MFIN8881: Advanced Corporate Finance
Spring 2023
(This project carries 15% of the course grade. You are expected to work on and
complete this project ALONE and not as a group.)
Solo Class Project QUESTIONS
This project carries four questions. The first question carries 50% of the total solo-
project credit; the second and third questions carry 15% each; the last question
carries 20%.
1. Answer the following questions after studying the preliminary prospectus of the
Biotech company, Mineralys Therapeutics, and the two attached newspaper articles related
to its IPO. Mineralys went public on February 10, 2023 with a final IPO offer price of
$16.00 per share. You can dig up additional information on Mineralys and its IPO and use
this additional information to answer these questions as well (though your answer should
be self-contained and cannot rely on someone else’s calculations: you need to give ALL
supporting calculations for any quantitative questions such as the valuations of the firm,
etc.)
(i) Was Mineralys undervalued or overvalued at the time of IPO (i.e., at the final offer
price)? Justify your answer with various calculations. (Useful calculations would include
computing the intrinsic value of the company using either comparable valuation or cash
flow valuation, or both). You may use various IPO web sites (like IPOscoop.com,
Hoover.com or Renaissance Capital) linked to the course web site to produce (obtain)
additional information helpful in doing various calculations, though you need to provide
all these calculations yourself.
(ii) Mineralys Therapeutics initially filed to go public mentioning that its offer price would
be between $14 to $16 per share (“initial filing range”). Assuming that you are working
for an institutional investor potentially interested in investing in the IPO, could you
prepare a brief (one page) “Investing note” on Mineralys Therapeutics, explaining why
2 you think this IPO is a good investment (or why it is not a good investment) if shares are
offered with an offer price at or within the initial filing range. You can mention the nature
of the firm’s business, its competitors, potential risks, how the firm has been financed so
far, or any other information you may wish to include. In preparing this investing note,
feel free to use any information you can find (i.e., any information in addition to that in
the prospectus).
(iii) At the very beginning of their prospectus, Mineralys Therapeutics refers to itself as an
“emerging growth company.” Could you explain what this means? How do you think
this classification affected the Mineralys IPO?
(iv) One of the attached articles mentions the following: “Shares of Mineralys opened at
$21.10 at around 11:15 a.m. ET, quickly reaching a high of $21.98 before sliding to a
low of $20.50. The stock recently changed hands at $20.72, up 30% from its IPO price,
at approximately 12:10 p.m. ET.” Could the fairly high initial return have been predicted
in advance (to some extent)? What would be the indicators you would use to make such
a prediction?
(v) What fraction of the IPO equity offering is “primary” and what fraction is “secondary”?
Give details (numerical fractions).
(vi) The first page of the IPO prospectus says: “The underwriters may also exercise their
option to purchase up to an additional 1,800,000 shares of common stock from us, at the
initial public offering price, less the underwriting discount, for 30 days after the date of
this prospectus.” This provision is called the “green show” or overallotment option.” Was
this provision likely to have been exercised in the case of Mineralys Therapeutics’ IPO?
Why or why not (i.e., why would it have been exercised or not exercised)? What will be
the effect of the overallotment option on underwriters’ incentives?
(vii) What accounts for the timing of Mineralys Therapeutics’ IPO? Comment on the timing
from the point of view of the equity market as well as from the point of view of the firm’s
life cycle. Hint: While this article is not required for the exam, the advanced reading,
“The Going Public Decision and the Product Market,” by Chemmanur, He, and Nan
(posted under IPOs on the course website) may be worth a quick look before answering
this question (you may also want to keep our case discussion(s) in mind).
IPO. Comment on this choice by Mineralys of its underwriting team (top book runners).
Is this choice appropriate?
there something special about this listing site? Is this choice of listing appropriate for the
company?
currently affect its attractiveness to potential investors?
Mineralys Therapeutics, Inc. As a researcher advising the portfolio manager, you are
asked to arrive at a trading strategy for the shares your fund received in the IPO. Would
you recommend that your fund flip out of the IPO immediately? What trading strategy
would you recommend? You should give details, like the percentage of the IPO
allocation you recommend your portfolio manager sell (if any) during what horizon, until
the entire IPO allocation is exhausted. Briefly give the rationale for your advice, based
on our class discussions, the available empirical evidence etc. (An advanced reading on
the course website by Chemmanur, Hu, and Huang (2010) may be helpful to answer this
question, though this reading is not required for the exam.)
