Exam 18: Issuing Capital and the Investment Banking Process

You have approached your local bank for a start-up loan commitment for $5,000,000 needed to open a car repair store. You have requested that the term of the loan be one year. Your bank has offered you the following terms: size of loan commitment = $5,000,000, term = one year, up-front fee = 30 basis points, back-end fee = 40 basis points, and rate on the loan = 8 percent. If you immediately take down $1,000,000 and no more during the year, what is the total interest and fees you have paid on this loan commitment?

Sipe's Paint and Wallpaper, Inc., needs to raise $1.25 million to finance plant expansion. In discussions with its investment bank, Sipe's Paint and Wallpaper learns that the bankers recommend a gross price of $37.20 per share and that 48,500 shares of stock be sold. If the net proceeds on the stock sale leaves Sipe's Paint and Wallpaper with $1.25 million, calculate the underwriter's spread per share on the stock issue.

Just Add Water, Inc., with the help of its investment bank recently issued $200,000,000 of new debt. The offer price on the debt was $1,000 per bond and the underwriter's spread was 4 percent of the gross proceeds. What amount of capital funding did Just Add Water raise through this bond issue?

Which of the following is an example of an appropriate loan covenant?

Renee's Boutique, Inc., needs to raise $75.25 million to finance firm expansion. In discussions with its investment bank, Renee's Boutique learns that the bankers recommend an offer price of $67 per share and that 1.25 million shares of stock be sold. If the net proceeds on the stock sale leaves Renee's Boutique with $75.25 million, calculate the underwriter's spread per share on the stock issue.

Which of the following is a security issue in which the underwriter does not guarantee a firm price to the issuer and acts more as a placing or distribution agent for a fee?

Which of the following terms is defined as the lead bank(s) in a syndicate, who directly negotiate with the issuing firm on behalf of the syndicate?

Don's Captain Morgan, Inc., needs to raise $25.5 million to finance plant expansion. In discussions with its investment bank, Don's Captain Morgan learns that the bankers recommend an offer price (or gross proceeds) of $19 per share and Don's Captain Morgan will receive $14.50 per share. How many shares of stock will Don's Captain Morgan need to sell in order to receive the $25.5 million they need?

Polly's Ponies, Inc., with the help of its investment bank recently issued 7.5 million shares of new stock. The offer price on the stock was $15.00 per share and Polly's Ponies received a total of $105.75 million from the stock offering. Calculate the net proceeds and the underwriter's spread charged by the underwriter to Polly's Ponies. What percentage of the gross proceeds is the investment bank charging Polly's Ponies for underwriting the stock issue?

The rate on commercial paper is generally higher than the prime rate.

Renee's Boutique, Inc., needs to raise $25 million to finance firm expansion. In discussions with its investment bank, Renee's Boutique learns that the bankers recommend an offer price of $9 per share and that 5 million shares of stock be sold. If the net proceeds on the stock sale leaves Renee's Boutique with $25 million, calculate the underwriter's spread per share on the stock issue.

Most business loans today are:

Which of these is a contractual commitment to loan the firm a certain maximum amount at a given interest rate?

River Valley Corp. recently went public with an initial public offering in which they received a total of $40 million in new capital funding. The underwriter used a firm commitment offering in which the offer price was $10 and the underwriter's spread was $0.50. River Valley also paid legal and other administrative costs of $750,000 for the IPO. What is the number of shares issued through this IPO?

Sipe's Paint and Wallpaper, Inc., needs to raise $1 million to finance plant expansion. In discussions with its investment bank, Sipe's Paint and Wallpaper learns that the bankers recommend a gross price of $40 per share and that 30,000 shares of stock be sold. If the net proceeds on the stock sale leave Sipe's Paint and Wallpaper with $1 million, what percent of the total raised represents net proceeds to the firm?

Elle Inc. plans to issue 4 million new shares of its stock. In discussions with its investment bank, Elle learns that the bankers recommend a net proceed of $75.10 per share and they will charge an underwriter's spread of 7 percent of the gross proceeds. In addition, Elle must pay $2 million in legal and other administrative expenses for the seasoned stock offering. Calculate the gross proceeds per share received by Elle from the sale of the 4 million shares of stock.

During the last year you have had a loan commitment from your bank to fund working capital for your business. The total line available was $10,000,000, of which you took down $7,800,000. It is now the end of the loan commitment period and your bank had you pay the back-end fees. You have misplaced the paperwork that listed the terms of the commitment, but you know you paid total fees (this does not include any interest paid to borrow the $7,800,000) of $51,200 on this loan commitment. You remember that the back-end fee was 112 basis points. Calculate the front-end fee on this loan commitment.

You have approached your local bank for a start-up loan commitment for $290,000 needed to open a computer repair store. You have requested that the term of the loan be one year. Your bank has offered you the following terms: size of loan commitment = $290,000, term = one year, up-front fee = 45 basis points, back-end fee = 80 basis points, and rate on the loan = 9.5 percent. If you immediately take down $175,000 and no more during the year, calculate the total interest and fees you have paid on this loan commitment.

Which of these is the type of loan where the firm makes fixed interest payments over the life of the loan?

Howett Pockett, Inc., plans to issue 10 million new shares of its stock. In discussions with its investment bank, Howett Pockett learns that the bankers recommend a net proceed of $15 per share and they will charge an underwriter's spread of 6.5 percent of the gross proceeds. In addition, Howett Pockett must pay $1 million in legal and other administrative expenses for the seasoned stock offering. Calculate the gross proceeds per share from the sale of the 10 million shares of stock.