1900000)/0.93/32=1911962 shares
Its corporate finance meaning is: the company must issue more shares to the public to cover higher issuance costs.
//Wrong explanation: Failure to understand the essence of "price difference". It should be divided by 1-F, not 1+F
The number of shares to be issued is5500/(32/1.07)=183.9110,000 shares
17【English Intermediate 11】
//The textbook mentions four dilution effects, and this question only tests three: PPS, BVPS, and EPS.
In fact, we also examined the fifth type of financial report data in Chapter 2-3: price-earnings ratio, price-to-book ratio, price-to-sales ratio, and the algorithm of the per-share indicator.
1) The book value per share has declined, as evidenced by the following:
∵The owner’s equity at the beginning of the period is TE0=TA0-TD0=9400000-4100000=5300000 yuan
∴BVPS0=TE0/N0=5300000/65000=81.54 yuan at the beginning of the period
The project investment will be included in the balance sheet, so after the project financing plan is announced, the owner’s equity becomes TE1=TE0+C0=5300000+1500000=6800000 yuan
//The most important thing about the PB series is the number of shares, and the number of shares is determined by the project financing amount and the proposed issuance price. The proposed issuance price may not be the current market price; the current market price is used for bidding because this project is consistent with the company's price-to-earnings ratio and ROE, which means the total risk remains unchanged (operating risk ↑, leverage ↓)
∵The project’s PE and ROE are equivalent to the company’s current levels
∴The issuance price of additional shares is the current market price
∴The number of additional copies to be issued is △N=C0/PPS0=1500000/75=20000 copies
∴BVPS1=TE1/(N0+△N)=6800000/(65000+20000)=80 yuan at the end of the period
//Ross's definition of accounting dilution is: BVPS decreases, or B/P decreases. It's exactly the opposite of the price-to-book ratio.
This question doesn't mention PB, so just compare BVPS directly.
As BVPS declines, the issuance of new shares will have an accounting (book value) dilution effect.
//Tip: Ross's text and exercises are not very rigorous. If P/B is less than 1, it can only mean that the stock price has fallen below the net value, reflecting the company's poor performance, the industry's downturn, and investors' lack of confidence. However, failure to launch this round of additional issuance will lead to accounting dilution. If the original PB ≥ 1 and it falls below 1 after SEO, it will mean that the additional issuance has a negative effect. To be more rigorous, we can use the definition of B/P to derive it.
2) Earnings per share will fall. The proof is as follows:
//EPS formula needs to calculate net profit and number of common shares, which can be calculated separately at the beginning and end of the period.
Earnings per share at the beginning of the period EPS0=NI0/N0=980000/65000=15.08 yuan
From 1), the total number of shares at the end of the period is N1=N0+△N=65000+20000=85000 shares
//The missing EPS1 needs to be calculated using ROE. Note that among the letters of ROE, E stands for euity and R stands for Earnings=Net Income.
The following uses the ROE multiplier to calculate the net profit at the end of the period.
Project ROE=Company ROE=NI0/TE0=980000/5300000=0.1849
Also, the total equity at the end of the period TE1=TE0+BV(C0)=TE0+C0=5300000+1500000=6800000 yuan
∴Net profit at the end of the period NI1=ROE*TE1=0.1849*6800000=1257320 yuan
//Error-prone tip: In period 1, the number of shares and owner's equity have changed
∴Ending earnings per share EPS1=NI1/N1=1257320/85000=14.79 yuan
3) The value per share is also diluted, as evidenced by:
//The reason why PPS is placed after EPS:
PPS involves market value, stock price and number of shares, and has nothing to do with owner's equity. Without production data, FCFE and FCFF are invalid; without dividend policy data, DDM is also invalid. At this time, only the relative valuation method can be used to calculate the stock price. If the PE remains unchanged, we need to find the EPS at the end of the period.
According to the meaning of the question, the price per share at the beginning of the period PPS0 = 75 yuan
Obviously, MHMM can only use the relative valuation method to value its stock price.
Since the project PE is consistent with the company's PE, the beginning data is available at the end of the period.
∴Applicable PE=PPS0/EPS0=75/15.08=4.9735
∴The price per share at the end of the period PPS1=PE*EPS1=4.9735*14.79=73.56 yuan
Obviously, this round of SEO will bring dilution to the market value of each share.
4)
//Tip: This question of NPV is calculated by the back-squeezing method. Since no production and operation data are given, we can only use the change in stock market value to back-end based on EMH.
Note that it is not a change in the owner's equity: the owner's equity will only increase the amount of new shares, which is actually the initial investment amount of the project. C does not represent NPV.
According to the meaning of the question, the equity market value at the beginning of the period is S0=PPS0*N0=75*65000=4875000 yuan＜TE0
Equity market value at the end of the period S1=PPS1*N1=73.58*85000=6254300 yuan＜TE1
//Tip: There are two steps to enter NPV into the table.
In the first step, the market expects that FCFF will ↑ in the future, but it will also be accompanied by investment expenditures. Therefore, MV will increase the net present value.
What is affected here is the company's market value and stock price on the announcement date.
In the second step, the investment is completed. What FCFF increases is the project cash flow on the right side of NPV; combined with the original OCF, it can be seen that the company's value rebounds back to the pre-investment level at this time. The discussion here is purely about market value.
To discuss the dilution effect, PPS and MV after the investment is completed are used. In other words, either use the MV on the announcement date to derive NPV, or use the difference between the MV after the investment is completed and the MV at the beginning of the period, minus the investment amount.
This is the proof method used in Ross's book starting from the MM theorem. It is obviously not rigorous, at least it is not considered in discounting. Just do the questions.
∴Project NPV=S1-S0-C0=6254300-4875000-1500000=-120700 yuan
Its economic significance is: the company invests in projects with negative net present value, causing all PPS, EPS and BVPS to be diluted.
//Q: Why is the PE of the project given? Is this intrinsic or current period P/E ratio?
//Answer: Project PE, ROE and PB will all change based on the company's opening data. Since the expected data is not used, it is actually the current period's price-to-earnings ratio.
18【English Intermediate 15】
//The Chinese version mistranslates ex-rights price into "pre-ex-rights" price for the second time.
According to the ex-rights reference price formula,
Px=(Pro*N0+Ps*△N)/(N0+△N)
Substitute the data and get
61=(68*10+67)/(10+△N)
The solution is △N=(68*10+67)/61-10=2.2459
Also ∵Ps*△N=67
∴Ps=67/2.2459=29.83 yuan