Financial Assignment

Advantages of private sources: 1.Terms of private bonds and equities can be customized for individual investors 2.No costly registration with the securities regulator 3. No need to reveal confidential information 4.Easier to renegotiate

Disadvantages:1.Limited investor base 2.Less liquid.

Advantages of going public: Better access to capital markets. Shareholders gain liquidity. Original owners can diversify. Monitoring and information are provided by external capital markets. Enhances the firm’s credibility with customers, employees, and suppliers. DIS: expensive, cost of dealing with shareholders, information revealed to competitors, public pressure.

US public issues more common: 1Firms closely held in Europe vs Widely held in US 2Increasing the investor base reduces cost of raising funds 3Rights Issues may signal low quality 4Regulatory Issues

Features of Eurobonds :1Sold outside the country in whose currency it is denominated 2Bearer bond 3Offered to investors in many different countries 4Generally sold only by large and well-known multinational firms 5Coupons are typically paid annually

Compute the accrued interest on a 8 per cent Eurozone corporate bond that settles on 30 June. The last coupon date was 25 February. Solution: The number of days since the last coupon is:6 days (Feb.) + 30 × 3 days (Mar., Apr., May) + 29 days (Jun.) = 125 days, 125/368 * €8= €2.77778. The bond has €2.77778 of accrued interest per €100 of face value.

The tangency portfolio and optimal investment

Result 5.2: Under the assumptions of mean-variance analysis, and assuming the existence of a risk-free asset, all investors will select portfolios on the capital market line. g=b*ROE