Chap015

Chapter 15 - Raising Capital

Chapter 15Raising Capital

Multiple Choice Questions

1. Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called? A. green shoe fundingB. tombstone underwritingC. venture capitalD. red herring fundingE. life cycle capital

2. What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public? A. prospectusB. red herringC. indentureD. public disclosure statementE. registration statement

3. Miller & Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering? A. Regulation AB. Regulation CC. Regulation GD. Regulation QE. Regulation R

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4. What is a prospectus? A. a letter issued by the SEC authorizing a new issue of securitiesB. a report stating that the SEC recommends a new security to investorsC. a letter issued by the SEC that outlines the changes required for a registration statement to be approvedD. a document that describes the details of a proposed security offering along with relevant information about the issuerE. an advertisement in a financial newspaper that describes a security offering

5. Which one of the following is a preliminary prospectus? A. tombstoneB. green shoeC. registration statementD. rights offerE. red herring

6. Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called: A. red herrings.B. tombstones.C. Green Shoes.D. registration statements.E. cash offers.

7. What is an issue of securities that is offered for sale to the general public on a direct cash basis called? A. best efforts underwritingB. firm commitment underwritingC. general cash offerD. rights offerE. herring offer

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8. Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? A. best efforts offerB. firm commitment offerC. general cash offerD. rights offerE. priority offer

9. Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing, and distributing healthy soups in a dried form. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called? A. venture capital offeringB. shelf offeringC. private placementD. seasoned equity offeringE. initial public offering

10. What is a seasoned equity offering? A. an offering of shares by shareholders for repurchase by the issuerB. shares of stock that have been recommended for purchase by the SECC. equity securities held by a firm's founder that are being offered for sale to the general publicD. sale of newly issued equity shares by a firm that is currently publicly ownedE. a set number of equity shares that are issued and offered to the public annually

11. Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n): A. aftermarket specialist.B. venture capitalist.C. underwriter.D. seasoned writer.E. primary investor.

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12. What is the definition of a syndicate? A. a venture capitalistB. a group of attorneys providing services for an IPOC. block of investors who control a firmD. a bank that loans funds to finance the start-up of a new firmE. a group of underwriters sharing the risk of selling a new issue of securities

13. The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the: A. gross spread.B. under price amountC. filing fee.D. new issue premium.E. offer price.

14. D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this? A. best effortsB. shelfC. over subscribedD. private placementE. firm commitment

15. Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting? A. best effortsB. shelfC. direct rightsD. private placementE. firm commitment

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16. The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period. A. silentB. quietC. lockupD. greenE. red

17. Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following? A. Green shoe provisionB. Red herring provisionC. quiet provisionD. lockup agreementE. post-issue agreement

18. Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock? A. pre-issue dateB. aftermarket dateC. declaration dateD. holder-of-record dateE. ex-rights date

19. The date on which a shareholder is officially listed as the recipient of stock rights is called the: A. issue date.B. offer dateC. declaration dateD. holder-of-record date.E. ex-rights date.

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20. A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting. A. standbyB. best effortsC. firm commitmentD. direct feeE. tombstone

21. The amount paid to an underwriter who participates in a standby underwriting agreement is called a(n): A. gross spread.B. optional spread.C. standby fee.D. additional fee.E. oversubscription fee.

22. Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase the unsubscribed shares. Which one of the following will allow her to do so? A. standby provisionB. oversubscription privilegeC. open offer privilegeD. new issues provisionE. overallotment provision

23. Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to: A. an oversubscription cost.B. underpricing.C. dilution.D. the Green Shoe provision.E. a locked in period.

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24. Direct business loans typically ranging from one to five years are called: A. private placements.B. debt SEOs.C. notes payable.D. debt IPOs.E. term loans.

25. A group of five private investors recently loaned $6 million to Henderson Hardware for ten years at 9 percent interest. This loan is best described as a: A. private placement.B. debt SEO.C. notes payable.D. debt IPO.E. term loan.

26. Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this? A. standby registrationB. shelf registrationC. Regulation A registrationD. Regulation Q registrationE. private placement registration

27. Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed. She knows a venture capitalist who has offered to finance her business to the point where she would be ready to begin the manufacturing and marketing stage. Which type of financing is Suzie being offered? A. syndicateB. introductionC. second-stageD. mezzanine-levelE. seed money

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28. Which one of the following is probably the most successful means of finding venture capital? A. internet searchesB. Dutch auctionsC. newspaper advertisementsD. personal contactsE. personal letters to venture capital firms

29. Which one of the following statements concerning venture capital financing is correct? A. Venture capitalists desire shares of common stock but avoid preferred stock.B. Venture capital is relatively easy to obtain.C. Venture capitalists rarely assume active roles in the management of the financed firm.D. Venture capitalists often require at least a forty percent equity position as a condition of financing.E. Venture capital is relatively inexpensive in today's competitive markets.

30. Which one of the following statements concerning venture capitalists is correct? A. Venture capitalists assume management responsibility for the firms they finance.B. Exit strategy is a key consideration when selecting a venture capitalist.C. Venture capitalists limit their services to providing money to start-up firms.D. Most venture capitalists are long-term investors in a firm.E. A venture capitalist normally invests in a new idea and finances that idea until the newly-formed firm can issue an IPO.

31. Which of the following should be considered when selecting a venture capitalist?I. level of involvementII. past experiencesIII. termination of fundingIV. financial strength A. I and III onlyB. II and IV onlyC. I, III, and IV onlyD. I, II, and IV onlyE. I, II, III, and IV

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32. Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public? A. select an underwriterB. obtain SEC approvalC. gain board approvalD. prepare a registration statementE. distribute a prospectus

33. All new interstate security issues are regulated by the: A. registration statement.B. Green Shoe provision.C. Securities Exchange Act of 1934.D. Securities Act of 1933.E. Federal Reserve Act of 1931.

34. The Securities and Exchange Commission: A. verifies the accuracy of the information contained in the prospectus.B. verifies the accuracy of the information contained in the red herring.C. examines the registration statement during the Green Shoe period.D. is concerned only that an issue complies with all rules and regulations.E. determines the final offer price once they have approved the registration statement.

