Deck 19: Raising Capital

Question 1

The Golden Nickel just arranged a 2-year direct business loan.Which one of the following terms matches this loan arrangement?

A)Seasoned offer
B)Rights offer
C)Private placement
D)Shelf loan
E)Term loan

Answer 1

Term loan

Question 2

Which one of the following is an underwriting of securities where the final offer price is determined by investor bids?

A)Private placement
B)Best efforts underwriting
C)Initial public offering
D)Green Shoe option
E)Dutch auction

Answer 2

Dutch auction

Question 3

What is the legal document called that is provided to potential investors and describes a new security offering?

A)Prospectus
B)Security agreement
C)Formal filing
D)Registration statement
E)Public statement

Answer 3

Prospectus

Question 4

Which one of the following statements concerning the issuance of long-term debt is correct?

A)Rarely is debt issued privately in the U.S.
B)Private placements generally have shorter maturities than term loans.
C)All U.S.debt issues,private and public,must be registered with the SEC.
D)It is easier to renegotiate a public issue than it is a private issue of debt.
E)A direct placement of debt generally has more restrictive covenants than a public issue.

Question 5

Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?

A)Initial public offering
B)Best efforts underwriting
C)Firm commitment underwriting
D)Rights offer
E)Private placement

Question 6

Which one of the following projects is most apt to be financed with venture capital?

A)Seasonal merchandise for a major retailer
B)New product for an international manufacturing company
C)Domestic outlet for a large global importer
D)Additional warehouse space for a profitable trucking firm
E)Prototype for a newly patented tool by an individual inventor

Question 7

A Green Shoe provision can be defined as a(n):

A)privileged subscription.
B)guarantee of sale for all shares offered.
C)overallotment option.
D)public price auction.
E)private price auction.

Question 8

Which stage of venture capital financing provides the funding needed to develop a working model of a new product?

A)Start-up
B)First-round
C)Mezzanine
D)Seed money
E)Second-round

Question 9

Which one of the following best describes an initial public offering?

A)The first sale of equity shares to the general public
B)Any newly issued shares offered to the general public
C)Shares sold to the public in exchange for cash
D)Shares held by a firm's founder
E)Any shares initially offered to a firm's existing shareholders

Question 10

A publicly-traded firm has just decided to issue an additional 10,000 shares of common stock.The firm plans to offer these shares to the general public next month.Which term applies to this issue of securities?

A)Initial public offering
B)Private placement
C)In-house offering
D)Rights offering
E)Seasoned equity offer

Question 11

Artic Adventures just filed the required paperwork with the SEC that contains all of the material information related to their upcoming IPO.What is the name associated with this paperwork?

A)Comment letter
B)Registration statement
C)Security agreement
D)Prospectus
E)Red herring

Question 12

Which of these qualifications must you meet to participate as an investor in crowdfunding?
I.Ten or more years of experience as a venture capitalist
II.Net income of $200,000 or more in two of the last three years
III.SEC licensed
IV.Net worth of $1 million or more

A)I and III only
B)II and IV only
C)III and IV only
D)II,III,and IV only
E)I,II,III,and IV

Question 13

Which one of the following is the name given to a registration of securities under SEC 415 that permits a firm to issue the registered securities over a 2-year period?

A)Shelf registration
B)Seasoned registration
C)Negotiated registration
D)Delayed registration
E)Extended registration

Question 14

The specified period of time following an IPO when insiders are prevented from selling their shares is called the:

A)lockup period.
B)quiet period.
C)comment period.
D)Green Shoe period.
E)waiting period.

Question 15

Which one of these parties is primarily responsible for the pricing and selling of new securities to the general public?

A)Underwriter
B)Investment advisor
C)Specialist
D)Securities dealer
E)Venture capitalist

Question 16

Which one of the following best fits the description of a private placement?

A)5-year commercial bank loan
B)10-year loan from an insurance company
C)2-year direct business loan
D)3-year loan to a firm by its original founder
E)20-year bonds sold in the public markets

Question 17

The difference between the price an underwriter pays to a securities' issuer and the price at which the securities are offered for sale is called the:

A)markup.
B)commission.
C)spread.
D)rights price.
E)private price.

Question 18

Kite Flyers recently offered 6,000 shares of stock for sale but only received payment from its underwriters for the 4,500 shares they sold.What type of underwriting was this?

A)Standby rights offer
B)Best efforts cash offer
C)Firm commitment cash offer
D)Dutch Auction
E)Private placement

Question 19

What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering?

