Kampfire, Inc., a very successful manufacturer of camping equipment, is considering going public next month to raise funds to help finance the company’s future growth. The financial manager of Kampfire has approached the investment banking firm at which you work seeking help with its decision. Your boss asked you to explain the nature of the U.S. financial markets and the process of issuing equity to the financial manager. To help with this task, your boss has asked you to answer the following questions in explaining the U.S. financial system to the financial manager: a. What is a financial market? How are financial markets differentiated from markets for physical assets? b. Differentiate between money markets and capital markets. c. Differentiate between a primary market and a secondary market. If Microsoft decided to issue additional common stock and an investor purchased 1,000 shares of this stock from the underwriter, would this transaction be a primary market transaction or a secondary market transaction? Would it make a difference if the investor purchased previously outstanding Microsoft stock in the NASDAQ market?
Kampfire, Inc., a very successful manufacturer of camping equipment, is considering going public next month to raise funds to help finance the company’s future
growth. The
banking firm at which you work seeking help with its decision. Your boss asked
you to explain the nature of the U.S. financial markets and the process of issuing
equity to the financial manager. To help with this task, your boss has asked you
to answer the following questions in explaining the U.S. financial system to the
financial manager:
a. What is a financial market? How are financial markets differentiated from
markets for physical assets?
b. Differentiate between
c. Differentiate between a primary market and a secondary market. If Microsoft
decided to issue additional common stock and an investor purchased 1,000
shares of this stock from the underwriter, would this transaction be a primary
market transaction or a secondary market transaction? Would it make a difference
if the investor purchased previously outstanding Microsoft stock in the
NASDAQ market?
d. Describe the three primary ways in which capital is transferred between
savers and borrowers.
e. Securities can be traded on physical exchanges or in the over-the-counter market.
Define each of these markets, and describe how stocks are traded in each one.
f. Describe the investment banking process as it relates to initial public offerings.
g. Kampfire estimates that it needs $25 million to support its expected growth.
The underwriting fees charged by the investment banking firm for which you
work are based on the schedule given in Table 3-3. In addition, it is estimated
that Kampfire will incur $284,000 in other expenses related to the IPO. If your
analysis indicates that Kampfire’s stock can be sold for $8.00 per share, how
many shares must be issued to net the company the $25 million it needs?
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