Is it true? Explain IPO initial return for the investor is the return that equal

Question

Is it true? Explain IPO initial return for the investor is the return that equals to the difference between the opening and closing price of the first trading day. Is it true? Level I American depository receipts allow to US company to raise new capital in US stock market, where those receipts could be placed and traded at one of the leading stock exchanges. Is it true? Explain. If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC. Is a short-term debt included in the cost of capital estimation? Why? Could the beta be negative? In which case? Explain the consequences for the Required Rate of Return.

Explanation / Answer

1- Answer-False.

IPO initial return calculated from closing price on the first day of trading and the offering price of the IPO.

IRi=log(PiClose)log(PiOffer)

where PClosei and POfferi refer to the closing price on the first day of trading and the offering price, respectively, for the IPO

2.Answer- False.

an American depositary receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. ADRs are bought and sold on American markets just like regular stocks, and are issued/sponsored in the U.S. by a bank or brokerage.

Level 1 ADR - This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. Level 1 ADRs are found on the over-the-counter market and are an easy and inexpensive way to gauge interest for its securities in North America. Level 1 ADRs also have the loosest requirements from the Securities and Exchange Commission (SEC). This ADR can only be traded in the OTC Bulletin Board or Pink Sheets trading systems, usually by institutional investors.

3. Answer- True. If marginal tax rate increase then then cost of debt decreased.

For example if cost of debt before tax is 5% and tax rate is 30% then cost of debt after tax will be 5*(100%-30%)=3.5%

If marginal tax rate increased to 40% then the cost of debt after tax will be 5*(100%-40%)=3%. It proves the fact that if tax rate increase then the cost of debt decrease.

4.Answer- Interest bearing short term debt can be included in the cost of capital estimation but non interest bearing short term debt generally not included in the cost of capital estimation. Generally small company included the interest bering short term debt in their cost of capital estimation.

If the firm uses short-term interest-bearing debt to acquire fixed assets rather than just to finance working capital needs, then the WACC should include a short-term debt component. Noninterest-bearing debt is generally not included in the cost of capital estimate because these funds are netted out when determining investment needs, that is, net rather than gross working capital is included in capital expenditures.

5.Answer-

Negative beta - A beta less than 0, which would indicate an inverse relation to the market - is possible but highly unlikely. However, some investors believe that gold and gold stocks should have negative betas because they tended to do better when the stock market declines.any investment that when added to a portfolio, makes the overall risk of the portfolio go down, has a negative beta. A more intuitive way of thinking about this is that a negative beta investment represents insurance against some macro economic risk that affects the rest of your portfolio adversely

Consequences of negative beta on required rate of return-

The expected return on that investment will be less than the riskfree rate; the nominal returns on gold over the last 40 years have been 2% less,on average annually, than the riskfree rate. However, that makes complete sense if you think of it as buying insurance. You are paying for the insurance by settling for a very low or even negative return.

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