Exam 18: Issuing Capital and the Investment Banking Process

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.

Paige's Purses, Inc., needs to raise $25 million to finance plant expansion. In discussions with its investment bank, Paige's Purses learns that the bankers recommend an offer price (or gross proceeds) of $50 per share and Paige's Purses will receive $45 per share. What is the underwriter's spread on the issue?

A professionally managed pool of money used to finance new and often high-risk firms is referred to as:

You have approached your local bank for a start-up loan commitment for $1,000,000 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 = $1,000,000, term = one year, up-front fee = 20 basis points, back-end fee = 50 basis points, and rate on the loan = 9 percent. If you immediately take down $750,000 and no more during the year, what is the total interest and fees you have paid on this loan commitment?

Calculate the total fees a firm would have to pay when its bank offers the firm the following loan commitment: A loan commitment of $7,500,000 with an up-front fee of 80 basis points and a back-end fee of 50 basis points. The take-down on the loan is 60 percent.

Your company needs to raise $50 million to finance plant expansion. In discussions with its investment bank, you learn that the bankers recommend a gross price of $75 per share and that 675,000 shares of stock be sold. If the net proceeds on the stock sale leave your company with $50 million, what is the underwriter's spread on the stock issue?

Roy's Bar, Inc., needs to raise $25 million to finance firm expansion. In discussions with its investment bank, Roy'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 6 percent of the gross price. How many bonds will Roy's need to sell in order to receive the $25 million they need?

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?

Howett Pockett, Inc., needs to raise $80 million in new capital funding from a seasoned equity offering. In discussions with its investment bank, Howett Pocket learns that the bankers recommend a gross price of $47.50 per share and they will charge an underwriter's spread of $2.50. In addition, Howett Pockett must pay $3 million in legal and other administrative expenses for the seasoned stock offering. Calculate the number of shares of stock that Howett Pockett will need to sell to raise the $80 million.

Which of the following describes the type of venture capital firms who are wealthy individuals who make equity investments?

Casey's One Stop has been approved for a $55,000 loan commitment from its local bank. The bank has offered the following terms: term = one year, up-front fee = 85 basis points, back-end fee = 35 basis points, and rate on the loan = 9.75 percent. 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.

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 = one 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.

Hughes Technology Corp. recently went public with an initial public offering in which they received a total of $42 million in new capital funding. The underwriter used a firm commitment offering in which the offer price was $22 and the underwriter's spread was $0.85. Hughes Technology also paid legal and other administrative costs of $825,000 for the IPO. Calculate the number of shares issued through this IPO.

Which of the following statements is incorrect?

Turbo Technology Corp. recently went public with an initial public offering of 3 million shares of stock. The underwriter used a firm commitment offering in which the net proceeds was $7.50 per share and the underwriter's spread was 9 percent of the gross proceeds. Turbo Technology also paid legal and other administrative costs of $200,000 for the IPO. Calculate the gross proceeds per share received by Turbo Technology from the sale of the 3 million shares of stock.

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?

Bailey's Dog Pens, Inc., with the help of its investment bank recently issued $165,500,000 of new debt. The offer price on the debt was $1,000 per bond and the underwriter's spread was 7 percent of the gross proceeds. Calculate the amount of capital funding Bailey's Dog Pens raised through this bond issue.

Beach Stuff, Inc., needs to raise $10 million in new capital funding from a seasoned equity offering. In discussions with its investment bank, Beach Stuff learns that the bankers recommend a gross price of $20.00 per share and they will charge an underwriter's spread of $1.75 of the gross price. In addition, Beach Stuff must pay $1.5 million in legal and other administrative expenses for the seasoned stock offering. What is the number of shares of stock that Beach Stuff will need to sell to raise the $10 million?

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

Computer Technology Corp. recently went public with an initial public offering of 7 million shares of stock. The underwriter used a firm commitment offering in which the net proceeds was $8.35 per share and the underwriter's spread was 7 percent of the gross proceeds. Computer Technology also paid legal and other administrative costs of $300,000 for the IPO. Calculate the gross proceeds per share received by Computer Technology from the sale of the 7 million shares of stock.