Q1. (a)
Motilal Oswal Financial Services Ltd has asked for a help from the Venture capitalists. These are the businesses, which make investments in order to support the operations of the company in the earlier phase of the business. Hence, in this case there are two eventual investors that are supporting MOFSL, which include Bessemer Venture Partners and New Vernon capital. Furthermore, the role of the VCs is that once they decide that they are going to support a business then they will surely give an advice on how further improvements can be made in a business plan.
It is also mentioned that there was an introduction of an unusual term by the venture capitalist, which states that if MOFSL does not go public by adopting initial price offering within 5 years, then the investors have the option to take back the shares. However, this approach is not going to be acceptable by MOFSL because they want to make investments in the markets and trade their shares publicly. Moreover, this company is quite sensitive to any sort of severe conditions in the market and because it will ultimately have an impact on the value of the company. If the venture capitalist is making an investment in the company, then they also have an exit route in their mind in order to escape the company.
Having said this, the investors are avoiding the exposure to risk of the market conditions up to some extent by keeping their shares at minimum IRR. The role of IRR is generally that it helps the investors in order evaluate the rate of return on their investments. The major role of IRR is that it helps in determining that whether or not a project is making any financial sense for MOFSL. The acceptable IRR for this put feature is almost 37%.
b)
It is known that the venture capitalists normally add value to the businesses by making huge amount of investments in the company. The value drivers that can be included are; the quality of the company’s management, its growth in terms of sustained return on equity and the earnings relatively.Despite this, the other value driver for MOFSL is the long term competitive advantage in the stock market and the price. The other factor that resulted in value addition is the population of India with higher income.Apart from that, another factor is the in crease in the share price from $1.26 in 2006 and in 2007 $2.81/share. The number of top brokers has increased significantly,which almost doubled between the fiscal years of 2001 and 2005. Hence, 2006 there was also a significant growth in the company in terms of internal growth and growth via acquisitions and as a result MOFSL became one of the top 3 brokerage houses. The future of brokerage in India seems to be better because Motilal Oswal Securities were able to serve the both the small and the major customers.
The assumption about the future brokerage is that the MOFSL is also providing services based on depository. The reason behind the better future of brokerage is that this service also resulted in a high generation of the revenue. Among several other services the brokerage also provided advice to its clients about hedging. It was able to serve the huge customer base,which included several different types of customers. However, it has served the market as a pioneer in terms of retail brokerage services. Furthermore,due to the better future of the brokerage service, there may be different implications on MOFSL in terms of value. There may be an increase in the value of MOFSL due to the better performance of brokerage houses in India.
c)
MOFSL should go public and the reason behind this is that MOFSL is currently in need of a large amount of cash, which it can obtain from the Venture capitalists. If the company becomes listed on the stock market, then it is going to result in the increase of its share price. The other reason for going public is that it will prove beneficial in improving the statement of financial position in order to make purchases of other companies in the upcoming future.
Moreover, the other reason behind going public is that MOFSL would be able to attract large number of investors.There is also an increased chance that the market is having better prospects in the future, which will ultimately support the success of MOFSL. Due to the better performance of the company, the market has grown across the globe. By having the shares in the company and not investing it in the stock market will not result in the increase in the price of shares. Therefore,if a company wants to keep its shareholders satisfied by generating sufficient returns for them, then there it has to go public, which will also help in keep making dividend payments to the shareholders. Hence, the recommended issue size related to the stock of the company should be almost $3.53/share in order to achieve better future returns....................
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