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15Student:
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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
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 issuer
E. 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.
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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
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.
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.
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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
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.
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
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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.
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.
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
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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
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 involvement
II. past experiences
III. termination of funding
IV. 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
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.
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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.
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
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
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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.
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.
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
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
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
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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
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
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
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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
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
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
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
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.
82. Firms encounter several costs when issuing new securities.
Identify and describe at least four of these 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.
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
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
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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15 Key 1. C
2. E
3. A
4. D
5. E
6. B
7. C
8. D
9. E
10. D
11. C
12. E
13. A
14. E
15. A
16. B
17. A
18. E
19. D
20. A
21. C
22. B
23. C
24. E
25. A
26. B
27. E
28. D
29. D
30. B
31. E
32. C
33. D
34. D
35. C
36. E
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37. B
38. E
39. E
40. C
41. E
42. D
43. B
44. C
45. D
46. A
47. E
48. D
49. B
50. C
51. B
52. D
53. C
54. A
55. C
56. B
57. C
58. B
59. A
60. D
61. C
62. B
63. A
64. D
65. E
66. C
67. A
68. A
69. B
70. B
71. B
72. A
73. A
74. A
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75. D
76. C
77. C
78. B
79. 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.
80. 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.
6. underpricing rewards institutional investors for the
information they provide to underwriters regarding the potential
interest in and value of a security issue.5. underpricing addresses
the issue of the "winner's curse", and4. underpricing rewards IPO
investors for purchasing risky securities,3. underpricing is just
an indirect cost of a securities issue,2. underpricing helps ensure
the success of the security offering,1. determining the correct
offering price is extremely difficult,81. Several reasons have been
given for underpricing an IPO. These include:
82. 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:
83. 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.
84. B
85. D
86. A
87. A
88. E
89. D
90. A
91. D
92. B
93. E
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15 Summary Category # of Questions
AACSB: Analytic 36AACSB: N/A 52AACSB: Reflective thinking
5Blooms: Analysis 7Blooms: Analytic 1Blooms: Application 30Blooms:
Comprehension 6Blooms: Knowledge 49Difficulty: Basic 84Difficulty:
Intermediate 9EOC #: 15-11 1EOC #: 15-12 1EOC #: 15-14 1EOC #: 15-2
1EOC #: 15-3 1EOC #: 15-4 1EOC #: 15-5 1EOC #: 15-6 1EOC #: 15-7
1EOC #: 15-9 1Learning Objective: 15-1 7Learning Objective: 15-2
29Learning Objective: 15-2 and 15-3 1Learning Objective: 15-3
30Learning Objective: 15-4 26Ross - Chapter 15 93Section: 15.1
7Section: 15.10 3Section: 15.11 2Section: 15.2 8Section: 15.3
4Section: 15.4 16Section: 15.5 8Section: 15.6 1Section: 15.7
11Section: 15.8 21Section: 15.9 12Topic: Aftermarket period 1Topic:
Best efforts 1Topic: Book value 1Topic: Dilution 9Topic: Dutch
auction 4Topic: Earnings per share 1Topic: Ex-rights date 1Topic:
Firm commitment 1Topic: Firm commitment underwriting 1Topic:
Flotation costs 3Topic: General cash offer 1Topic: Green shoe
provision 1Topic: Gross spread 1Topic: Holder-of-record date
1Topic: Initial public offering 3Topic: IPO 4
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Topic: IPO allocations 1Topic: IPO provisions 1Topic: IPO
underpricing 4Topic: Issue costs 5Topic: Lockup agreement 1Topic:
Long-term debt 1Topic: Market value 1Topic: Oversubscription
privilege 1Topic: Private placement 1Topic: Prospectus 1Topic:
Quiet period 1Topic: Red herring 1Topic: Registration statement
1Topic: Regulation A 1Topic: Right value 3Topic: Rights 3Topic:
Rights offer 11Topic: Seasoned equity offering 1Topic: SEC 1Topic:
Securities Act of 1933 1Topic: Seed money 1Topic: Shelf
registration 2Topic: Standby fee 1Topic: Standby underwriting
1Topic: Stock issue announcement 1Topic: Syndicate 1Topic: Term
loans 1Topic: Tombstones 1Topic: Underwriters 2Topic: Underwriting
costs 1Topic: Venture capital 6