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Kayla H.
Client Service Manager at Ameriprise Financial
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Finance
TutorMe
Question:

What is underwriting and the process involved with it?

Kayla H.
Answer:

Underwriting is the insurance term, which means risk provided by investment bankers. Under firm-commitment underwriting, the underwriter assumes the full risk that the shares cannot be sold to the public at the stipulated offering price. Then the prospectus is created, which is the legal statement that is approved by the Securities and Exchange Commission that offers the investment for sale to the public. At this point, the price at which the securities will be offered to the public is announced. After, the issuers of the security go on a road show. This is where they travel around the world to talk to potential investors about the Initial Public Offering (IPO). The purpose of the road show is to generate interest among potential investors and to provide information to the issuing firm and underwriters about the price at which they will be able to market the securities. When they begin the IPO allocation, there is an auction and only the people who offer the highest price will get the initial shares. Everyone wants to get IPO allocation because it offers the stock at a lower price, and there is a limited amount of shares. This underpricing is reflected in price jumps that occur on the date when the shares are first traded in the public security markets. The process of polling potential investors is called book building. Explicit costs of an IPO tend to be around 7% of the fund raised.

Corporate Finance
TutorMe
Question:

How is the expected return on equity calculated?

Kayla H.
Answer:

To solve for a companies return on equity, you will use the Capital Asset Pricing Model (CAPM) formula. The CAPM formula is: Re = Rf + B(Rm-Rf). The variables stand for Expected Return on Equity (Re), Risk Free Rate (Rf), Beta (B), and the Expected Return on the Market (Rm). If your B= 1.2735, Rf= 0.0028, and Rm= .009267 then your Re= .08516 or 8.52%.

Business
TutorMe
Question:

What are the key problems in maintaining a competitive advantage in embryonic and growth industry environments? What are the dangers associated with being the leader in an industry?

Kayla H.
Answer:

In the embryonic and growth industries, to maintain a competitive advantage it is important to determine your business strategy by looking at market demand. Innovators and early adopters have different needs than the early and late majority, and it is important to recognize this in order for a company to cross the chasms. The dangers of being the leader of an industry is sustaining this competitive advantage and constantly looking for more ways to bring more value to the customer. Pioneering companies that do not change the strategies they use in their business model will therefore lose competitive advantage to the companies that implement new strategies.

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