A)Underwriting cartel
B)Syndicate
C)Firm commitment group
D)Dutch auction group
E)Venture capitalists

Question 20

Individual or limited partner venture capitalists generally:

A)seek an exit strategy.
B)provide only seed money to start-up firms.
C)tend to be long-term investors.
D)are easy to contact.
E)request less than 25 percent ownership.

Question 21

Which one of the following statements concerning debt issues is correct?

A)A prospectus is required for public issues of equity but not for debt.
B)The only difference between a term loan and a private placement is the size of the issue.
C)Direct long-term loans must be registered with the SEC.
D)Firms often pay higher interest rates on term loans than on public issues of debt.
E)The flotation costs of issuing debt tend to be more expensive than for issuing equity.

Question 22

Which of the following have been offered as justification for stock price declines following an SEO announcement?
I.Investors assume managers issue stock when shares are overvalued.
II.Corporate taxes imposed on stock offerings lower the value of the issuer's cash flows.
III.Issuing debt may be considered a signal that the issuer has too much debt.
IV.Issue costs reduce the value of the issuing firm.

A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV

Question 23

What is the length of the SEC registration waiting period?

A)10 days
B)45 days
C)20 days
D)90 days
E)180 days

Question 24

Which of the following have been offered as explanations of IPO underpricing?
I.Underpricing helps offset the "winner's curse".
II.Underpricing helps ensure investors will be long-term holders of the IPO securities.
III.Underpricing helps ensure investment bank customers will earn a profit on average.
IV.Underpricing is needed to convince investors to accept the risks associated with IPOs.

A)II only
B)IV only
C)II and III only
D)I,III,and IV only
E)I,II,III,and IV only

Question 25

Which one of these statements is correct?

A)The underwriter's spread is an indirect issue cost.
B)Filing fees are indirect issue costs.
C)Underwriter spreads are directly related to the size of the issue.
D)Investment grade bonds incur lower direct issue costs than junk bonds.
E)An abnormal return is defined as the increase in value of a stock on its first day of trading.

Question 26

Galactic Travel wants to do an IPO but is quite concerned that the underwriters might underprice the issue.Which one of the following might the firm consider to address this concern?

A)Extended lockup period
B)Dutch auction underwriting
C)Extended quiet period
D)Best efforts underwriting
E)Standby underwriting

Question 27

Which of these are two major benefits a firm derives from going public?
I.Investment bank customers remain content
II.Increased ability of the firm to raise capital
III.Reselling IPO shares at higher prices on the first day of trading
IV.Shareholders are better able to diversify their holdings

A)I and III only
B)II and IV only
C)I and II only
D)III and IV only
E)I and IV only

Question 28

Assume the SEC approved the registration statement for a new securities issue this morning.Which one of the following statements must be true about this issue?

A)The red herrings can now be distributed as their distribution was awaiting the SEC approval.
B)The waiting period started when the approval was received this morning.
C)The final prospectuses were all delivered or the SEC would not have approved the issue.
D)The issuer is following all of the required rules and regulations in regards to this issue.
E)The SEC believes the issue will be a profitable investment for all purchases made at the offer price.

Question 29

What is the primary reason why securities are sometimes offered through a rights offering?

A)To avoid corporate taxation of excessive profits
B)To provide additional income to the current shareholders
C)To assist current shareholders maintain their current proportional ownership position
D)To replace a regular stock dividend
E)To allow shareholders to avoid taxes

Question 30

Which one of these was most cited by CFOs as the motive for going public?

A)Creating public shares for use in future acquisitions
B)Allowing the firm's principals to diversify their holdings
C)Establishing a market value for the firm
D)Minimizing the firm's cost of capital
E)Allowing venture capitalists to cash out

Question 31

When issuing securities,which of the following can occur prior to receiving SEC approval?
I.Oral offer to buy shares
II.Written offer to buy shares
III.Final determination of the offer price
IV.Distribution of a preliminary prospectus

A)I only
B)II only
C)III and IV only
D)I and IV only
E)I,III,and IV only

Question 32

What was the average first-day return on IPOs for the period 1975-2012 in the U.S.?

A)28.7 percent
B)21.7 percent
C)9.2 percent
D)11.4 percent
E)18.6 percent

Question 33

A stock with a file price range of _____,a final offer price of ______,and a first-day closing price of _____ is the best example of the partial adjustment phenomenon.