35. Underwriters generally: A. pay a spread to the issuing firm.B. provide only best efforts underwriting in the U.S.C. receive less compensation under a competitive agreement than under a negotiated agreement.D. market and distribute an entire issue of new securities within their own firm.E. pass the risk of unsold shares back to the issuing firm via a firm commitment agreement.

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36. With firm commitment underwriting, the issuing firm: A. is unsure of the total amount of funds it will receive until after the offering is completed.B. is unsure of the number of shares it will actually issue until after the offering is completed.C. knows exactly how many shares will be purchased by the general public during the offer period.D. retains the financial risk associated with unsold shares.E. knows up-front the amount of money it will receive from the stock offering.

37. With Dutch auction underwriting: A. each winning bidder pays the price he or she bid.B. all successful bidders pay the same price.C. all bidders receive at least a portion of the quantity for which they bid.D. the selling firm receives the maximum possible price for each security sold.E. the bidder for the largest quantity receives the first allocation of securities.

38. If an IPO is underpriced then the: A. investors in the IPO are generally unhappy with the underwriters.B. issue is less likely to sell out.C. stock price will generally decline on the first day of trading.D. issuing firm is guaranteed to be successful in the long term.E. issuing firm receives less money than it probably should have.

39. Which of the following have been offered as supporting arguments in favor of IPO underpricing?I. Underpricing counteracts the "winner's curse".II. Underpricing rewards institutional investors for sharing their opinions of a stock's market value.III. Underpricing diminishes the underwriting risk of a firm commitment underwriting.IV. Underpricing reduces the probability that investors will sue the underwriters. A. I and III onlyB. II and IV onlyC. I and II onlyD. I, II, and III onlyE. I, II, III, and IV

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40. Which one of the following is a key goal of the aftermarket period? A. collection of largest number of Dutch auction bids as possibleB. best determination of a fair offer price for an upcoming IPOC. price support for a new issue of securitiesD. establishment of a broad-based underwriting syndicate for an upcoming IPOE. widest distribution of red herrings as possible

41. 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.

42. 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.

43. 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.

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44. 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.

45. 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.

46. 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.

47. 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.

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48. 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 onlyB. II and IV onlyC. I and II onlyD. I, II, and III onlyE. I, II, III, and IV

49. 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. overallotmentB. percentage ownership dilutionC. Green ShoeD. Red herringE. abnormal event

50. 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.

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51. 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.

52. 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.

53. 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 $28 a share with an 8.5 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. $2,727,200B. $2,495,388C. $3,074,400D. $3,360,000E. $3,645,600

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54. 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. $805,000B. $910,000C. $920,000D. $1,035,000E. $1,040,000

55. Miller Motors has decided to sell 1,600 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. $30,400B. $33,400C. $33,600D. $35,400E. $38,600

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56. 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. $10,800B. $12,000C. $13,400D. $14,400E. $16,800

57. 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. $28,500B. $30,000C. $31,500D. $33,000E. $34,500

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58. You are a broker and have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.50 a share and IPO B was selling for $29 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading? A. -$425B. -$350C. $525D. $975E. $1,150

59. Richard has an outstanding order with his stock broker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading IPO A opened at $31.50 a share and ended the day at $26 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $40.25 a share. What is Richard's total profit or loss on these three IPOs as of the end of the first day of trading? A. -$2,175B. -$1,850C. -$1,500D. $2,250E. $3,500

60. Two IPOs will commence trading next week. Scott places an order to buy 300 shares of IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B. Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve is allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share. What is the difference in the total profits or losses that Scott and Steve have as of the end of the first day of trading? A. $120B. $240C. $360D. $420E. $580

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61. 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 $32.50 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 7.5 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 sharesB. 419,127 sharesC. 430,437 sharesD. 454,209 sharesE. 461,806 shares

62. 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 sharesB. 756,044 sharesC. 769,315 sharesD. 772,200 sharesE. 781,909 shares

63. 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 $121,000. How many shares of stock will Outdoor Living need to sell to finance this project? A. 568,201 sharesB. 488,917 sharesC. 452,311 sharesD. 559,180 sharesE. 562,400 shares

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64. High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so. After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share. The current market price of the firm's stock is $22 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans? A. 140,015 sharesB. 159,091 sharesC. 166,667 sharesD. 194,444 sharesE. 205,688 shares

65. Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities. How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $28 a share? A. 417,647 sharesB. 437,856 sharesC. 458,065 sharesD. 482,604 sharesE. 507,143 shares

66. A.K. Stevenson wants to raise $7.5 million through a rights offering. The subscription price is set at $24. Currently, the company has 2.1 million shares outstanding with a current market price of $25 a share. Each shareholder will receive one right for each share of stock they currently own. How many rights will be needed to purchase one new share of stock in this offering? A. 6.40 rightsB. 6.67 rightsC. 6.72 rightsD. 6.87 rightsE. 7.00 rights

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67. The Motor Plant wants to raise $21.4 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $12 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $12.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering? A. 1.46 rightsB. 1.52 rightsC. 1.55 rightsD. 1.60 rightsE. 1.67 rights

68. Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering? A. 2.07 rightsB. 2.17 rightsC. 2.22 rightsD. 2.50 rightsE. 2.67 rights

69. Jefferson Refining is issuing a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $21 plus 3 rights. The current market price of the stock is $23 a share. What is the value of one right? A. $0.25B. $0.50C. $1.00D. $1.50E. $2.00

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70. The stock of Cleaner Home Products is currently selling for $26.40 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $25 plus five rights. What is the value of one right? A. $0.16B. $0.23C. $0.25D. $0.47E. $0.50

71. Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding. The offering consists of a total of 860,000 new shares. The current market price of the stock is $35. Currently, there are 5.16 million shares outstanding. What is the value of one right? A. $0.37B. $0.43C. $0.48D. $0.52E. $0.60

72. You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $28. One right will be issued for each share of outstanding stock. This offering will provided $9 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally? A. 7.33 percentB. 7.46 percentC. 7.87 percentD. 8.00 percentE. 8.21 percent

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73. Jennifer owns 12,000 shares of Calico Clothing. Currently, there are 1.6 million shares of stock outstanding. The company has just announced a rights offering whereby 200,000 shares are being offered for sale at a subscription price of $14 a share. The current stock price is $16 a share. Assume that Jennifer sells her rights and that all rights are exercised. What percentage of the firm will Jennifer own after the rights offering? A. 0.67 percentB. 0.75 percentC. 0.86 percentD. 0.93 percentE. 1.01 percent

74. Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets. The net present value of the project is $22,500. Equity shares will be issued as the sole means of financing the project. What will the new book value per share be after the project is implemented given the following current information on the firm?