(xiii) You work for a mutual fund which invests primarily in the shares of firms going public,
in an advisory capacity. While the fund’s portfolio manager is aware that IPOs
underperform in the long run, its strategy is to cherry-pick good IPOs, and invest in them
in the aftermarket (i.e., after the start of trading in the IPO firm’s shares) for a three to
five-year horizon. Would you advice the portfolio manager to invest in the shares of
Mineralys Therapeutics as of today (i.e., in the secondary market)? Discuss specifically
what the facts are which prompt you to advice investing or not investing (you can
mention the strengths and weaknesses of Mineralys Therapeutics as an investment,
including its age at IPO, product portfolio, industry characteristics, and product market
competition), before giving your overall final recommendation regarding whether or not
to invest. Further, if you do recommend investment, when do you recommend your
mutual fund invest: i.e., how many months after the IPO? NO CREDIT WILL BE
GIVEN FOR A SIMPLE YES OR NO ANSWER WITHOUT JUSTIFICATION OR
AN ANSWER WITHOUT A FINAL RECOMMENDATION.
volume/low margin/low growth Hampshire unit to another firm. Your task is to estimate
the price that Maine Inc may be able to get for its Hampshire unit as of early (March)
2023. You have available the following operating projections:
Hampshire Unit: 2023-2027 Projections (millions $)
2023 2024 2025 2026 2027
Sales 4,700.5
Growth rate of sales 5.0% 5.0% 5.0% 5.0% 5.0%
Cost of sales 72.5% 72.5% 72.5% 72.5% 72.5%
Operating expenses 26.9% 26.8% 26.7% 26.6% 26.6%
———————————————————————————————
EBIT 28.2
Depreciation 30.6 36.2 40.9 41.1 37.0
CAPEX + WC increases 45.0 49.5 50.0 45.0 40.0
—————————————————————————————————————–
You estimate that the Hampshire unit can be financed with 50% debt at 12%, that its equity beta
for that leverage will be 0.9, and that the corporate tax rate is 40%. You have observed that the
long-term Treasury yield is 4.22%. The equity risk premium over long-term Treasuries for small-
cap firms is 6%. Finally, an examination of companies comparable to the Hampshire unit yielded
an average EBIT multiple equal to 8.5 times current EBIT.
(Hint: As a prelude to computing the value of the Hampshire unit, you need to compute the
free-cash flow of the Hampshire unit for the years 2023 through 2027.)
has 40% probability of being highly successful and 60% probability of having a mediocre
outcome. The cash flows for each scenario are projected to be as follows:
Highly Successful Scenario: Cash flows of $70 million, $340 million, and $1000 million,
respectively, in year 1, year 2, and year 3.
Mediocre Scenario: Cash flows of $50million, $60 million, and $200 million, respectively,
in year 1, year 2, and year 3.
How much of the equity should he demand if his expected rate of return is 40%.
a warrant to be given to the VC that you believe will improve the entrepreneur’s
incentive to work hard to achieve the “highly successful” scenario. You should give
the details of the proposed cash flows to the bond at each date; and the fraction of the
firm’s equity that the warrant should be convertible into at time 3.
used in practice, namely, convertible preferred shares) being offered to the VC by
startup firms (instead of offering common stock to the VC)?
required or even advanced readings) on venture capital, IPOs, the exit strategies of
successful private firms, etc. and the insights from our class discussions of venture capital
financing and IPOs. For each question (subpart), give your answers carefully in four or five
lines each (no calculations are necessary, but give the detailed reasoning behind your
answer for each question).
(i) Name two alternatives to traditional venture capital (VC) firms (independent venture
capital firms organized as private limited partnerships) that are available to early stage
firms in the US. for raising private equity financing? List the advantages and
disadvantages each of these two alternative sources of private equity financing
compared to raising financing from traditional VC firms?
(ii) Read the attached article from the Wall Street Journal (dated February 20, 2023)
mentioning that venture fund raising from limited partners hit a nine-year low in the
last (fourth) quarter of 2022. What are the factors that may have contributed to this
venture financing slowdown? What do you think are the implications of this scarcity
in investment by limited partners in venture funds for the valuation of early versus late
stage start-up firms? Finally, suppose a startup firm did get funding from venture
capitalists during the fourth quarter of 2022. What do you think the success probability
of such a firm compared to a startup firm that got funding during the fourth quarter of
2021 (when venture capital funding was more plentiful)?
“direct listing” on the NYSE of the video-gaming firm Roblox Corporation. A second
attached WSJ article (December 22, 2020) talks about a rule-change made by the New
York Stock Exchange (NYSE) that facilitate raising capital through such a direct listing
(such capital raising through direct listing was previously not allowed). How would
such a direct listing differ from a regular (traditional) IPO? What are the possible
advantages and disadvantages of such a direct listing over a regular IPO for the firm
involved? If direct listings such as that of Spotify Technology, Slack Technologies,
and Palantir Technology become more popular, how will this affect the structure of the
investment banking industry in the US?
achieved by large “sponsoring investors (sponsors)” and retail investors from investing in firms that went public through SPACs. Hint: If you want to dig a bit deeper into SPACs, you can also read the advanced reading on SPACs by Gahng, Ritter, and Zhang posted on the course website under the first session on IPOs.