A)$14-16;$15;$18
B)$10-12;$16;$15
C)$16-18;$15;$12
D)$10-12;$24;$24
E)$9-11;$22;$29

Question 34

Currently,you own 7 percent of the outstanding stock of Metals Unlimited.The firm has decided to issue additional shares of stock and has given you the first option to purchase 7 percent of those additional shares.Which one of the following will you be participating in if you opt to purchase the shares you have been offered?

A)Red herring offer
B)Rights offer
C)Private placement
D)IPO
E)General cash offer

Question 35

Which one of the following statements concerning the underwriting of new issues of debt and equity is correct?

A)Underwriters exercise the Green Shoe option whenever the market price of an IPO declines on its first day of trading.
B)Underwriters guarantee the number of shares to be sold in a best efforts underwriting.
C)Competitive underwriting is generally more expensive than negotiated underwriting.
D)Underwriters may receive warrants and shares of stock as part of their compensation.
E)The majority of equity underwritings in the U.S.are competitive underwritings.

Question 36

You own 600 of the 12,000 outstanding shares of BLM stock.The firm just announced that it will be issuing an additional 3,000 shares to the general public in a cash offer at $19 per share.What type of event are you participating in if you opt to purchase 100 of these additional shares?

A)Private placement
B)Seasoned equity offering
C)Dutch auction
D)IPO
E)Rights offer

Question 37

The Green Shoe option is most apt to be exercised when an IPO is ______ and _____.

A)underpriced;undersubscribed
B)underpriced;oversubscribed
C)correctly priced;neither over nor undersubscribed
D)overpriced;oversubscribed
E)overpriced;undersubscribed

Question 38

Which one of the following is an intended result of a lockup agreement?

A)Temporarily supporting the market price of IPO shares
B)Maximizing the return on an IPO to a firm's original owners
C)Increasing the volume of trading for shares of a recent IPO
D)Limiting price volatility on the first day of trading IPO shares
E)Guaranteeing a minimum number of sold IPO shares

Question 39

Which one of the following statements is correct?

A)The underwriters must approve any increase in the authorized number of shares for a firm.
B)A prospectus must be provided to all investors who purchase shares of a new equity offering.
C)The corporate CEO has the authority to authorize additional shares of stock for a new issue.
D)When issuing new securities,the first step is the distribution of the prospectus.
E)Written offers can be made for new securities during the waiting period.

Question 40

The primary purpose of a lockup agreement is to ensure:

A)the lead underwriter maintains an economic interest in the IPO it is managing.
B)company insiders maintain an economic interest in the issuer of an IPO for a minimum period of time.
C)research reports are issued.
D)the issuer of new securities receives a minimally agreed upon amount from the issue.
E)investors purchasing shares at the offer price hold those shares for a stated number of days following the IPO.

Question 41

Which one of these conditions must exist if a rights offering is to be successful?

A)The rights cannot be resold.
B)The market price must be less than the subscription price.
C)Shareholders must be able to obtain one new share for every right they receive.
D)The issuer must guarantee to repurchase the rights at the offer price if the market price declines.
E)The subscription price must be less than the market price.

Question 42

Disaster Cleanup stock sells for $46 a share.The firm has a rights offer outstanding for new equity shares.Antonio is a current stockholder and owns 400 shares.He just received one right for every share he owns.To purchase one new share he must submit three rights and $15.What is the value of one right?

A)$7.75
B)$8.33
C)$7.91
D)$8.04
E)$8.46

Question 43

Iver Mfg.wants to raise $14.7 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $320,000 for accounting,legal,and other costs.The underwriting spread is 8.5 percent and the issue price is $22 per share.How many shares of stock must be sold if the firm is to receive sufficient funds to purchase all its desired equipment?

A)744,799 shares
B)802,108 shares
C)746,150 shares
D)740,759 shares
E)833,333 shares

Question 44

The Corner Market is offering 60,000 shares of stock to the public in a general cash offer.The offer price is $32 a share and the underwriter's spread is 7.5 percent.The administrative costs are estimated at $310,000.How much will Hilltop Market net from this stock offering assuming the issue is completely sold?

A)$1,370,800
B)$1,346,000
C)$1,466,000
D)$1,610,000
E)$1,800,000

Question 45

Max's Outlet stock currently sells for $18 a share.The firm has a rights offer outstanding for new equity shares.To purchase one new share you must submit two rights and $15.What is the ex-rights stock price?

A)$17.00
B)$17.25
C)$16.45
D)$17.55
E)$16.50

Question 46

DJ's stock currently sells for $29 a share.The firm has a rights offer outstanding for new equity shares.To purchase one new share you must submit four rights and $25.What is the ex-rights stock price?

