This question is worth 10 marks in total. This is a written calculation question, and you should perform the necessary calculations/working on paper to later be scanned and uploaded. Start a new page for this question. For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places. If any parts of the question use values from earlier parts, use the EXACT values from earlier parts.

QUESTION START

a) Explain why venture capital funding is critical for start-up firms with a lot of intangible assets. (1 mark)

b) Discuss the problem of information asymmetry in venture capital funding. (1 mark)

c) Describe two ways in which venture capital firms structure their funding to reduce risk. (2 marks)

The following information applies for parts d), e) and f). A company makes an initial public offering of shares to raise $240 million, at an offer price of $8 per share. The issue is underwritten at $7.60. The costs of preparing the prospectus, legal fees, ASIC registration and other administrative costs add up to $700,000. The firms share price closes at $8.70 on its first day of trade.

Two years later, the company wants to finance a new investment project costing $36 million. It will do this through a seasoned equity offering at $54 per share, and the underwriter charges a 7% spread.

d) Calculate the IPO underwriting spread. (2 marks)

e) Calculate the IPO underpricing. (1 mark)

f) How many shares have to be issued through the SEO? (1 mark)

g) Discuss two advantages for firms to raise capital through seasoned equity offerings, as compared with an IPO. (2 marks)