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Initial Public Offering Paper - Essay Example
c. Ownership and control become more disperse. Before the IPO, Del-Ta Engineering is the direct beneficial owner of 46.64% of its outstanding shares and may be deemed the beneficial owner of a total of 67.55% of its outstanding ordinary shares by virtue of its shareholders agreement with David Rivel, its Chief Executive Officer and a principal shareholder…
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. ...