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Principles of Finance Videos 156 videos

Principles of Finance: Unit 1, Alex, That’s Finance Potpourri for $500
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Okay, so you want to be a company financial manager. It's basically up to you to make money for the shareholders. It would also be swell if you mad...

Principles of Finance: Unit 1, Company Formation, Structure, Inception
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How is a company... born? Can it be performed via C-section? Is there a midwife present? Do its parents get in a fight over what to name it? In thi...

Principles of Finance: Unit 1, Income Statements: Margin, Operating Profits, and More
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What is an income statement, and why do we need it in our lives? Well, let's take a look at an income statement for Year 1 of the Sauce Company, an...

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Principles of Finance: Unit 1, Pros and Cons of IPOs, The Secondary & Primary Market 25 Views


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What are the pros and cons of IPOs, and of the secondary and primary market? Why might a company want to go public, and what's the best way to go about... doing that? Well, our good friends at the Sauce Company will have to decide how much control they're comfortable giving up, how their decisions will affect investors, their stock prices, etc.

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Transcript

00:00

principles of Finance a la shmoop. pros and cons of IPOs, the secondary and

00:07

the primary market. ah the IPO. investing holy grail. well an IPO is an initial

00:15

public offering. in it the company agrees to conform to higher standards of [white board definitions]

00:20

operation mainly in the form of reporting and accounting compliance and

00:25

in return the company gets to sell stock to the public and list its shares on an

00:30

exchange like Nasdaq or the American Stock Exchange or the NYSC you know just

00:35

like the big boys. why would the sauce company want to do that well two reasons.

00:42

really one is that it gives the original investors Artie Bernie Reid a purple key [man gives power point]

00:47

the opportunity to cash out or get liquid. liquidity vocab word time -refers

00:54

to investors easy and quick means with which to turn their equity shares

00:59

into the cold hard stuff or cash. like if you're very liquid you hold a

01:03

lot of cash. mr. market the stock market puts a valuation on the company in the

01:09

form of pricing its shares- it's a valuation that is typically

01:12

higher than professional private equity or venture investors would give it, and

01:16

well with that IPO move come the burdens of being a public company- more scrutiny

01:23

more stringent reporting requirements more bureaucrats more filings more [power point presentation continues]

01:28

accountability, just well more. well all of these are a cost to any public

01:33

company. and the big debate revolves around whether the positives outweigh

01:37

the negatives ,right because being public carries a lot of burden to it. there's a

01:41

lot of spirited debate within the sauce company around the question why go [scale pictured]

01:44

public at all? well Bernie notes that he likes having the freedom to experiment

01:49

and spend money trying new applications for the sauce. could it be a know a hair

01:55

conditioner ?or what about a pet laxative? and

02:00

don't ask how he came up with that idea. well he's talking about branching out [cat leaves litter box]

02:04

into scented candles as well. it seems that the early trials have been a huge

02:08

hit in Thailand. well if the sauce company is public he worries that he

02:13

will not have the ability to make mistakes experimenting because well the

02:17

company will be focused solely on hitting their quarterly profitability

02:21

numbers, so that Wall Street will be happy and they'll carry a high stock [smiling man in a suit]

02:24

price. well Artie ruefully points out that the venture guys will sell them out

02:28

dumping their shares just in time for the sauce company to miss a quarter by a

02:33

few pennies a share and then well they watch their stock price get cut in half

02:37

overnight. so the founders really don't want to take the company public. the [chart shown]

02:41

debate gets heated enough that Artyom Bertina find their own legal counsel to

02:44

outline their choices. they wanted to use uncle hy but well he realized this was

02:49

way out of his league. so he found them a lawyer from the August firm Dewey

02:53

Cheatham and Howe. well Hine Goldberg a partner at the firm points out that [lawyer firm shown]

02:57

since the company doesn't need the money well they already have 40 million

03:01

dollars in cash on the books no debt and a very high free cash flow coming into

03:06

the company each month ,well the only reason for doing an IPO would be to let

03:10

others sell stock. high notes the huge success of off marketplaces that have [man smiles holding stock]

03:16

emerged through which companies like Facebook and Google and Twitter and a

03:20

bunch of other high-growth Silicon Valley companies have transacted in the

03:23

billions of dollars. they could simply list their securities on a second market

03:28

or the actual company called the second market and hope for the best!

03:32

well unfortunately the VCS do not believe that second market marketplaces

03:36

alone will give them the liquidity they need to sell so many shares. so the VCS [logo of second market shown]

03:41

are determined to go public and really they're kind of miffed because that was

03:45

the handshake they made when they invested in the first place. that the

03:48

company would go public if it could. well it appears that they have a stalemate

03:52

until mr. Wu weighs in .he's at a crossroads in his career. because he's

03:57

done such a spectacular job at running the sauce company while he's now being [man answers phone]

04:01

highly recruited to come in and run huge public companies as CEO. well he only has

04:06

six more months to vest in his stock options that were granted originally,

04:10

and if the sauce company decides not to go public, well he can just quietly

04:13

finish best and give notice in a few months and we'll move on to his next gig.

04:17

he'll profit handsomely from his options which he bought out and owns the shares [three men play musical instruments]

04:21

of now, and with his vesting he'll have converted them entirely into the common

04:26

stock that he bought out. got it? he can surely find buyers for his small stake

04:30

on the second market in well just move on. but if mr. Wu goes well it's a huge

04:35

headache for everyone. arty and Bernina have grown to respect

04:39

and like him as has the board and the other thousand employees now inside the

04:43

company but most importantly so has Bubbie. [men frown]

04:46

she got to know mr. Wu's mother who was about her age and while they had been

04:50

experimenting with a blend of Eastern European cooking and just eastern

04:54

cooking kreplach dim sum which has fast become Bobby's favorite dish. well since

04:59

the heart and soul the company is bubbie anyway when she speaks no the rest of [women smile sitting at a table]

05:02

the room gets quiet fast, and she wants Wu to stay so she asked him to describe

05:07

his vision for the future of the company Wu then details his longer-term strategy

05:11

which is to take the company public and then acquire or roll up other smaller

05:16

brands contiguous to the sauce arena. salad dressings snack foods other

05:21

cooking elixirs all branded under this new hot brand the sauce to buyers who [salad dressing and vegetable oil shown]

05:27

pray to the goddess Bubbe who's smiling face at this point from seventeen while

05:31

going on 20 years ago actually adorns every bottle. bubbie loves this idea! so

05:35

it was said so it shall be done. Aarti and Bernie stare at their laps as

05:39

they vote okay quietly when the board resolution is passed to go public. yep [young men frown]

05:45

what a good couple of minions.

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