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Exam 19: Raising Capital

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Question 1

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

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

F) B) and D)
G) B) and C)

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Question 2

Multiple Choice

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Which one of these statements is correct?

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

F) A) and B)
G) C) and D)

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Question 3

Multiple Choice

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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