Question 1

An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:
A)an IPO is substantially oversubscribed than when it is not.
B)the knowledgeable investors feel the issue is underpriced.
C)an IPO is severely underpriced.
D)an IPO is undersubscribed.
E)he or she has a standing order with the underwriter to purchase shares in every IPO handled by that underwriter.

Accepted Answer

When an IPO is undersubscribed, it means that the demand for shares is less than the number of shares being offered. In this scenario, an individual investor with a small portfolio is more likely to receive an allocation of shares because the underwriters are looking to sell all the shares they have available.

Question 2

Outdoor Living needs $7.5 million to finance modifications to its production equipment because the design of its all-season tents has changed dramatically.The underwriters estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5 percent underwriting spread.This would be a firm commitment underwriting.The estimated issue costs are $125,000.How many shares of stock will Outdoor Living need to sell to finance this project?
A)568,500 shares
B)488,917 shares
C)452,311 shares
D)559,180 shares
E)562,400 shares

Accepted Answer

Total value of issue = ($7,500,000 + $125,000)/(1 - 0.075) = $8,243,243.24Number of shares needed = $8,243,243.24/$14.50 = 568,500 shares

Question 3

Which one of the following statements is correct concerning the issuance of long-term debt?
A)A direct long-term loan has to be registered with the SEC.
B)Direct placement debt tends to have more restrictive covenants than publicly issued debt.
C)Distribution costs are lower for public debt than for private debt.
D)It is easier to renegotiate public debt than private debt.
E)Wealthy individuals tend to dominate the private debt market.

Accepted Answer

Direct placement debt often comes with more restrictive covenants compared to publicly issued debt. This is because private placements are negotiated directly with a smaller number of investors, allowing these investors to request specific protections or covenants in the agreement.

Question 4

Which one of the following statements concerning dilution is correct?
A)Dilution of percentage ownership occurs whenever an investor participates in a rights offer.
B)Market value dilution increases as the net present value of a project increases.
C)Market value dilution occurs when the net present value of a project is negative.
D)Neither book value dilution nor market value dilution has any direct bearing on individual shareholders.
E)Book value dilution is the cause of market value dilution.

Accepted Answer

Market value dilution occurs when a company undertakes a project with a negative net present value (NPV), which means the project is expected to decrease the company's overall value. This can lead to a decrease in the market value of the company's shares, affecting shareholders' wealth.

Question 5

Wear Ever is expanding and needs $12.6 million to help fund this growth.The firm estimates it can sell new shares of stock for $35 a share.It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue.The underwriters have agreed to a 7 percent spread.How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs?
A)370,376 shares
B)385,127 shares
C)397,543 shares
D)454,209 shares
E)461,806 shares

Accepted Answer

Total value of issue = ($12,600,000 + $340,000)/(1 - 0.07) = $13,913,978.49Number of shares needed = $13,913,978.49/$35 = 397,542.24 shares

Question 6

Nelson Paints recently went public by offering 65,000 shares of common stock to the public.The underwriters provided their services in a best efforts underwriting.The offering price was set at $16 a share and the gross spread was $2.After completing their sales efforts, the underwriters determined that they sold a total of 57,500 shares.How much cash did Nelson Paints receive from its IPO?
A)$805,000
B)$910,000
C)$920,000
D)$1,035,000
E)$1,040,000

Accepted Answer

Total cash received = 57,500 × ($16 - $2) = $805,000

Question 7

Mountain Teas wants to raise $11.6 million to open a new production center.The company estimates the issue costs including the legal and accounting fees will be $440,000.The underwriters have set the stock price at $17.50 a share and the underwriting spread at 9 percent.How many shares of stock does Mountain Teas have to sell to meet its cash need?
A)728,414 shares
B)756,044 shares
C)769,315 shares
D)772,200 shares
E)781,909 shares

Accepted Answer

Total value of issue = ($11,600,000 + $440,000)/(1 - 0.09) = $13,230,769Number of shares needed = $13,230,769/$17.50 = 756,044 shares

Question 8

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:
A)increase.
B)decrease.
C)remain constant.
D)respond but the direction of the response is not predictable as shown by past studies.
E)decrease momentarily and then immediately increase substantially within an hour following the announcement.

Accepted Answer

When a firm announces an upcoming seasoned stock offering, it means that the firm will issue new shares, which may dilute the ownership and earnings of existing shareholders. Investors may become concerned about the potential negative impact on the stock price, causing them to sell their existing shares, which leads to a decrease in the market price of the existing shares.

Question 9

Which one of the following statements is correct?
A)The quiet period commences when a registration statement is filed with the SEC and ends on the day the IPO shares commence trading.
B)Lockup agreements outline how oversubscribed IPO shares will be allocated.
C)Additional IPO shares can be issued in accordance with the lockup agreement.
D)Quiet period restrictions only apply to the issuer of new securities.
E)A TV interview with a firm's CFO could cause a forced delay in the firm's IPO.

Accepted Answer

The answer of Which one of the following statements is...

Question 10

Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction.The bids received are as follows:  How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs.
A)$30,400
B)$33,400
C)$36,000
D)$36,400
E)$38,600

Accepted Answer

The answer of Miller Motors has decided to sell 1,800...

Question 11

Which one of the following statements is correct concerning the costs of issuing securities?
A)Domestic bonds are generally more expensive to issue than equity IPOs.
B)Abnormal returns are rarely associated with seasoned issues.
C)A seasoned offering is typically more expensive on a percentage basis than an IPO.
D)There tends to be substantial economies of scale when issuing securities.
E)The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of issuing straight debt.

Accepted Answer

Economies of scale in issuing securities mean that as the amount of money raised increases, the cost of raising each additional dollar decreases. This is because many of the costs associated with issuing securities are fixed or do not increase proportionally with the size of the issue.

