Literature Review On Underpricing

The share price of $270,000 was significantly higher because the “fair value” as perceived by the dissenters, which accounted for the chance of an IPO. Taking into account the recently traded Kohler Co. share prices, the book value of a share, and the possibility of an IPO greatly inflated what the perceived value of each share should be. While Kohler believed their voting control and ownership structure would remain the same, the shareholders believed otherwise. Because shareholders assumed Kohler would go public, they argued for a higher valuation so as to receive the highest price, and thus profit, in the buyout.  So based on the highest MVE, we picked Masco as the comparable firm of choice. Using Masco’s MVE, $9838.8, and LTM EBIAT, $437.3, we solved for Masco’s P/E ratio, which was equal to 22.5. By multiplying the P/E ratio by Kohler’s LTM EBIAT (22.5 * $93.76), we projected a market value of $2,109,610,000.  To solve for estimated share price, we divided the projected market value by 7,587.89, the number of shares outstanding to obtain an estimated share price of $278,023.47. This estimate is near the $270,000 per share offer price.

The recent Time Magazine article "Post-Sandy Price Gouging: Economically Sound, Ethically Dubious," evaluates the recent price gouging by businesses during Hurricane Sandy (Futrelle). Examples of price gouging include raising prices on batteries and gas to astronomic levels, with the knowledge that the captive public audience will purchase the products regardless of the price. Businesses that have raised prices include bodegas, supermarkets and gas stations. Although such price gouging is undeniably an economically profitable business measure, the article argues that it is ethically dubious since it takes advantage of the public.

The five events are correlated and occurring over approximate five months from 18th August 2010 to 13th December 2010.

The $400,000-dollar company could be more profitable than the 10-billion-dollar company. An outside investor may want to invest in the new start-up instead of the established company. A creditor may feel safer loaning money to the start-up because the financial statements show that the business will pay its debts. Percentage analysis sidesteps the materiality problems of comparing different companies by measuring changes in percentages rather than absolute amounts (Edmonds, Tsay, & Olds, 2011). The absolute dollar amount can be misleading when comparing businesses. The absolute dollar amount analysis may not be comparing apples to

However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.

Guay (1999) documents a positive relationship between firm size and CEO risk-taking incentives. I measure firm size as the total sales at the end of the year. Previous empirical studies show that growth opportunities are also expected to be positively related to CEO risk-taking incentives (Guay, 1999; Rajgopal and Shevlin, 2002; Coles et al., 2006). Consistent with earlier compensation studies, the market-to-book value of assets is used as a proxy for growth opportunities. In contrast, leverage is expected to be negatively associated with the risk-taking incentives (Rogers, 2002). Financial leverage increases the probability of financial distress increase and, therefore, there is lesser need to provide the CEO with a risk-taking incentive. I utilize the debt ration (book value of debt to book value of assets) as a proxy for leverage (Rogers, 2002).

The contemporary corporate world is seemingly a place for huge corporate giants. Multinationals and listed public limited company is the ultimate aim of most businesses. A big company does not only mean a strong dominance in the market, but also has a good chance to increase profitability due to its volume based production. However, all the large corporate giants around the world have started from a very low scale and have grown themselves over a period of time. On the other hand despite of opportunities to grow some businesses still prefer to stay small due to catering to niche elite segments which are relatively smaller market sectors.

Most rely on valuation heuristics involving P/E, PEG, and price-to-sales . The simplicity of using heuristic triggers dependence on valuation heuristics as an alternative for the fundamental valuation. P/E, PEG, and price-to-sales need few variables and use simple formulas. Therefore , the estimates are rather perceptive THUS subject to bias. The cause of these biases arise from weak assumption made towards P/E, PEG, and price-to-sales inputs.

In the absence of a different set of companies, with a smaller market capitalization, we observe the following estimations for Robertson.

Sarah Newell’s company Newell Manufacturing & Distribution is currently valued to an amount of $132,508,608 through the use of discounted cash flow models. It is suggested that she sells the company as a whole. The reasoning for selling of the design division is based off of the positive correlation between the equity valuation of a company in the industry and its ability to generate sales. Consequently, there is no direct relationship between the amount of sales and the number of households a company has in its mailing list. Esteban Armijo’s need for a design company with over 3 million households in its mailing list will provide the Sarah an opportunity to sell the division at a price which reflects revenues and an additional premium that

Every company for example Wal-Mart worries about its profitability. One of the most regularly utilized implements of financial ratio analysis is profitability ratios which are utilized to figure out the bottom line of the company. Profitability measures are vital to corporation managers and owners alike. If a small industry has outside stockholders who have put their own money into the corporation, the primary owner surely has to show profitability to those equity stockholders. (Blanchard, 2008)

Analytical researches will based on the competition (Verrecchia, 1983; Darrough and Stoughton, 1990) and firm value (Hughes, 1986). On the other hand, Empirical research will be mainly focused on the impact of the firm characteristics (Cerf, 1961). Elliott and Jacobson (1994) also claims that there are three benefit of business information disclosure, the entity’s interests, Non-owner investors’ interests and the national interest.

Normally, the underwriter’s agreement can come in two basic forms: Firm Commitment and Best Efforts. Using a Firm Commitment arrangement the investment bank will acquire all the new shares from the issuing firm and then be responsible to market it to the public. The compensation for the investment bank is the spread between their purchase price and public offering price. Using this method, the investment bank undertakes the full risk of not being able to sell all the shares at the determined price. By the best effort arrangement, the investment bank assists the issuing firm to sell their shares. The investment bank serves as an intermediary between the potential investors and the issuing

If the firms funding requirements are larger than their retained earnings, they must issue debt as this is preferred to issuing equity. Based on this theory, a firm’s financing policies could be viewed as signalling management’s view of the firm’s stock value (Wang & Lin 2010).Myers and Majluf (1984) also add that if firms issued no new securities but only used its retained earning to support the investment opportunities, the information asymmetric could be resolved. This suggests that issuing equity turn out to be more expensive as asymmetric information insiders and outsiders increase. Large firms should then issue debt to avoid selling under priced securities. As the requirement for external financing increases, businesses will work down the pecking order, from safe to riskier debt, perhaps to convertible securities or preferred stock, and finally to equity as a last resort. Each firm's debt ratio therefore reflects its cumulative requirement for external financing (Myers 2001).The pecking order theory clarifies why the bulk of external financing comes from debt. It also describes why organizations that are more profitable borrow less: since their goal debt ratio is, low-in the pecking order they do not have a goal since profitable firms have more internal financing available.

To increase and maximize the wealth/value of shareholders, it is necessary that the company is competitive in their market and can reliably “earn a considerable return on its investments above their cost of capital” (Doyle, 2000). The increasing rates of return of well performing companies attract new investors who invest money to become shareholders. These outside funds from investors are essential for growth of businesses and the expansion into new markets. Measurements of generated shareholder returns over a certain time period deliver the company useful information on whether their objectives have been achieved or should be new adjusted (Atrill, 2009).