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Posted: September 1st, 2023
Finance Questions essay
3000 words maximum
Assignment Questions:
The assignment is based on the following three documents
• A case study ‘The Facebook IPO hype: a rude
social awakening’
• Facebook IPO prospectus
• An Excel file containing daily share price of
Facebook since its
IPO (FB shareprice)
• Read the case study and the relevant parts of the
Facebook IPO prospectus answer the following
questions. You will find the eBook ‘IPOs: The mechanics
and performance of initial public offerings (Arif
Khurshed, Harriman House, 2011) helpful. This book can
be accessed from the University of Manchester Library’s
website. You can also use credible external resources to
answer the questions.
•
(i) An IPO marks a strategic milestone for a company.
(a) Explain the generic benefits and drawbacks of going
public. (b) What motivated Facebook to go public?
• (ii) Facebook had several avenues to raise funds. Why was it
relatively easier for Facebook to raise capital from the stock
markets over debt? Was an IPO the most suitable choice?
(iii) On page 37 of the IPO prospectus, Facebook provides
information on the ‘Use of proceeds’. What is your view on
how Facebook planned to use the capital raised from the
IPO? Should Facebook invest IPO proceeds in financial
securities?
(iv) Is it correct to state that Facebook raised $16 billion through
its IPO? Why or why not?
(v) Facebook offered only Class A stock through the IPO. Who
were the primary purchasers of these shares? How would new
investors be affected by the dual-class share structure?
(vi) What is an IPO over-allotment (Greenshoe) option? Did
Facebook include such an option in its IPO?
(vii) What are IPO lock-up agreements? Describe the lock-up
agreement of the Facebook IPO.
(6 marks) (viii) The underwriting investment bank takes on a
central role in the IPO process.
(a) What are the key tasks executed by the underwriter?
(b) What are primary considerations when selecting an
underwriter?
(c) Often, multiple underwriters are involved. What are the main
motivations for syndication?
(d) How much compensation was paid to the underwriters of
Facebook? Do you think it is comparable to the average
compensation paid to underwriters in US IPOs?
(e) What do you understand by ‘price-stabilization’ activities
conducted by the underwriter(s)? Do you think the underwriters
were involved in price- stabilization of the Facebook IPO?
(ix) Describe what happens during ‘book-building’ of an IPO. What
price range was used for book building of the Facebook IPO?
Why do you think Facebook priced its offering at the top end of
the book-building range?
(x) Assess Facebook’s issue price ($38) in light of the valuation
data and parameters provided in the case within DCF (Discounted
Cash Flow) and CCA (Comparable Companies Analysis)
techniques. Briefly evaluate the valuation performed by Prof.
Damodaran in Exhibit 17 of the case study.
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