q6fall13 answers

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SIXTH QUIZ FNCE 238/738 November 25, 2013 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 or 3):__________________________________
1. On Nov. 12 th , before the market opened, Trade Street Residential announced a rights offering: Trade Street Residential Inc. on Nov. 12 commenced a $100 million fully backstopped common stock rights offering to its stockholders. The rights will have a subscription price of $6.33 per share and will be transferable. The company said certain investment entities managed by Senator Investment Group LP agreed to backstop the rights offering by purchasing, on the same terms, any and all shares not subscribed through the exercise of rights Under the terms of the rights offering, the company will distribute at no charge to the holders of its common stock transferable rights to purchase up to an aggregate of approximately 15,797,788 new shares of common stock. The company will distribute to each such holder one transferable right for every share of common stock owned on the record date. Each right will entitle the holder to purchase 1.3775 shares of common stock, , at a subscription price of $6.33 per share. Trade Street Residential closed on Nov. 11 th at $6.76/share. a. (4 pts) At what discount from TERP is this offering priced? TERP = 6.33 + (6.76-6.33)/(1+1.3775) = 6.51 Discount = (6.51-6.33)/6.51 = 2.8% b. (4 pts) The offering is transferable, meaning the rights will trade separately. Everything else equal, what price would you expect a right to trade for? Two ways to approach this One way - rights are worth cum-rights share price minus TERP = 6.76-6.51 = 0.25 Other way = 1 right buys 1.3775 shares @ $6.51-$6.33 = $0.18 profit per share, so value per right is (1.3775)(0.18) = 0.25
2. (8 pts) In recent IPO news, Zulily went public at 22, and then closed at $37.70 on its first day, while Relypsa went public at 11, and closed at $12.04 on its first day. What, if anything, do these datapoints tell you about the relative volatility of these stocks going forward? What is your logic? The empirical evidence is that aftermarket volatility increases with initial underpricing. A logical connection between the two is that a stock’s ex post volatility correlates with underwriters’ ex ante uncertainty about where the stock will trade, and that underwriters respond to uncertainty by discounting more to bring the chance of accidental overpricing down to an acceptable level.
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2. (8 pts) An all-equity firm has existing assets and an investment opportunity that costs 5, and everybody knows that the firm’s manager has private information about the value of each: the firm is either in state 1, where the assets are worth 4 and the investment opportunity pays off 6 (i.e. has an NPV of 1), or it is in state 2 where the assets are worth 13 and the investment opportunity pays off 7 (i.e. has an NPV of 2). The manager knows for sure which state the firm is in, whereas everybody else puts a 50% probability on each state. Assuming the project has to be financed with an equity offering, would the manager finance it no matter what, i.e. whether he knows the firm is in state 1 or instead in state 2, if investors believe that the manager will finance it no matter what? Explain. If the firm finances the project, then if it’s in state 1 it’s worth 4+6 = 10, and if it’s in state 2 it’s worth 13+7=20, so if the firm finances the project regardless of its state, then the expected value to investors is ½(10) + ½(20) = 15. So to raise 5, the firm needs to sell 5/15=1/3 of its equity to the new investors, leaving 2/3 of the equity for old investors. If the firm is in state 1, this is worth 2/3(10) = 6.67 which is greater than the 4 it is worth w/o the new project, and if it is in state 2, this is worth 2/3(20) = 13.33 > 13 it is worth w/o the new project, so the project makes the original investors better off no matter what, if investors believe the manager finances no matter what, then the manager does indeed finance no matter what.
4. (6 pts) News from a couple weeks ago: Merger doesn't suit Jos. A. Bank Elizabeth Lazarowitz with News Wire Services 16 November 2013 New York Daily News © 2013 Daily News, New York. All rights reserved. Menswear retailers Jos. A. Bank and Men's Wearhouse don't seem to match. Jos. A. Bank said on Friday it had scrapped a $2.3 billion takeover bid for its larger rival after it failed to lure the company into merger talks. Men's Wearhouse had rejected the $48-per-share offer in October, dismissing it as inadequate and not in the best interest of shareholders. The 40-year-old retailer also instituted a shareholder rights plan, known as a "poison pill," to help prevent a hostile takeover. Jos. A. Bank said it was still keeping the door open to a possible tie-up. It previously said it would consider raising its bid if it seemed warranted. Hedge fund Eminence Capital, Men's Wearhouse's largest shareholder, slammed the retailer for rebuffing Jos. A. Bank's overtures, saying it was "disappointed." It also said it's asking regulators to permit a vote on rules that would let shareholders boot directors from the board before the company's annual meeting. Men's Wearhouse cut its profit forecast in September, complaining that it was being hit by weaker consumer spending on apparel. Just months before, it booted founder George Zimmer, known for giving the line "You're going to like the way you look. I guarantee it," in TV commercials, after he tussled with the board. How could the poison pill have frustrated Jos. A. Bank’s attempted takeover ? All I’m looking for here is how poison pills frustrate attempted takeovers, which is through a heavily discounted rights offering to all investors except the pot ential acquirer, triggered by the acquirer’ s stake reaching an indicated level, such as 10%. This rights offering hurts the acquirer by reducing the value of his shares and also reducing their fractional voting power.