A. $13.25B. $13.70C. $14.23D. $14.94E. $15.60

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75. Birds and More is considering a project which requires the purchase of $164,000 of fixed assets. The net present value of the project is $4,500. Equity shares will be issued as the sole means of financing this project. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented given the following current information on the firm?

A. $20.68B. $20.72C. $20.80D. $20.95E. $21.10

76. Wagner Trucking is considering investing in a new project that will cost $13 million and increase net income by 6.5 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.25 million shares of stock outstanding with a market price of $42 per share. The current earnings per share are $1.82. What will the earnings per share be if the project is implemented? A. $1.39B. $1.45C. $1.55D. $1.62E. $1.69

77. You own 15 percent or 13,500 shares of Printers, Etc. These shares have a total market value of $426,600. By what percentage will the total value of your investment in this firm change if the company sells an additional 10,000 shares of stock at $30 a share and you do not buy any? A. -1.37 percentB. -1.21 percentC. -0.51 percentD. 1.03 percentE. 1.29 percent

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78. Kurt currently owns 3.4 percent of Northeastern Transportation. The company has a total of 438,000 shares outstanding with a current market price of $26.20 a share. At present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed? A. 3.06 percentB. 3.22 percentC. 3.27 percentD. 3.40 percentE. 3.51 percent

Essay Questions

79. It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make. Explain why.

80. Explain both a rights offering and the basic characteristics of a right.

81. Explain why there is a tendency for IPOs to be underpriced.

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82. Firms encounter several costs when issuing new securities. Identify and describe at least four of these costs.

83. Steve is the founder of Jefferson & Westover. Recently, the firm decided to issue an IPO with Steve retaining 30 percent ownership of the firm. The IPO agreement contained both a Green Shoe provision and a 6-month lockup agreement. Steve's cost basis per share is $15. The offering price for the IPO was $16. On the first day of trading, the market price per share rose to $28.20 and closed for the day at $25.60. Now, six months after the IPO release, the stock is valued at $15.40 a share. Explain who benefited the most during the lockup period, an outside investor or Steve, and why.


84. The Timken Company has announced a rights offer to raise $25 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently sells for $48 per share, and there are 2.6 million shares outstanding. The subscription price is set at $43 per share. What is the ex-rights price per share? A. $45.58B. $47.09C. $48.15D. $48.80E. $49.42

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85. The Warm Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $100 to $95 ($100 is the rights-on-price; $95 is the ex-rights price, also known as the when-issued price). The company is seeking $18 million in additional funds with a per-share subscription price of $50. How many shares of stock are outstanding, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.) A. 324,000B. 360,000C. 1,800,000D. 3,240,000E. 3,600,000

86. The Woods Co. and the Mickelson Co. have both announced IPOs at $43 per share. One of these is undervalued by $20, and the over is overvalued by $14, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson? A. -$10,000B. -$6,000C. -$4,000D. $4,000E. $6,000

87. Flagler, Inc. needs to raise $30 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $30 per share and the company's underwriters charge a 10 percent spread. How many shares need to be sold? A. 1,111,111 sharesB. 1,250,000 sharesC. 1,666,667 sharesD. 2,500,000 sharesE. 3,333,333 shares

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88. The Educated Horses Corporation needs to raise $20 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. Suppose the offer price is $40 per share and the company's underwriters charge an 8 percent spread. The SEC filing fee and associated administrative expenses of the offering are $660,000. How many shares need to be sold? A. 448,907B. 461,222C. 511,111D. 529,937E. 561,413

89. The Huff Co. has just gone public. Under a firm commitment agreement, Huff received $21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per share, and the stock rose to $30.51 per share in the first few minutes of trading. Huff paid $1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The flotation costs were what percentage of the funds raised? A. 38.56 percentB. 40.32 percentC. 41.68 percentD. 43.75 percentE. 44.09 percent

90. Mountain Homes wishes to expand its facilities. The company currently has 7 million shares outstanding and no debt. The stock sells for $55 per share, but the book value per share is $43. The firm's net income is currently $9.1 million. The new facility will cost $30 million, and it will increase net income by $309,000. Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio. What will be the EPS be after the new equity issue? A. $1.25B. $1.30C. $1.35D. $1.40E. $1.45

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91. The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:

MHMM is considering an investment that has the same P/E ratio as the firm. The cost of the investment is $798,270, and it will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the price after the offering to be $110 per share? Assume the PE ratio remains constant. A. 18.28 percentB. 21.41 percentC. 27.63 percentD. 37.27 percentE. 40.03 percent

92. Precise Machining is considering a rights offer. The company has determined that the ex-rights price would be $46. The current price is $53 per share, and there are 7 million shares outstanding. The rights offer would raise a total of $70 million. What is the subscription price? A. $26.48B. $27.06C. $27.50D. $28.18E. $29.10

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93. Atlas Corp. wants to raise $4 million via a rights offering. The company currently has 450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $26 per share and will charge the company a 7 percent spread. Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering. How much can you get for selling all of your rights? A. $24,911.21B. $25,362.84C. $25,792.19D. $26,414.14E. $27,094.95

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Chapter 15 Raising Capital Answer Key


1. Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called? A. green shoe fundingB. tombstone underwritingC. venture capitalD. red herring fundingE. life cycle capital

Refer to section 15.1

AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-1Section: 15.1Topic: Venture capital

