Exam 18: Issuing Capital and the Investment Banking Process

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?

Calculating Costs of Issuing Stock Plains Corp. recently went public with an initial public offering in which they received a total of $25 million in new capital funding. The underwriter used a firm commitment offering in which the offer price was $25 and the underwriter's spread was $1.00. TriState also paid legal and other administrative costs of $800,000 for the IPO. What is the number of shares issued through this IPO?

Calculating Costs of Issuing Debt R&D, Inc., needs to raise $200 million to finance firm expansion. In discussions with its investment bank, R&D's learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter's spread of 3 percent of the gross price. How many bonds will R&D need to sell in order to receive the $200 million they need?

Which of the following is defined as when a single investment bank obtains the exclusive right to originate, underwrite, and distribute the new bonds through a one-on-one negotiation process?

Calculating Costs of Issuing Stock Your company needs to raise $10 million to finance plant expansion. In discussions with its investment bank, you learn that the bankers recommend a gross price of $45 per share and that 240,000 shares of stock be sold. If the net proceeds on the stock sale leave your company with $10 million, what is the underwriter's spread on the stock issue?

Kelly Girl's Golf Games, Inc., with the help of its investment bank recently issued $7.95 million of new debt. The offer price (and face value) on the debt was $1,000 per bond and the underwriter's spread was 4 percent of the gross proceeds. Calculate the amount of capital funding Kelly Girl's Golf Games, Inc., raised through this debt offering.

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.

Sipe's Paint and Wallpaper, Inc., needs to raise $1.25 million to finance plant expansion. In discussions with its investment bank, Sipe's learns that the bankers recommend a debt issue with a gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 8.25 percent of the gross proceeds. How many bonds will Sipe's Paint and Wallpaper need to sell in order to receive the $1.25 million they need?

Calculating Costs of Issuing Stock Paige's Purses, Inc., needs to raise $30 million in new capital funding from a seasoned equity offering. In discussions with its investment bank, Paige learns that the bankers recommend a gross price of $25.00 per share and they will charge an underwriter's spread of $2.00 of the gross price. In addition, Paige must pay $2 million in legal and other administrative expenses for the seasoned stock offering. What is the number of shares of stock that Paige will need to sell to raise the $30 million?

The advantage of the shelf registration is that _______________.

Calculating Fees on a Loan Commitment During the last year you have had a loan commitment from your bank to fund inventory purchases for your small business. The total line available was $500,000, of which you took down $400,000. It is now the end of the loan commitment period and your bank is asking you to 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 $400,000) of $1,750 on this loan commitment. You remember that the up-front fee was 25 basis points. What is the back-end fee on this loan commitment?

Calculating Costs of Issuing Stock Sandal Etc., Inc., needs to raise $49 million to finance firm expansion. In discussions with its investment bank, Sandals learns that the bankers recommend an offer price of $25 per share and that 2 million shares of stock be sold. If the net proceeds on the stock sale leaves Sandal with $49 million, calculate the underwriter's spread on the stock issue.

Calculating Costs of Issuing Debt Basketball Games, Inc., with the help of its investment bank recently issued $5 million of new debt. The offer price (and face value) on the debt was $1,000 per bond and the underwriter's spread was 6 percent of the gross proceeds. What is the amount of capital funding Basketball Games, Inc., raised through this debt offering?

What is the difference between a prospectus and a red herring prospectus?

Calculating Costs of Issuing Stock Saddles and Bridles, Inc., with the help of its investment bank recently issued 3 million shares of new stock. The offer price on the stock was $23.50 per share and Saddles received a total of $68.385 million from the stock offering. Calculate the net proceeds and the underwriter's spread charged by the underwriter to Saddles. What percentage of the gross proceeds is the investment bank charging Saddles for underwriting the stock issue?

When stock market values are relatively high, ___________________.

Calculating Fees on a Loan Commitment During the last year you have had a loan commitment from your bank to fund inventory purchases for your small business. The total line available was $500,000, of which you took down $300,000. It is now the end of the loan commitment period and your bank is asking you to 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 $300,000) of $5,000 on this loan commitment. You remember that the up-front fee was 75 basis points. What is the back-end fee on this loan commitment?

Wealthy individuals who make equity investments in firms are referred to as ______________.

One Stop has been approved for a $55,000 loan commitment from its local bank. The bank has offered the following terms: term = 1 year, up-front fee = 85 basis points, back-end fee = 35 basis points, and rate on the loan = 9.75%. Casey's expects to immediately take down $45,000 and no more during the year unless there is some unforeseen need. Calculate the total interest and fees Casey's One Stop can expect to pay on this loan commitment.

Calculating Fees on a Loan Commitment You have approached your local bank for a start-up loan commitment for $1,000,000 needed to open an auto 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 = $1,000,000, term = 1 year, up-front fee = 20 basis points, back-end fee = 50 basis points. If you take down 90 percent of the total loan commitment, calculate the total fees you have paid on this loan commitment.