Question

3. What is a venture capitalist? What is an IPO? What does the term “underpricing “an IPO mean? Why are IPOs typically underpriced? When might this be fraudulent? What is a leveraged buyout (LBO)?

4. Explain how a company can be reporting accounting profits but financial analysts could conclude that management is not adding economic value—in fact is reducing the value of the company. What would that imply about the firm’s IRR and ROE?

5.   If 10-year U.S. Treasury notes yield 5% and German 10-year bunds yield only 1%, you as the CFO of a U. S. company propose to borrow lots of euros at 2.50%, sell the euros for dollars, earn 5% for six months and hedge your currency risk with a forward contract. That, you argue, will substantially increase profits. Should your boss approve this proposal? Why or why not?

Answer 1

Ans 3  Venture capitalist :

Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take a monetary form; it can also be provided in the form of technical or managerial expertise. Venture capital is typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.

IPO :

An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors.

Why IPO Underpriced ?

An IPO may be underpriced deliberately in order to boost demand and encourage investors to take a risk on a new company. It may be underpriced accidentally because its underwriters underestimated the demand in the market for this company's stock

When might this be fraudulent:

When Company is not Good and Based on which it is also Underpriced.

LBO:

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company

Ans 4:Company can be reporting accounting profits but financial analysts could conclude that management is not adding economic value—in fact is reducing the value of the company.

Economic Value is based on the common accounting based items like interest bearing debt, equity capital and net operating profit. It differs from the traditional measures mainly by including the cost of equity. Mathematically EVA gives exactly the same results in valuations.

EVA is aimed to be a measure that tells what have happened to the wealth of shareholders. According to this theory, earning a return greater than the cost of capital increases value (of a company), and earning less decreased value.

Imply about the firm’s IRR and ROE:

Firms use both metrics when budgeting for capital, and the decision on whether to undertake a new project often comes down to the projected ROI or IRR. Software makes calculating IRR much easier, so deciding which metric to use boils down to which additional costs need to be considered.

While there are many ways to measure investment performance, few metrics are more popular and meaningful than return on investment (ROI) and internal rate of return (IRR). Across all types of investments, ROI is more common than IRR largely because IRR is more confusing and difficult to calculate.

Ans 5: Boss Will Approve The proposal for whch the fact are as follow,

-U.S. Market have Higher Return

- By Taking Euro Position the Risk related to the Currency can be Reduced.