A)$29.00
B)$28.64
C)$28.45
D)$28.20
E)$27.36

Question 47

DDP has 84,000 shares of stock outstanding at a market price per share of $49.The firm plans a rights offering of 21,000 shares with an offer price of $47 a share.What will be the ex-rights stock price?

A)$48.33
B)$48.50
C)$48.60
D)$48.54
E)$48.40

Question 48

The Cookie Co.would like to sell 1,000 shares of stock using the Dutch auction method.The bids received are as follows: Bidder A: 200 shares at $41;Bidder B: 400 shares at $39: Bidder C: 500 shares at $38;and Bidder D: 700 shares at $37.What will be the gross proceeds from this auction?

A)$37,000
B)$41,000
C)$39,000
D)$40,000
E)$38,000

Question 49

Youngwood's wants to raise $3.2 million for an expansion project by issuing new equity shares.Management estimates the issue will cost the firm $246,000 for direct issue costs.The underwriting spread is 7.75 percent and the issue price is $14 per share.How many shares of stock must be sold if the firm is to receive sufficient funds for the expansion?

A)265,219 shares
B)266,822 shares
C)266,150 shares
D)265,345 shares
E)264,807 shares

Question 50

The Bread Basket needs to raise $38 million to expand its operations nationally.The company will sell new shares of common stock using a general cash offering.The underwriters charge a 7.65 percent spread,the administrative costs are $395,000,and the offer price is $28 per share.How many shares of stock must be sold for The Bread Basket to receive the total funds it desires?

A)1,484,840 shares
B)1,638,311 shares
C)1,663,022 shares
D)1,814,141 shares
E)1,833,333 shares

Question 51

Zebra Stripes would like to sell 500 shares of stock using the Dutch auction method.The bids received are as follows: Bidder A: 100 shares at $26;Bidder B: 300 shares at $25: Bidder C: 200 shares at $25;and Bidder D: 500 shares at $24.What will be the gross proceeds from this auction?

A)$27,100
B)$13,000
C)$12,500
D)$14,600
E)$12,000

Question 52

Deep Hollow Oil issued 120,000 shares of stock last week,received $27.45 a share,and incurred direct costs of $287,000.The offer price was $30 a share.Within the first hour of trading,the stock price increased to $36 a share.What was the flotation cost as a percentage of the funds raised?

A)19.72%
B)33.49%
C)24.47%
D)54.55%
E)43.66%

Question 53

Newton Water Works would like to sell 800 shares of stock using a Dutch auction.The bids received are as follows: Bidder A: 100 shares at $26;Bidder B: 300 shares at $25;Bidder C: 200 shares at $25;Bidder D: 300 shares at $24;and Bidder E: 800 shares at $20.Bidder C will be able to purchase _____ shares at a price per share of ____.

A)800;$20
B)24;$26
C)24;$25
D)178;$25
E)178;$24

Question 54

Given an efficient market,a rights offer:

A)provides a means for current shareholders to sell their shares for more than their actual worth.
B)increases the wealth of the firm's current shareholders.
C)neither creates nor destroys shareholder value.
D)provides a means of obtaining shares for less than market value.
E)imposes losses on the firm's current shareholders.

Question 55

To be eligible to use Rule 415,a firm must:

A)not have defaulted on its debt anytime in the past five years.
B)guarantee the new shares will be sold evenly over a period of three years.
C)have a market value of common stock in excess of $250 million.
D)never have violated any of the provisions of the Securities Act of 1934.
E)have an investment-grade rating.

Question 56

Wholesale Foods would like to sell 1,600 shares of stock using a Dutch auction.The bids received are as follows: Bidder A: 300 shares at $23;Bidder B: 500 shares at $22;Bidder C: 700 shares at $21;Bidder D: 900 shares at $20;and Bidder E: 200 shares at $18.Bidder D will be able to purchase _____ shares at a price per share of ____.

A)533;$20
B)600;$20
C)533;$23
D)553;$18
E)553;$23

Question 57

Denver Mines is offering 45,000 shares of stock to the public in a general cash offer.The offer price is $48 a share and the underwriter's spread is 9.5 percent.The administrative costs are estimated at $360,000.How much will Denver Mines net from this stock offering assuming the issue is completely sold?

A)$1,629,000
B)$1,646,000
C)$1,594,800
D)$1,705,450
E)$1,988,950

Question 58

BL Timber stock sells for $56 a share.The firm has a rights offer outstanding for new equity shares.Lisa is a current stockholder and owns 300 shares.She just received one right for every share she owns.To purchase one new share she must submit five rights and $12.What is the value of one right?

