Exam 15: How Corporations Raise Venture Capital and Issue Securities

An underwriter issues a firm commitment to sell 1 million shares at $20 each,including a $2 spread.How much does the issuing firm receive if only 500,000 shares are sold?

Currently,M & S Inc.has 2 million shares outstanding selling at $70 a share.A rights issue will be made that allows 1 share to be purchased for every 5 shares currently held by stockholders for $40 each.Which of the following is true?

The consent of a corporation's stockholders must be received prior to any:

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

The most likely reason that underpricing of new issues occurs more frequently than overpricing is that:

Shelf registration is a procedure that allows firms to file several registration statements for one issue of the security.

Why does private placement of securities appear to be more popular with small- or medium-sized firms?

A secondary offering IPO occurs when:

The liquidity of Baja Corporation has been decreasing,and it contemplates a rights issue.There are currently 2 million shares outstanding with a market value of $60 each.The firm needs to raise $24 million and wants you to design a rights issue that will allow the new stock price to be no lower than $55 and for there to be no more than 2.5 million shares outstanding after the issue.How many shares must be held to obtain the right to one new share,and what will be the price of the new share?

What would you expect to be the market price of stock after a sold-out rights issue if each existing shareholder purchases one new share at $60 for each three that he or she currently holds and the current share price is $100?

Privately placed securities may be difficult to remarket.

Ajax Corporation has received a firm commitment from its underwriter to purchase 1 million shares of stock that will be marketed to the general public at $23 per share.The underwriter's spread is $1.90 per share and the issuing firm will pay an additional $1.65 million in legal and other fees.The issue was fully sold on the first day and the stock closed at $27.50 on that day.Calculate both the direct expense of issuance and the indirect (i.e.,underpricing)expense.What percentage of the market value of the shares is represented by these costs?

The financial analyst at GoodBuys reasoned that since the costs of flotation amount to about 15% of the proceeds for small common stock issues,the opportunity cost of external equity capital is about 15 percentage points higher than that of retained earnings.Comment on his reasoning.

An investor exercises the right to buy one additional share at $20 for every five shares held.How much should each share be worth after the rights issue if they previously sold for $50 each?

Companies making smaller security issues may prefer to issue them through:

One strategy that appears to be used by certain underwriters to reduce the risk of marketing a stock is to:

When securities are issued under a rights issue:

Economies of scale are apparent in the issuance of securities.

Which of the following security issues might have the lowest direct costs?

A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own.What should be the stock price after the rights issue if the stock sells for $80 per share before the issue?