In this case, even after the IPO, Del-Ta Engineering is still the controlling shareholder by virtue of its shareholders agreement with David Rivel (Initial Public Offerings (IPO): RRSAT Global Communications Network Ltd. n.d.).
IPOs have positive initial returns on average. This is the phenomenon of underpricing (Ross, Westerfield, and Jaffee, 1996). For example, at start of the first day after the RRSat Global Communications Network Ltd., the shares were 12.16% [($14.02 - $ 12.50)/$12.50] above their initial offering price. At the end of the first day, the shares were 20.24% [($15.03 - $ 12.50)/$12.50] above their initial offering price (RRSat Global Communications Network Ltd. n.d.).
The present value of the first three payments comprises a significant portion (20.73%) of the price of stock. This can be explained by the time value of money. A dollar now is worth more than a dollar in the future.
a. High-risk companies. High-risk companies are expected to distribute a relatively low proportion of current earnings and have a relatively low PE ratio. A high-risk company is likely to retain more of its earnings as the probability of bankruptcy is higher. ...