# Dixon Essay

1812 Words8 Pages
Tutorial 1 (with answers) 1. What are the main advantages and disadvantages of going public? The two main advantages of going public are liquidity and access to capital. One of the major disadvantages of an IPO is that once a company becomes a public company, it must satisfy all of the requirements of being a public company such as SEC filings and listing requirements of the securities exchanges. 2. What is IPO underpricing? If you decide to try to buy shares in every IPO, will you necessarily make money from the underpricing? Underpricing refers to the fact that, on average, underwriters pick the IPO issue price so that the average first-day return is positive. If you followed a strategy of placing an order for a fixed number of shares on every IPO, your order will be completely filled when the stock price goes down, but you will be rationed when it goes up. In effect you only get substantial amounts of stock when you do not want it. The winners’ curse is substantial enough so that the strategy of investing in every IPO does not yield above market returns. 3. Explain why the yield on a convertible bond is lower than the yield on an otherwise identical bond without a conversion feature. The option to convert the bond into stock is valuable, hence its price will be higher and its yield lower. 4. You own a bond with a face value of \$10,000 and a conversion ratio of 450. What is the conversion price? The conversion price is the face value of the bond divided by the conversion ratio. In this case: P= Face value \$10, 000 = Conversion ratio 450 P = \$22.22. 5. Acort Industries owns assets that will have an 80% probability of having a market value of \$50 million in one year. There is a 20% chance that the assets will be worth only \$20 million. The current risk-free rate is 5%, and Acort’s assets have a cost of capital of 10%. a. b. c. d. a. If Acort is