Business

MBA Concentration: Finance

MG762: Financial markets and Institutions

Assignment One

1. Briefly explain an IPO (Initial Public Offering) (1 mark).

A. An Initial Public Offering (IPO) refers to “the first sale of stock by a company to the public” (www.investorwords.com). This is a strategy often used by smaller, younger companies seeking the capital to expand and by large privately owned companies looking to become publicly traded (www.investopedia.com). The website www.investopedia.com writes that “in an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.”

In the assessment of the website http://www.entrepreneur.com “the ideal candidate for an IPO has both a well-established track record of steadily growing sales and earnings, and operates in an industry that's currently in the news.” The website further postulates that “the stringent requirements for IPOs leave out most companies, including those that do not have audited financials for the past several years, as well as those that operate in slow-growing or obscure industries”. In the view expressed on the website “an IPO is probably the most expensive way to raise money in terms of upfront cost.”

B) Why did public confidence in the integrity of the IPO process erode in the early 2000s? (5 Marks)

In the assessment of the NYSE/NASD IPO Advisory Committee “fairness, integrity and efficiency make the U.S. capital markets the most successful in the world.” The committee reports that “in the past decade, more than 5,600 domestic and foreign enterprises raised an aggregate of over $500 billion through IPOs in U.S. markets.” These IPOs served as an engine for corporate growth and active participation by all sectors of the investment community, from venture capitalists to large institutions and individual investors (NYSE/NASD...