Exam 18: Issuing Capital and the Investment Banking Process

Amy's Accessories, Inc., needs to raise $10 million to finance plant expansion. In discussions with its investment bank, Amy's Accessories learns that the bankers recommend an offer price (or gross proceeds) of $25 per share and Amy's Accessories will receive $23 per share. What is the underwriter's spread on the issue?

Which of these is the type of loan where the firm borrows against pre-negotiated lines of credit or loan commitments?

Which of these are the markets in which corporations raise funds through new stock issues?

A market in which corporations raise funds through new issues of securities is referred to as a:

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

Bailey's Dog Pens, Inc., with the help of its investment bank recently issued 5 million shares of new stock. The offer price on the stock was $19.5 per share and Bailey's Dog Pens received a total of $70 million from the stock offering. What percentage of the gross proceeds is the investment bank charging Bailey's Dog Pens for underwriting the stock issue?

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?

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 fee charged by a bank on any unused balances of a loan commitment line at the end of the loan commitment period?

Blue Dragon, Inc., needs to raise $600 million to finance its plan for nationwide expansion. In discussions with its investment bank, Blue Dragon learns that the bankers recommend an offer price (or gross price) of $60 per share and they will charge an underwriter's spread of $3.00 per share. Calculate the net proceeds to Blue Dragon from the sale of stock. How many shares of stock will Blue Dragon need to sell in order to receive the $600 million they need?

Bailey's Dog Pens, Inc., with the help of its investment bank recently issued 5 million shares of new stock. The offer price on the stock was $15 per share and Bailey's Dog Pens received a total of $65 million from the stock offering. What percentage of the gross proceeds is the investment bank charging Bailey's Dog Pens for underwriting the stock issue?

Which of these is the fee charged by a bank for making funds available through 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 $25,000,000, of which you took down $20,000,000. 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 $20,000,000) of $110,000 on this loan commitment. You remember that the back-end fee was 60 basis points. Calculate the front-end fee on this 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 $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.

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 Gear 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 Gear for underwriting the stock issue?

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

Which of the following refers to when the bond issuing firm invites bids from a number of underwriters?

You have approached your local bank for a start-up loan commitment for $450,000 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 = $450,000, term = one year, up-front fee = 20 basis points, back-end fee = 50 basis points, and rate on the loan = 12 percent. If you immediately take down $200,000 and no more during the year, calculate the total interest and fees you have paid on this loan commitment.

Which of these is defined as a professionally managed pool of money used to finance new and often high-risk firms?

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