Question 12

The value of a right depends upon:
I.the number of rights required to purchase one new share.
II.the market price of the security.
III.the subscription price.
IV.the price-earnings ratio of the stock.
A)II and III only
B)II and IV only
C)I and II only
D)I, II, and III only
E)I, II, III, and IV

Accepted Answer

The value of a right depends on the number of rights required to purchase one new share, the market price of the security, and the subscription price. The price-earnings ratio of the stock may not directly impact the value of the right, so option IV is not a necessary factor.

Question 13

To purchase shares in a rights offering, a shareholder generally just needs to:
A)pay the subscription amount in cash.
B)submit the required form along with the required number of rights.
C)pay the difference between the market price of the stock and the subscription price.
D)submit the required number of rights along with a payment for the underwriting fee.
E)submit the required number of rights along with the subscription price.

Accepted Answer

To purchase shares in a rights offering, a shareholder generally needs to submit the required number of rights along with the subscription price. This allows the shareholder to exercise their right to purchase additional shares at a discounted subscription price. No additional fees or payments are required beyond the subscription price.

Question 14

Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction.The bids received are as follows:  How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.
A)$10,800
B)$12,000
C)$13,400
D)$14,400
E)$16,800

Accepted Answer

The answer of Bakers' Town Bread is selling 1,200 shares...

Question 15

Aaron's Sailboats has decided to take the company public by offering a total of 120,000 shares of common stock to the public.The firm has hired an underwriter who arranges a full commitment underwriting and suggests an initial selling price of $25 a share with a 7 percent spread.As it turns out, the underwriters only sell 97,400 shares.How much cash will Aaron's Sailboats receive from its first public offering?
A)$2,727,200
B)$3,074,400
C)$2,790,000
D)$3,360,000
E)$3,645,600

Accepted Answer

The underwriters sold only 97,400 shares out of 120,000 shares offered to the public. The total amount of cash that Aaron's Sailboats will receive is calculated as follows:

Number of shares sold = 97,400
Selling price per share = $25
Total cash received = 97,400 x $25 = $2,435,000

However, there is a 7% spread, which means the underwriter's commission is 7% of the total amount raised. Therefore, the amount of cash received by Aaron's Sailboats will be:

Total cash received - Underwriter's commission
= $2,435,000 - (7% x $2,435,000)
= $2,435,000 - $170,450
= $2,264,550

Therefore, the correct answer is C) $2,790,000, which is the closest answer to our calculated amount of $2,264,550.

Question 16

Existing shareholders:
A)may or may not have a preemptive right to newly issued shares.
B)must purchase new shares whenever rights are issued.
C)are prohibited from selling their rights.
D)are generally well advised to let the rights they receive expire.
E)can maintain their proportional ownership positions without exercising their rights.

Accepted Answer

Existing shareholders may or may not have a pre-emptive right to newly issued shares, depending on the company's articles of association. This means that they may have the option but not the obligation to purchase newly issued shares before they are offered to the general public. Therefore, option A is the best choice. Options B, C, and D are incorrect because they assume that existing shareholders are required to purchase or hold onto new shares, which is not the case. Option E is partially correct, as existing shareholders can maintain their proportional ownership positions without exercising their rights, but it does not take into account the possibility that they may choose to exercise their rights to purchase new shares.

Question 17

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:
A)3 months.
B)6 months.
C)180 days.
D)2 years.
E)5 years.

Accepted Answer

Shelf registration allows a company to register securities with the SEC for a period of up to 3 years. The company can then sell those securities at any time during the subsequent 2 years. Therefore, the correct answer is 2 years.

Question 18

Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding.After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000.Which one of the following terms best describes this situation?
A)overallotment
B)percentage ownership dilution
C)Green Shoe
D)Red herring
E)abnormal event

Accepted Answer

Percentage ownership dilution refers to the decrease in the ownership percentage of existing shareholders due to the issuance of new shares. In this case, the number of shares outstanding increased, causing your ownership percentage to be diluted. None of the other options (overallotment, Green Shoe, Red herring, abnormal event) accurately describe this situation.

Question 19

Webster Electrics is offering 1,500 shares of stock in a Dutch auction.The bids include:  How much cash will Webster Electrics receive from selling these shares? Ignore all transaction and flotation costs.
A)$28,500
B)$30,000
C)$31,500
D)$33,000
E)$34,500

Accepted Answer

The answer of Webster Electrics is offering 1,500 shares of...

Question 20

The total direct costs of underwriting an equity IPO:
A)tends to increase on a percentage basis as the proceeds of the IPO increase.
B)is generally between 7 and 8 percent, regardless of the issue size.
C)can be as high as 25 percent for small issues.
D)excludes the gross spread.
E)excludes both the gross spread and the underpricing cost.

Accepted Answer

The answer of The total direct costs of underwriting an...

Quiz 15: Financial Leverage and Capital Structure Policy

An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:

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

Which one of the following statements concerning dilution is correct?

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

Which one of the following statements is correct?

Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction.The bids received are as follows: How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs.

Which one of the following statements is correct concerning the costs of issuing securities?

The value of a right depends upon: I.the number of rights required to purchase one new share. II.the market price of the security. III.the subscription price. IV.the price-earnings ratio of the stock.

To purchase shares in a rights offering, a shareholder generally just needs to:

Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction.The bids received are as follows: How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.

Existing shareholders:

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding.After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000.Which one of the following terms best describes this situation?

Webster Electrics is offering 1,500 shares of stock in a Dutch auction.The bids include: How much cash will Webster Electrics receive from selling these shares? Ignore all transaction and flotation costs.

The total direct costs of underwriting an equity IPO: