Deakin UniversityMAF 101

(a) On April 3RD 2018, Spotify Ltd, the Swedish streaming music company listed on the New York Stock Exchange with an offer price of $132 per share. Is it an example of direct or indirect financing? Explain.

(b)   XYZ has just issued a 120 day bank accepted bill (BAB) with a face value of 25 million when the interest rate is 5% p.a. How much is the BAB selling for?

(c) ABC is a small company with no credit rating. Can the company still raise debt in the short-term money market? How?

Answer:

(a): This is direct financing.

Here Spotify raised financing by listing its shares in the stock exchange. Thus this was an IPO i.e. an initial public offering. It should be noted that in an IPO shares of a company are offered for sale and this is regarded as direct financing as funds are procured directly from the investors. Moreover the listing was a direct listing as there was no primary or secondary underwritten offering in case of Spotify.

(b): BAB's selling price = face value/[1+(rate*no.of days/365)]

= 25 million/[1+(0.05*120/365)]

= 25 million/1.0164384

= 24,595,687.33 (or 24.5957 million (4 decimals)   or 24.60 million (2 decimals)

(c ): Yes, ABC can still raise debt in the short term money market.

Here ABC can issue commercial papers (CPs). CPs are promissory notes that ABC can issue to raise capital to meet  short term business needs. As the ABC is a small company with no credit rating it will have to offer a high rate of interest on the commercial papers issued by it. Alternatively ABC company will have to secure their commercial papers through some assets that will be used as collateral. This will help it in offering the CPs at lower interest rates.