q5fall11 answers

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FIFTH QUIZ FNCE 238/738 November 16, 2011 WRITE ALL ANSWERS ON THE TEST. IF YOUR ANSWER CONTINUES ON THE BACK, MAKE A NOTE OF IT ON THE FRONT. 30 PTS / 25 MINUTES NAME:_____________________________________________ SECTION (12, 1:30, 3):__________________________________

1. (8 pts.) In ABS deals such as the CarMax deal we looked at, do all the dollars flowing into the trust flow through to the notes it sold to the public? Explain (in general; I’m not looking for the exact details of any particular deal). Key points  Trust has to pay servicing  Trust pays dividends back to the seller if it is current on its obligations o Has paid the coupons o And the servicing o Cash trapped by the reserve account is at the target balance  The seller does not have to give these dividends back, even if the trust later runs into problems paying the notes down

2. Yesterday, 11/15/11, the French healthcare provider ORPEA, which has 42.4 million shares outstanding, announced a rights offering. For every 4 shares an investor currently holds, he gets one right to buy one new share for € 19.15. a. (6 pts.) Given the current, pre-rights price per share of € 30.89, what discount is the subscription price from the theoretical ex-rights price? Theoretical ex-rights price =[ (Current MV) + (Cash paid in through exercise of rights)]/(resulting #shrs) =[ (42.4M shares)( € 30.89/shr)+ (¼(42.4M shares))( € 19.15/shr)]/(42.4M + ¼(42.4M )) = 28.542 So discount of subscription price is (28.542-19.15)/28.542=32.9% b. (2 pts.) A bank syndicate (BNP Paribas, Credit Agricole, Natixis, Societe Generale) is underwriting the offering. What risk to ORPEA does this address? The underwriters will exercise the rights if shareholders do not. S o this addresses ORPEA’s risk that it does not raise the money because its stock price falls below € 19.15.

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3. (7 pts.) Looking at the performance of open-end mutual funds, we see that the relation between past and future performance is weak: the prospects of last year’s better performers are only a little better than the prospects of last year’s worse performers. What does this tell us about whether some managers are much better than others? Explain. In an open-end fund, investors directly expand and contract the fund by entering and leaving at NAV. If fund management exhibits decreasing returns to scale, then this expansion and contraction reduces and increases the fund’s value added per dollar. If investors are rational, they will move money from worse to better prospects, and will continue to do so until their prospects equalize. So if investors learn from one year’s performance that one fund’s manager is much better than another’s, then they will leave the latter for the former, rendering their expected future performance the same. So there would be no relation between past and future performance, even though some managers are much better than others. Thus the weak persistence we observe is not conclusive evidence against the idea that some managers are much better than others.

4. (7 pts.) Here are two follow-on stock offerings this year: Dynavax Announcement of the offering at the close of trading on Wednesday, November 2, 2011: Dynavax Technologies Corporation today announced that it intends to offer and sell shares of its common stock, subject to market and other conditions, in an underwritten public offering. Announcement of the pricing before the open of trading on Thursday, November 3, 2011: Dynavax Technologies Corporation today announced the pricing of a previously announced underwritten public offering of 24,000,000 shares of its common stock, offered at a price to the public of $2.50 per share. Aegerion Announcement of the offering on Thursday June 16, 2011: Aegerion Pharmaceuticals Inc. said Thursday it filed paperwork with regulators for an offering of more than 4 million shares. The company will offer about 3.3 million shares, and stockholders will offer an additional 1 million shares. Announcement of the pricing on Friday June 24, 2011: Aegerion Pharmaceuticals, Inc. announced the pricing of the underwritten public offering of 4,250,000 shares of its common stock at a price to the public of $15.50 per share. 3,250,000 of these shares are being offered by Aegerion and 1,000,000 of these shares are being offered by selling stockholders. How do these offerings differ in the risk borne by the issuer vs. the investors? The key difference is that the market was closed between the announcement and pricing of the Dynavax deal, so the investors could not see how the market took the news of the offering, and therefore the investors, rather than Dynavax, bore the risk of this market impact. By contrast, eight days passed between the announcement and pricing of the Aegerion deal, so the deal was priced with full knowledge of this market impact, meaning Aegerion, rather than investors, bore this risk.