Financial Lifecycle Project Exercise V: Capital Structure and Payout Policy

Liberty Energy Inc.

Financial Lifecycle Project Exercise V: Capital Structure and Payout Policy

In this individual assignment you will be asked to write a 2- to 4-page analysis of the current capital structure and payout policy of your firm that addresses the following items:

1. An analysis of the firm’s current capital structure.

2. A description of the firm’s dividend policy.

3. Assess the reasonableness of the firm’s current debt and payout policies.

It is recommended that you start with annual financials since the firm went public to assist in your comparison and discussion. This information is readily available from the firm’s most recent 10-Ks as well as from Mergent Online in the Franklin library. The Mergent site offers data that is particularly useful for the purposes of this assignment. On the main or summary page for your company there are sub-tabs entitled “Long Term Debt” and “Capital Stock” that, depending on the company, have summaries of the firm’s long term financing.

One goal of this assignment is to examine how a firm’s capital structure (its components of debt and equity) has evolved and what might explain that particular evolution, given the current firm’s performance, industry, and financial market conditions.

Financial Lifecycle Project Exercise IV: Pre-IPO and IPO Financing

 In this assignment you are asked to write a 3- to 5-page analysis of the capital structure of your firm prior to its IPO and the changes in capital structure that resulted from the IPO. An assessment of the reasonableness of the valuation of the firm as reflected in the IPO and the shares’ subsequent price performance will also be required. This assignment involves accessing the firm’s public filings with the SEC, such the general form for registration of securities, the prospectus, and any supplemental filings, and financial press and analysts’ reports on the IPO and the firm’s shares. Specifically, you are asked for the following:

1. An analysis of the select firm’s pre-IPO financial structure.

2. A description of the changes resulting from the IPO.

3. A discussion of the reasonableness of the IPO valuation: Was it underpriced, overpriced, or priced correctly?

The first question requires that you find and review the prospectus for the IPO. You can access these directly in the SEC database via Edgar: http://www.sec.gov/edgar/searchedgar/companysearch.html.

Entering the firm’s ticker symbol retrieves the listing of all filings the company has made with the SEC. To get the prospectus enter “424” in the box “Form Type” in the upper right. There may be several types of Form 424, such as: Form 424A: Prospectus statement filed pursuant to Rule 424(a). and Form 424B1: Prospectus statement filed pursuant to Rule 424(b).

There is no need to master these distinctions. Look for the original prospectus and any substantive filings prior to the stock issuance date. Alternatively, to get all pre-IPO SEC filings you can ignore “Form Type” and type in the date of the IPO in the “Prior to” box. This retrieves not only the original prospectus but also the general registration form, S-1, any amendment to it, S-1/A and, possibly, another registration form, 8-A,

Your assignment is to familiarize yourself with the firm’s pre-IPO financing. Financial statements for the past three years before the IPO are provided in both the prospectus and general registration form. It is suggested that you rely primarily on the prospectus as providing the timeliest information prior to the IPO date.

In these financials the firm’s pre-IPO financial structure (components of debt and equity) is provided. The motivations for the IPO and the intended use of funds along with a discussion of risks faced by prospective investors are all discussed. You can then compare the next year’s post-IPO financials by selecting “Form Type” 10-k at the SEC site. Look at the retrieved files for the firm’s first 10-k or annual report filed after the IPO date. Then compare the financials for the firm before and after the IPO and identify the financial structure changes that resulted. Here are some questions that are relevant to your investigation: How has shareholders’ equity changed? How has the firm’s debt changed? Amount? Type? Average maturity length? Is the company stronger post-IPO? How so? What are the changes in securities issued by the firm? Why do you think the firm chose this time to go public? How were the proceeds of the IPO used?

To investigate these questions you will need not just the balance sheet but also the notes to the financials. Beyond the financials you are encouraged to become familiar with the firm’s prospectus and its claims. It might help you to set up a table comparing pre-IPO liabilities and shareholders’ equity line items to these items post-IPO.

The final question in the assignment involves an assessment of the fairness of the original valuation of the company. Consider this question: At the time of the IPO would you invest in this firm at the public offering price? Look at the per share price at issuance and its subsequent performance.

In your analysis you are encouraged to apply the tools of stock valuation from your finance principles class. Here are a couple of websites on stock valuation: http://www.fool.com/investing/beginning/how-to-value-stocks-introduction-to-valuation-meth.aspx http://www.moneychimp.com/articles/valuation/valuation_theory.htm