2. What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public? A. prospectusB. red herringC. indentureD. public disclosure statementE. registration statement


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.2Topic: Registration statement

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3. Miller & Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering? A. Regulation AB. Regulation CC. Regulation GD. Regulation QE. Regulation R


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.2Topic: Regulation A

4. What is a prospectus? A. a letter issued by the SEC authorizing a new issue of securitiesB. a report stating that the SEC recommends a new security to investorsC. a letter issued by the SEC that outlines the changes required for a registration statement to be approvedD. a document that describes the details of a proposed security offering along with relevant information about the issuerE. an advertisement in a financial newspaper that describes a security offering


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.2Topic: Prospectus

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5. Which one of the following is a preliminary prospectus? A. tombstoneB. green shoeC. registration statementD. rights offerE. red herring


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.2Topic: Red herring

6. Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called: A. red herrings.B. tombstones.C. Green Shoes.D. registration statements.E. cash offers.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.2Topic: Tombstones

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7. What is an issue of securities that is offered for sale to the general public on a direct cash basis called? A. best efforts underwritingB. firm commitment underwritingC. general cash offerD. rights offerE. herring offer


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.3Topic: General cash offer

8. Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? A. best efforts offerB. firm commitment offerC. general cash offerD. rights offerE. priority offer


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.3Topic: Rights offer

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9. Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing, and distributing healthy soups in a dried form. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called? A. venture capital offeringB. shelf offeringC. private placementD. seasoned equity offeringE. initial public offering


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-3Section: 15.3Topic: Initial public offering

10. What is a seasoned equity offering? A. an offering of shares by shareholders for repurchase by the issuerB. shares of stock that have been recommended for purchase by the SECC. equity securities held by a firm's founder that are being offered for sale to the general publicD. sale of newly issued equity shares by a firm that is currently publicly ownedE. a set number of equity shares that are issued and offered to the public annually


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.3Topic: Seasoned equity offering

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11. Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n): A. aftermarket specialist.B. venture capitalist.C. underwriter.D. seasoned writer.E. primary investor.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Underwriters

12. What is the definition of a syndicate? A. a venture capitalistB. a group of attorneys providing services for an IPOC. block of investors who control a firmD. a bank that loans funds to finance the start-up of a new firmE. a group of underwriters sharing the risk of selling a new issue of securities


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Syndicate

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13. The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the: A. gross spread.B. under price amountC. filing fee.D. new issue premium.E. offer price.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Gross spread

14. D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this? A. best effortsB. shelfC. over subscribedD. private placementE. firm commitment


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Firm commitment

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15. Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this underwriting? A. best effortsB. shelfC. direct rightsD. private placementE. firm commitment


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Best efforts

16. The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period. A. silentB. quietC. lockupD. greenE. red


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Quiet period

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17. Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following? A. Green shoe provisionB. Red herring provisionC. quiet provisionD. lockup agreementE. post-issue agreement


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Green shoe provision

18. Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock? A. pre-issue dateB. aftermarket dateC. declaration dateD. holder-of-record dateE. ex-rights date


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Ex-rights date

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19. The date on which a shareholder is officially listed as the recipient of stock rights is called the: A. issue date.B. offer dateC. declaration dateD. holder-of-record date.E. ex-rights date.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Holder-of-record date

20. A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting. A. standbyB. best effortsC. firm commitmentD. direct feeE. tombstone


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Standby underwriting

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21. The amount paid to an underwriter who participates in a standby underwriting agreement is called a(n): A. gross spread.B. optional spread.C. standby fee.D. additional fee.E. oversubscription fee.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Standby fee

22. Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 a share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase the unsubscribed shares. Which one of the following will allow her to do so? A. standby provisionB. oversubscription privilegeC. open offer privilegeD. new issues provisionE. overallotment provision


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Oversubscription privilege

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23. Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to: A. an oversubscription cost.B. underpricing.C. dilution.D. the Green Shoe provision.E. a locked in period.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-4Section: 15.9Topic: Dilution

24. Direct business loans typically ranging from one to five years are called: A. private placements.B. debt SEOs.C. notes payable.D. debt IPOs.E. term loans.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.10Topic: Term loans

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25. A group of five private investors recently loaned $6 million to Henderson Hardware for ten years at 9 percent interest. This loan is best described as a: A. private placement.B. debt SEO.C. notes payable.D. debt IPO.E. term loan.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.10Topic: Private placement

26. Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this? A. standby registrationB. shelf registrationC. Regulation A registrationD. Regulation Q registrationE. private placement registration


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.11Topic: Shelf registration

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27. Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed. She knows a venture capitalist who has offered to finance her business to the point where she would be ready to begin the manufacturing and marketing stage. Which type of financing is Suzie being offered? A. syndicateB. introductionC. second-stageD. mezzanine-levelE. seed money


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-1Section: 15.1Topic: Seed money

28. Which one of the following is probably the most successful means of finding venture capital? A. internet searchesB. Dutch auctionsC. newspaper advertisementsD. personal contactsE. personal letters to venture capital firms



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29. Which one of the following statements concerning venture capital financing is correct? A. Venture capitalists desire shares of common stock but avoid preferred stock.B. Venture capital is relatively easy to obtain.C. Venture capitalists rarely assume active roles in the management of the financed firm.D. Venture capitalists often require at least a forty percent equity position as a condition of financing.E. Venture capital is relatively inexpensive in today's competitive markets.



30. Which one of the following statements concerning venture capitalists is correct? A. Venture capitalists assume management responsibility for the firms they finance.B. Exit strategy is a key consideration when selecting a venture capitalist.C. Venture capitalists limit their services to providing money to start-up firms.D. Most venture capitalists are long-term investors in a firm.E. A venture capitalist normally invests in a new idea and finances that idea until the newly-formed firm can issue an IPO.