A)$8.80
B)$7.33
C)$7.91
D)$9.33
E)$8.46

Question 59

Marti owns 200 shares of ABC stock with a current value of $31 a share.The firm just issued one right for each of the 3,500 shares outstanding.The purchase of a share through the offering requires three rights plus $24.Assume Marti decides to sell her rights.All else constant,Marti will have ___ in cash and stock valued at ____ once the rights offering is completed.

A)$350;$6,200
B)$350;$5,850
C)$425;$6,200
D)$425;$5,775
E)$350;$6,025

Question 60

Kurt's Campers issued 54,000 shares of stock last week,received $51.54 a share,and incurred direct costs of $312,000.The offer price was $56 a share.Within the first hour of trading,the stock price increased to $63 a share.What was the flotation cost as a percentage of the funds raised?

A)37.67%
B)33.49%
C)27.92%
D)22.37%
E)25.04%

Question 61

Wood Cabinet's is an all-equity firm with 210,000 shares of stock outstanding.The book value per share is $19 and the market value per share is $48.The current net income is $546,000.An expansion project will cost $1.45 million.Assume the price-earnings ratio remains constant.By what amount must the new project increase the net income for the stock price to remain at $48?

A)$77,319
B)$80,600
C)$79,774
D)$82,061
E)$78,542

Question 62

Explain how a Dutch auction operates and why a firm might choose to sell its securities in this manner.

Question 63

Arnold's Construction is an all-equity firm with 120,000 shares of stock outstanding.The book value per share is $14 and the market value per share is $54.The current net income is $385,000.The firm is considering a new project that will cost $2.1 million and increase net income by $120,000.The current earnings per share are ____ and they will be ____ if the project is accepted.

A)$3.21;$3.12
B)$3.86;$3.24
C)$3.86;$3.82
D)$3.21;$3.18
E)$3.21;$3.24

Question 64

Miller Tool is a successful manufacturer of both consumer and industrial hand tools and is publicly owned.The firm has several positive net present value projects that it would like to pursue and thus decided to issue additional shares of common stock.As a result of this stock issue,the firm's stock price declined.Explain why this occurred when the proceeds of the issue are being used to fund positive net present value projects.

Question 65

Mountain View is an all-equity firm with 125,000 shares of stock outstanding.The book value per share is $9 and the market value per share is $27.The current net income is $148,750.An expansion project will cost $780,000.Assume the price-earnings ratio remains constant.What must the new net income be for the market price to remain at $27?

A)$153,889
B)$183,128
C)$166,667
D)$157,415
E)$182,997

Question 66

Butterfield's is an all-equity firm with 165,000 shares of stock outstanding.The book value per share is $17 and the market value per share is $63.The current net income is $521,000.The firm is considering a new project that will cost $3.6 million and increase net income by $168,000.The current earnings per share are ____ and they will be ____ if the project is accepted.

A)$3.21;$3.12
B)$3.86;$3.24
C)$3.86;$3.82
D)$3.21;$3.18
E)$3.21;$3.24

Question 67

Why might an eligible firm choose a Rule 415 registration of securities?

Question 68

Tina researched DE Industries and decided the firm has good growth prospects.Since she knows the owners,she approached them with an offer.Her offer was $1 million in cash in exchange for 20 percent ownership in the firm.Both parties have agreed to the terms of her offer but Tina does have one remaining concern.She wants to ensure that she can maintain her proposed ownership percentage in the future.What can she do to ensure this will occur?

Question 69

The Down Under is an all-equity firm with 330,000 shares of stock outstanding.The book value per share is $21 and the market value per share is $54.The current net income is $412,500.An expansion project will cost $1.6 million.Assume the price-earnings ratio remains constant.What must the new net income be for the market price to remain at $54?

A)$427,394
B)$449,537
C)$386,221
D)$359,630
E)$478,542

Question 70

Provide two arguments in favor of IPO underpricing and two arguments against IPO underpricing.

Question 71

Kitchens and More is an all-equity firm with 145,000 shares of stock outstanding.The book value per share is $22 and the market value per share is $56.The current net income is $466,900.An expansion project will cost $2.2 million.Assume the price-earnings ratio remains constant.By what amount must the new project increase the net income for the stock price to remain at $56?

A)$126,500
B)$131,750
C)$87,080
D)$112,400
E)$108,500