Finance Assignment IPO and the Hertz Case Name: Mohammad Hamid

1. Explain how understanding the "winner's curse" problem can help explain this phenomenon The winner's curse is all about investors level of information in relation to the intrinsic value of an IPO issuance. who think that an IPO is overpriced will avoid it and underpriced will subscribe for, whereas others who doesn't fair estimate of an IPO end up buying overpriced IPOs or not buying underpriced IPOs. The only way for underwr counteract the winner's curse and attract informed investor to underprice on average the new issuance.

2. Dilution Given Information Current Condition of the Firm FCF g Ra # of Share Part a: Firm Value E[EPS] Stock Price Project NPV Part b: Project NPV Pre-issuance per share basis New Price # of shares to be issued Post issuance number of share

15 0.03 0.1 4

New Project FCF g Ra Cost

7 0.03 0.1 60

214.3 3.75 54 40 40 10 64 0.94 4.94

E[EPS] 4.45 Verifying Post issuance stock price 64 We can see that if NPV of the project is anticipated correctly in the market, the pre-issuance price compared to po issuence price is the same.

Part c: Optional If the stock price doesn't change from 54 to 64 to reflect the NPV of the new project, then would have the folowin # of stock to be issued 1.12 Post issuance number of share 5.12 E[EPS] 4.30

Post issuance share price 61 We see that the difference is now 3 dollar in sotck price.

This is a dilution effect

Part d: Optional If the firm has the choice of cash, new debt and new equity, but chose new quity to finance is sending negative sig the market because market assume that stock are overvalued and the firm issue new equity to benefit from overvaluation of its stock price. If the price of stock falls to $50 per share, then by dividing the new project cost by number "60/50=1.2", about 1.2million should be shared. This is more both than the answer in part "a" and part "b

3. Hertz Case a. Purpose One of the main reasons behind the Private Equity holder decision to pursue Hertz IPO was the potential risk of th Hertz due to unusual high leverage of more than $6 billion in total corporate debt. Obviously, the sponsors couldn such a risk for a period of 3-7 years of typical buyout before going to public. The second reason was that sponsors already received special devidend of $991.4million through 1,000 million debt borrowed on "Hertz Holdings Loan Facility", hence they needed more financing from public to fund that. Other partial reasons includes risen cost of vehicles, and tightness of revenue closely to air travel. b. Winners and losers The winner of the deal would be the sponsors, while the possible losers would be the new shareholders. The reaso that the sponsor already got special divdend of 991.4 million from the company, the fund they get from IPO proce be used to finance back the borrowed debt on "Hertz Holdings Loan Facility". In such as deal, the new investors be more risk and are prone to be hurt in case of an economic downturn. c. Valuation:
Multiple EBIDTA Multiple of RAC EBIDTA Multiple of HREC EBIDTA Enterprise Value

10.556 5.388 Book value of Feet

Enterprise Value Debt Cash Equity value

570.3 750.0

6020.23 4040.63 7600 17661 13,955 440 4146 232 17.9

Total common share after Offer (millions) Estimated Share Value

So based on my valuation, the estimated share price should be $12, therefore investing at $15 for Breg is not a go opportunity. If I was in the market, I wouldn't invest in this IPO for two reasons, one is that the company is highly leveraged and risky, second the valuation based on information shows that price of $15 is still high. Meanwhile, I w question why would the private equity sell the company wihtout any major change in terms of restructuring and s

So based on my valuation, the estimated share price should be $12, therefore investing at $15 for Breg is not a go opportunity. If I was in the market, I wouldn't invest in this IPO for two reasons, one is that the company is highly leveraged and risky, second the valuation based on information shows that price of $15 is still high. Meanwhile, I w question why would the private equity sell the company wihtout any major change in terms of restructuring and s

henomenon rinsic value of an IPO issuance. Those r, whereas others who doesn't have a IPOs. The only way for underwriter to erage the new issuance.

e-issuance price compared to post

ct, then would have the folowing

o finance is sending negative signal to ew equity to benefit from dividing the new project cost by this e answer in part "a" and part "b".

IPO was the potential risk of the Obviously, the sponsors couldn't carry cond reason was that sponsors owed on "Hertz Holdings Loan reasons includes risen cost of

he new shareholders. The reason is he fund they get from IPO proceed will ch as deal, the new investors bear

sting at $15 for Breg is not a good e is that the company is highly f $15 is still high. Meanwhile, I would e in terms of restructuring and so on.

sting at $15 for Breg is not a good e is that the company is highly f $15 is still high. Meanwhile, I would e in terms of restructuring and so on.