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31. Which of the following should be considered when selecting a venture capitalist?I. level of involvementII. past experiencesIII. termination of fundingIV. financial strength A. I and III onlyB. II and IV onlyC. I, III, and IV onlyD. I, II, and IV onlyE. I, II, III, and IV



32. Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public? A. select an underwriterB. obtain SEC approvalC. gain board approvalD. prepare a registration statementE. distribute a prospectus


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2 and 15-3Section: 15.2Topic: IPO

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33. All new interstate security issues are regulated by the: A. registration statement.B. Green Shoe provision.C. Securities Exchange Act of 1934.D. Securities Act of 1933.E. Federal Reserve Act of 1931.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.2Topic: Securities Act of 1933

34. The Securities and Exchange Commission: A. verifies the accuracy of the information contained in the prospectus.B. verifies the accuracy of the information contained in the red herring.C. examines the registration statement during the Green Shoe period.D. is concerned only that an issue complies with all rules and regulations.E. determines the final offer price once they have approved the registration statement.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.2Topic: SEC

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35. Underwriters generally: A. pay a spread to the issuing firm.B. provide only best efforts underwriting in the U.S.C. receive less compensation under a competitive agreement than under a negotiated agreement.D. market and distribute an entire issue of new securities within their own firm.E. pass the risk of unsold shares back to the issuing firm via a firm commitment agreement.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Underwriters

36. With firm commitment underwriting, the issuing firm: A. is unsure of the total amount of funds it will receive until after the offering is completed.B. is unsure of the number of shares it will actually issue until after the offering is completed.C. knows exactly how many shares will be purchased by the general public during the offer period.D. retains the financial risk associated with unsold shares.E. knows up-front the amount of money it will receive from the stock offering.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Firm commitment underwriting

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37. With Dutch auction underwriting: A. each winning bidder pays the price he or she bid.B. all successful bidders pay the same price.C. all bidders receive at least a portion of the quantity for which they bid.D. the selling firm receives the maximum possible price for each security sold.E. the bidder for the largest quantity receives the first allocation of securities.


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Dutch auction

38. If an IPO is underpriced then the: A. investors in the IPO are generally unhappy with the underwriters.B. issue is less likely to sell out.C. stock price will generally decline on the first day of trading.D. issuing firm is guaranteed to be successful in the long term.E. issuing firm receives less money than it probably should have.


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 15-3Section: 15.5Topic: IPO underpricing

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39. Which of the following have been offered as supporting arguments in favor of IPO underpricing?I. Underpricing counteracts the "winner's curse".II. Underpricing rewards institutional investors for sharing their opinions of a stock's market value.III. Underpricing diminishes the underwriting risk of a firm commitment underwriting.IV. Underpricing reduces the probability that investors will sue the underwriters. A. I and III onlyB. II and IV onlyC. I and II onlyD. I, II, and III onlyE. I, II, III, and IV


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 15-3Section: 15.5Topic: IPO underpricing

40. Which one of the following is a key goal of the aftermarket period? A. collection of largest number of Dutch auction bids as possibleB. best determination of a fair offer price for an upcoming IPOC. price support for a new issue of securitiesD. establishment of a broad-based underwriting syndicate for an upcoming IPOE. widest distribution of red herrings as possible


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-3Section: 15.4Topic: Aftermarket period

15-49


41. 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.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-3Section: 15.4Topic: IPO provisions

42. 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.


AACSB: N/ABloom's: ComprehensionDifficulty: BasicLearning Objective: 15-3Section: 15.5Topic: IPO allocations

15-50


43. 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.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.6Topic: Stock issue announcement

44. 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.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-3Section: 15.7Topic: Issue costs

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45. 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.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-3Section: 15.7Topic: Issue costs

46. 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.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Rights

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47. 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.



48. 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 onlyB. II and IV onlyC. I and II onlyD. I, II, and III onlyE. I, II, III, and IV



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49. 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. overallotmentB. percentage ownership dilutionC. Green ShoeD. Red herringE. abnormal event



50. 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.



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51. 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.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.10Topic: Long-term debt

52. 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.


AACSB: N/ABloom's: KnowledgeDifficulty: BasicLearning Objective: 15-2Section: 15.11Topic: Shelf registration

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53. 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 $28 a share with an 8.5 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. $2,727,200B. $2,495,388C. $3,074,400D. $3,360,000E. $3,645,600

Total cash received = 120,000 $28 (1 - 0.085) = $3,074,400

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-3Section: 15.7Topic: Initial public offering

54. 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. $805,000B. $910,000C. $920,000D. $1,035,000E. $1,040,000

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

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-3Section: 15.7Topic: Initial public offering

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55. Miller Motors has decided to sell 1,600 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. $30,400B. $33,400C. $33,600D. $35,400E. $38,600

Total cash received = 1,600 $21 = $33,600

AACSB: AnalyticBloom's: AnalyticDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Dutch auction

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56. 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. $10,800B. $12,000C. $13,400D. $14,400E. $16,800


AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Dutch auction

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57. 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. $28,500B. $30,000C. $31,500D. $33,000E. $34,500


AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-2Section: 15.4Topic: Dutch auction

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58. You are a broker and have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.50 a share and IPO B was selling for $29 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading? A. -$425B. -$350C. $525D. $975E. $1,150

Total profit = [500 ($23.50 - $25)] + [100 ($29 - $25)] = -$350

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-3Section: 15.5Topic: IPO

59. Richard has an outstanding order with his stock broker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading IPO A opened at $31.50 a share and ended the day at $26 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $40.25 a share. What is Richard's total profit or loss on these three IPOs as of the end of the first day of trading? A. -$2,175B. -$1,850C. -$1,500D. $2,250E. $3,500

Total profit = [1,000 ($26 - $30)] + [400 ($32 - $30)] + [100 ($40.25 - $30)] = -$2,175


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60. Two IPOs will commence trading next week. Scott places an order to buy 300 shares of IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B. Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve is allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share. What is the difference in the total profits or losses that Scott and Steve have as of the end of the first day of trading? A. $120B. $240C. $360D. $420E. $580

Scott's profit = 100 ($22.70 - $20) = $270Steve's profit = [100 ($22.70 - $20)] + [300 ($18.60 - $20)] = -$150Difference = $270 - (-$150) = $420


