Exam 18: Issuing Capital and the Investment Banking Process

Sipe's Paint and Wallpaper, Inc., needs to raise $1 million to finance plant expansion. In discussions with its investment bank, Sipe's 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 with $1 million, what percent of the stock price does the underwriter's spread represent?

Sipe's Paint and Wallpaper, Inc., needs to raise $1 million to finance plant expansion. In discussions with its investment bank, Sipe's 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 with $1 million, what percent of the total raised represents net proceeds to the firm?

Which of the following statements is incorrect?

Calculating Fees on a Loan Commitment 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 $2,500,000, of which you took down $1,000,000. 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 $1,000,000) of $15,000 on this loan commitment. You remember that the back-end fee was 30 basis points. Calculate the front-end fee on this loan commitment.

Calculating Costs of Issuing Debt Soccer Games, Inc., with the help of its investment bank recently issued $10 million of new debt. The offer price (and face value) on the debt was $1,000 per bond and the underwriter's spread was 5 percent of the gross proceeds. What is the amount of capital funding Soccer Games, Inc., raised through this debt offering?

Calculating Fees on a Loan Commitment Starr Co. has been approved for a $100,000 loan commitment from its local bank. The bank has offered the following terms: term = 1 year, up-front fee = 75 basis points, back-end fee = 25 basis points, and rate on the loan = 8.00%. Starr expects to immediately take down $80,000 and no more during the year unless there is some unforeseen need. What is the total interest and fees Starr can expect to pay on this loan commitment?

Calculating Costs of Issuing Stock Volleyball Gear, Inc., with the help of its investment bank recently issued 1.5 million shares of new stock. The offer price on the stock was $18.50 per share and Volleyball's received a total of $26,917,500 through this stock offering. Calculate the net proceeds and the underwriter's spread on the stock offering. What percentage of the gross price is the investment bank charging Volleyball's for underwriting the stock issue?

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

Which of these is defined as the compensation for the expenses and risks incurred by the investment bank to conduct primary sales of stock for a firm?

Husker's Tuxedos, Inc., needs to raise $135 million to finance its plan for nationwide expansion. In discussions with its investment bank, Husker's learns that the bankers recommend an offer price (or gross price) of $43.55 per share and they will charge an underwriter's spread of $2.25 per share. Calculate the net proceeds to Husker's from the sale of stock. How many shares of stock will Husker's need to sell in order to receive the $135 million they need?

A commitment fee is _____________.

One of the reasons that so much commercial paper is outstanding is because ___________.

List the steps for getting shares of stock to the investing public.

Which of these is the type of loan where the firm would receive the funds as soon as the bank approved the loan?

How does a best effort underwriting differ from a firm commitment underwriting?

Renee's Boutique, Inc., needs to raise $75.25 million to finance firm expansion. In discussions with its investment bank, Renee's 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 with $75.25 million, calculate the underwriter's spread on the stock issue.

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 $9,125,000. 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 $9,125,000) of $31,100 on this loan commitment. You remember that the back-end fee was 85 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 = 1 year, up-front fee = 45 basis points, back-end fee = 80 basis points, and rate on the loan = 9.5%. 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.

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