61. 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 $32.50 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 7.5 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 sharesB. 419,127 sharesC. 430,437 sharesD. 454,209 sharesE. 461,806 shares

Total value of issue = ($12,600,000 + $340,000)/(1 - 0.075) = $13,989,189.19Number of shares needed = $13,989,189.19/$32.50 = 430,437 shares

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-3Section: 15.7Topic: Issue costs

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62. 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 sharesB. 756,044 sharesC. 769,315 sharesD. 772,200 sharesE. 781,909 shares

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


63. 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 $121,000. How many shares of stock will Outdoor Living need to sell to finance this project? A. 568,201 sharesB. 488,917 sharesC. 452,311 sharesD. 559,180 sharesE. 562,400 shares

Total value of issue = ($7,500,000 + $121,000)/(1 - 0.075) = $8,238,918.92Number of shares needed = $8,238,918.92/$14.50 = 568,201 shares


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64. High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so. After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share. The current market price of the firm's stock is $22 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans? A. 140,015 sharesB. 159,091 sharesC. 166,667 sharesD. 194,444 sharesE. 205,688 shares

$3.5m/$18 = 194,444 shares

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Rights offer

65. Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities. How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $28 a share? A. 417,647 sharesB. 437,856 sharesC. 458,065 sharesD. 482,604 sharesE. 507,143 shares

$14.2m/$28 = 507,143 shares


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66. A.K. Stevenson wants to raise $7.5 million through a rights offering. The subscription price is set at $24. Currently, the company has 2.1 million shares outstanding with a current market price of $25 a share. Each shareholder will receive one right for each share of stock they currently own. How many rights will be needed to purchase one new share of stock in this offering? A. 6.40 rightsB. 6.67 rightsC. 6.72 rightsD. 6.87 rightsE. 7.00 rights

Number of rights issued = 1 2.1m = 2.1m; Number of shares needed = $7.5m/$24 = 312,500; Rights needed for each new share = 2.1m/312,500 = 6.72 rights


67. The Motor Plant wants to raise $21.4 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $12 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $12.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering? A. 1.46 rightsB. 1.52 rightsC. 1.55 rightsD. 1.60 rightsE. 1.67 rights

Number of rights issued = 1 2.6m = 2.6m; Number of shares needed = $21.4m/$12 = 1,783,333.33; Rights needed for each new share = 2.6m/1,783,333.33 = 1.46 rights


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68. Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering? A. 2.07 rightsB. 2.17 rightsC. 2.22 rightsD. 2.50 rightsE. 2.67 rights

Number of rights issued = 1 540,000 = 540,000; Number of shares needed = $8.6m/$33 = 260,606.06; Rights needed for each new share = 540,000/260,606.06 = 2.07 rights


69. Jefferson Refining is issuing a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $21 plus 3 rights. The current market price of the stock is $23 a share. What is the value of one right? A. $0.25B. $0.50C. $1.00D. $1.50E. $2.00

Value per share excluding right = [$21 + (3 $23)]/(1 + 3) = $22.50Value of one right = $23 - $22.50 = $0.50

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Right value

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70. The stock of Cleaner Home Products is currently selling for $26.40 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $25 plus five rights. What is the value of one right? A. $0.16B. $0.23C. $0.25D. $0.47E. $0.50

Cost per share = [$25 + (5 $26.40)]/(1 + 5) = $26.17Value of right = $26.40 - $26.17 = $0.23

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Right value

71. Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding. The offering consists of a total of 860,000 new shares. The current market price of the stock is $35. Currently, there are 5.16 million shares outstanding. What is the value of one right? A. $0.37B. $0.43C. $0.48D. $0.52E. $0.60

Subscription price = $27.52m/860,000 shares = $32 a shareNumber of shares issued = 1 5.16m = 5.16mNumber of rights needed = 5.16m/860,000 = 6Cost per share = [$32 + (6 $35)]/(1 + 6) = $34.57Value of a right = $35 - $34.57 = $0.43

AACSB: AnalyticBloom's: ApplicationDifficulty: IntermediateLearning Objective: 15-4Section: 15.8Topic: Right value

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72. You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $28. One right will be issued for each share of outstanding stock. This offering will provided $9 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally? A. 7.33 percentB. 7.46 percentC. 7.87 percentD. 8.00 percentE. 8.21 percent

Number of shares owned = 0.08 3.5m = 280,000 sharesNumber of shares offered = $9m/$28 = 321,428.57 sharesNew ownership position = 280,000/(3.5m + 321,428.57) = 7.33 percent

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-4Section: 15.9Topic: Dilution

73. Jennifer owns 12,000 shares of Calico Clothing. Currently, there are 1.6 million shares of stock outstanding. The company has just announced a rights offering whereby 200,000 shares are being offered for sale at a subscription price of $14 a share. The current stock price is $16 a share. Assume that Jennifer sells her rights and that all rights are exercised. What percentage of the firm will Jennifer own after the rights offering? A. 0.67 percentB. 0.75 percentC. 0.86 percentD. 0.93 percentE. 1.01 percent

New ownership percentage = 12,000/(1.6m + 0.2m) = 0.67 percent


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74. Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets. The net present value of the project is $22,500. Equity shares will be issued as the sole means of financing the project. What will the new book value per share be after the project is implemented given the following current information on the firm?

A. $13.25B. $13.70C. $14.23D. $14.94E. $15.60

Current market value per share = $936,000/60,000 = $15.60Number of new shares needed = $498,000/$15.60 = 31,923.08 sharesNew book value per share = ($720,000 + $498,000)/(60,000 + 31,923.08) = $13.25

AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateLearning Objective: 15-3Section: 15.9Topic: Book value

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75. Birds and More is considering a project which requires the purchase of $164,000 of fixed assets. The net present value of the project is $4,500. Equity shares will be issued as the sole means of financing this project. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented given the following current information on the firm?

A. $20.68B. $20.72C. $20.80D. $20.95E. $21.10

Current market value per share = $457,600/22,000 = $20.80Number of new shares needed = $164,000/$20.80 = 7,884.62 sharesNew market value per share = ($457,600 + $164,000 + $4,500)/(22,000 + 7,884.62) = $20.95

AACSB: AnalyticBloom's: ApplicationDifficulty: IntermediateLearning Objective: 15-3Section: 15.9Topic: Market value

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76. Wagner Trucking is considering investing in a new project that will cost $13 million and increase net income by 6.5 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.25 million shares of stock outstanding with a market price of $42 per share. The current earnings per share are $1.82. What will the earnings per share be if the project is implemented? A. $1.39B. $1.45C. $1.55D. $1.62E. $1.69

New earnings per share = ($1.82 1.25m 1.065)/[1.25m + ($13m/$42)] = $1.55

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 15-3Section: 15.9Topic: Earnings per share

77. You own 15 percent or 13,500 shares of Printers, Etc. These shares have a total market value of $426,600. By what percentage will the total value of your investment in this firm change if the company sells an additional 10,000 shares of stock at $30 a share and you do not buy any? A. -1.37 percentB. -1.21 percentC. -0.51 percentD. 1.03 percentE. 1.29 percent

Current number of shares outstanding = 13,500/0.15 = 90,000Price per share = $426,600/13,500 = $31.60New market value per share = [(90,000 $31.60) + (10,000 $30)]/(90,000 + 10,000) = $31.44Percent change = ($31.44 - $31.60)/$31.60 = -0.51 percent

AACSB: AnalyticBloom's: ApplicationDifficulty: IntermediateLearning Objective: 15-3Section: 15.9Topic: Dilution

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78. Kurt currently owns 3.4 percent of Northeastern Transportation. The company has a total of 438,000 shares outstanding with a current market price of $26.20 a share. At present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed? A. 3.06 percentB. 3.22 percentC. 3.27 percentD. 3.40 percentE. 3.51 percent

Number of shares owned = 0.034 438,000 = 14,892New ownership position = 14,892/(438,000 + 25,000) = 3.22 percent


Essay Questions

79. It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make. Explain why.

The potential rewards from venture capital can be substantial but the costs to the entrepreneur are equally substantial. The primary advantage of venture capital funding is the access to capital when funds are unavailable from other sources. In addition, a venture capitalist provides industry experience, expertise, and valuable business contacts. However, nothing is free. In exchange for this funding, entrepreneurs have to sacrifice a large percentage of their ownership rights to the venture capitalist. If venture capital is not accepted, the firm may fail for lacking of funding. If venture capital is accepted, there's no guarantee of success; only a guarantee that the entrepreneur will own less of the firm.

AACSB: Reflective thinkingBloom's: AnalysisDifficulty: BasicLearning Objective: 15-1Section: 15.1Topic: Venture capital

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80. Explain both a rights offering and the basic characteristics of a right.

A rights offering is an issue of common stock that is initially offered for sale to a firm's current shareholders. Shareholders generally receive one right for each share of stock owned. Each right grants its holder the ability to purchase a stated amount of new shares at a stated price during a stated period of time. If the recipient of a right decides not to participate in the rights offering, then he or she can sell that right to another investor who does want to participate. Selling stock via a rights offering is generally a cheaper method of issuing securities than a general cash offer.

AACSB: Reflective thinkingBloom's: ComprehensionDifficulty: BasicLearning Objective: 15-4Section: 15.8Topic: Rights offer

81. Explain why there is a tendency for IPOs to be underpriced.

Several reasons have been given for underpricing an IPO. These include:1. determining the correct offering price is extremely difficult,2. underpricing helps ensure the success of the security offering,3. underpricing is just an indirect cost of a securities issue,4. underpricing rewards IPO investors for purchasing risky securities,5. underpricing addresses the issue of the "winner's curse", and6. underpricing rewards institutional investors for the information they provide to underwriters regarding the potential interest in and value of a security issue.

AACSB: Reflective thinkingBloom's: ComprehensionDifficulty: BasicLearning Objective: 15-3Section: 15.5Topic: IPO underpricing

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82. Firms encounter several costs when issuing new securities. Identify and describe at least four of these costs.

Students should provide a partial discussion of the information found at the beginning of SECTION 15.7 where 6 different types of costs are identified and defined. These are:

AACSB: Reflective thinkingBloom's: KnowledgeDifficulty: BasicLearning Objective: 15-3Section: 15.7Topic: Underwriting costs

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83. Steve is the founder of Jefferson & Westover. Recently, the firm decided to issue an IPO with Steve retaining 30 percent ownership of the firm. The IPO agreement contained both a Green Shoe provision and a 6-month lockup agreement. Steve's cost basis per share is $15. The offering price for the IPO was $16. On the first day of trading, the market price per share rose to $28.20 and closed for the day at $25.60. Now, six months after the IPO release, the stock is valued at $15.40 a share. Explain who benefited the most during the lockup period, an outside investor or Steve, and why.

As a company insider, the lockup agreement has prevented Steve from selling any of his shares and benefiting from the substantial price increase to $28.20 a share. Thus, Steve still owns all of his shares and has a current profit of $0.40 a share. Meanwhile, Outside Investor A could have purchased shares for $16 and sold them at $28.20 each. Outside Investor B, could have bought the shares at $28.20 and suffered a loss since the shares have declined in value since that point. Thus, who is better off depends upon the price at which the outside investor purchased shares.

AACSB: Reflective thinkingBloom's: AnalysisDifficulty: IntermediateLearning Objective: 15-3Section: 15.4Topic: Lockup agreement


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84. The Timken Company has announced a rights offer to raise $25 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently sells for $48 per share, and there are 2.6 million shares outstanding. The subscription price is set at $43 per share. What is the ex-rights price per share? A. $45.58B. $47.09C. $48.15D. $48.80E. $49.42

Number of new shares = $25m/$43 = 581,395.35Number of rights needed to buy one share = 2.6m/581,395.35 = 4.472Ex-rights price per share = [$43 + 4.472($48)]/[1 + 4.472] = $47.09

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 15-2Learning Objective: 15-4Section: 15.8Topic: Rights offer

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85. The Warm Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $100 to $95 ($100 is the rights-on-price; $95 is the ex-rights price, also known as the when-issued price). The company is seeking $18 million in additional funds with a per-share subscription price of $50. How many shares of stock are outstanding, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.) A. 324,000B. 360,000C. 1,800,000D. 3,240,000E. 3,600,000

PEx = $95 = ($50 + $100N)/(N + 1); N = 9Number of new shares = $18m/$50 = 360,000 sharesNumber of old shares = 9 360,000 = 3,240,000 shares

AACSB: AnalyticBloom's: AnalysisDifficulty: BasicEOC #: 15-3Learning Objective: 15-4Section: 15.8Topic: Rights offer

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86. The Woods Co. and the Mickelson Co. have both announced IPOs at $43 per share. One of these is undervalued by $20, and the over is overvalued by $14, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson? A. -$10,000B. -$6,000C. -$4,000D. $4,000E. $6,000

Expected profit = 500($20) + 1,000(-$14) = -$4,000Profit if 1,000 shares of each = 1,000($20) + 1,000(-$14) = $6,000Difference = -$4,000 - $6,000 = -$10,000

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 15-4Learning Objective: 15-3Section: 15.5Topic: IPO underpricing

87. Flagler, Inc. needs to raise $30 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $30 per share and the company's underwriters charge a 10 percent spread. How many shares need to be sold? A. 1,111,111 sharesB. 1,250,000 sharesC. 1,666,667 sharesD. 2,500,000 sharesE. 3,333,333 shares

Required sales proceeds: $30m = x (1 - 0.10); x = $33,333,333Number of shares needed = $33,333,333/$30 = 1,111,111

AACSB: AnalyticBloom's: ApplicationDifficulty: BasicEOC #: 15-5Learning Objective: 15-3Section: 15.7Topic: Flotation costs

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88. The Educated Horses Corporation needs to raise $20 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. Suppose the offer price is $40 per share and the company's underwriters charge an 8 percent spread. The SEC filing fee and associated administrative expenses of the offering are $660,000. How many shares need to be sold? A. 448,907B. 461,222C. 511,111D. 529,937E. 561,413

Required sales proceeds: $20m + $0.66m = x (1 - 0.08); x = $22,456,522Number of shares needed = $22,456,522/$40 = 561,413


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89. The Huff Co. has just gone public. Under a firm commitment agreement, Huff received $21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per share, and the stock rose to $30.51 per share in the first few minutes of trading. Huff paid $1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The flotation costs were what percentage of the funds raised? A. 38.56 percentB. 40.32 percentC. 41.68 percentD. 43.75 percentE. 44.09 percent

Net amount raised = 6m ($21.50) - $1,260,000 - $390,000 = $127,350,000Total direct costs = $1,260,000 + ($23.65 - $21.50) (6m) = $14,160,000Total indirect costs = $390,000 = ($30.51 - $23.65) (6m) = $41,550,000Total costs = $14,160,000 + $41,550,000 = $55,710,000Flotation cost percentage = $55,710,000/$127,350,000 = 43.75 percent


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90. Mountain Homes wishes to expand its facilities. The company currently has 7 million shares outstanding and no debt. The stock sells for $55 per share, but the book value per share is $43. The firm's net income is currently $9.1 million. The new facility will cost $30 million, and it will increase net income by $309,000. Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio. What will be the EPS be after the new equity issue? A. $1.25B. $1.30C. $1.35D. $1.40E. $1.45

Number of shares after the offering = 7m + ($30m/$55) = 7,545,454.545455New EPS = ($9.1m + $309,000)/7,545,454.545455 = $1.25

AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateEOC #: 15-9Learning Objective: 15-3Section: 15.9Topic: Dilution

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91. The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:

MHMM is considering an investment that has the same P/E ratio as the firm. The cost of the investment is $798,270, and it will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the price after the offering to be $110 per share? Assume the PE ratio remains constant. A. 18.28 percentB. 21.41 percentC. 27.63 percentD. 37.27 percentE. 40.03 percent

Current ROE = $451,000/($4,631,000 - $2,315,500) = 0.19477435New net income = 0.19477435 ($4,631,000 - $2,315,500 + $798,270) = $606,483Number of new shares = $798,270/$110 = 7,257New EPS = $606,483/(11,000 + 7,257) =$33.22Current P/E = $110/($451,000/11,000) = 2.6829Necessary EPS = $110 = 2.6829(Necessary EPS); Necessary EPS = $41Necessary net income = $41 (7,257) = $297,537New ROE = $297,537/$798,270 = 37.27 percent

AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateEOC #: 15-11Learning Objective: 15-3Section: 15.9Topic: Dilution

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92. Precise Machining is considering a rights offer. The company has determined that the ex-rights price would be $46. The current price is $53 per share, and there are 7 million shares outstanding. The rights offer would raise a total of $70 million. What is the subscription price? A. $26.48B. $27.06C. $27.50D. $28.18E. $29.10

Number of new shares = $70m/PS

NEx = 7m/($70m/PS) = 0.1PS

PX = $46 = [0.1PS($53) + PS]/(0.1PS + 1); PS = $27.06

AACSB: AnalyticBloom's: ApplicationDifficulty: IntermediateEOC #: 15-12Learning Objective: 15-4Section: 15.8Topic: Rights offer

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93. Atlas Corp. wants to raise $4 million via a rights offering. The company currently has 450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $26 per share and will charge the company a 7 percent spread. Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering. How much can you get for selling all of your rights? A. $24,911.21B. $25,362.84C. $25,792.19D. $26,414.14E. $27,094.95

Net proceeds to firm = $26 (1 - 0.07) = $24.18New shares offered = $4m/$24.18 = 165,425.97Number of rights needed per share = 450,000/165,425.97 = 2.72025PEx = [$26 + 2.72025($40)]/(1 + 2.72025) = $36.24Right value = $40 - $36.24 = $3.76Sale proceeds = $3.76 (7,200) = $27,094.95

AACSB: AnalyticBloom's: AnalysisDifficulty: IntermediateEOC #: 15-14Learning Objective: 15-4Section: 15.8Topic: Rights offer

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