Question 1

With firm commitment underwriting,the issuing firm:

Accepted Answer

A) is unsure of the total amount of funds it will receive until after the offering is completed. 
B) is unsure of the number of shares it will actually issue until after the offering is completed. 
C) knows exactly how many shares will be purchased by the general public during the offer period. 
D) retains the financial risk associated with unsold shares. 
E) knows up-front the amount of money it will receive from the stock offering. 
A) is unsure of the total amount of funds it will receive until after the offering is completed. 
B) is unsure of the number of shares it will actually issue until after the offering is completed. 
C) knows exactly how many shares will be purchased by the general public during the offer period. 
D) retains the financial risk associated with unsold shares. 
E) knows up-front the amount of money it will receive from the stock offering. E

Question 2

Mountain Homes wishes to expand its facilities.The company currently has 7 million shares outstanding and no debt.The stock sells for $55 per share,but the book value per share is $43.The firm's net income is currently $9.1 million.The new facility will cost $30 million,and it will increase net income by $309,000.Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio.What will be the EPS be after the new equity issue?

Accepted Answer

A) $1.25 
B) $1.30 
C) $1.35 
D) $1.40 
E) $1.45 
A) $1.25 
B) $1.30 
C) $1.35 
D) $1.40 
E) $1.45 A

Question 3

Before a seasoned stock offering,you owned 7,500 shares of a firm that had 500,000 shares outstanding.After the seasoned offering,you still owned 7,500 shares but the number of shares outstanding rose to 625,000.Which one of the following terms best describes this situation?

Accepted Answer

A) overallotment 
B) percentage ownership dilution 
C) Green Shoe 
D) Red herring 
E) abnormal event 
A) overallotment 
B) percentage ownership dilution 
C) Green Shoe 
D) Red herring 
E) abnormal event B

Question 4

If an IPO is underpriced then the:

Accepted Answer

A) investors in the IPO are generally unhappy with the underwriters. 
B) issue is less likely to sell out. 
C) stock price will generally decline on the first day of trading. 
D) issuing firm is guaranteed to be successful in the long term. 
E) issuing firm receives less money than it probably should have. 
A) investors in the IPO are generally unhappy with the underwriters. 
B) issue is less likely to sell out. 
C) stock price will generally decline on the first day of trading. 
D) issuing firm is guaranteed to be successful in the long term. 
E) issuing firm receives less money than it probably should have.

Question 5

The Securities and Exchange Commission:

Accepted Answer

A) verifies the accuracy of the information contained in the prospectus. 
B) verifies the accuracy of the information contained in the red herring. 
C) examines the registration statement during the Green Shoe period. 
D) is concerned only that an issue complies with all rules and regulations. 
E) determines the final offer price once they have approved the registration statement. 
A) verifies the accuracy of the information contained in the prospectus. 
B) verifies the accuracy of the information contained in the red herring. 
C) examines the registration statement during the Green Shoe period. 
D) is concerned only that an issue complies with all rules and regulations. 
E) determines the final offer price once they have approved the registration statement.

Question 6

Tony currently owns 12,000 shares of GL Tools.He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public.What is this type of an offer called?

Accepted Answer

A) best efforts offer 
B) firm commitment offer 
C) general cash offer 
D) rights offer 
E) priority offer 
A) best efforts offer 
B) firm commitment offer 
C) general cash offer 
D) rights offer 
E) priority offer

Question 7

Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale.The underwriters sold a total of 53,000 shares to the public.The additional 3,000 shares were purchased in accordance with which one of the following?

Accepted Answer

A) Green shoe provision 
B) Red herring provision 
C) quiet provision 
D) lockup agreement 
E) post-issue agreement 
A) Green shoe provision 
B) Red herring provision 
C) quiet provision 
D) lockup agreement 
E) post-issue agreement

Question 8

Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.

Accepted Answer

Students should provide a part

Question 9

When a firm announces an upcoming seasoned stock offering,the market price of the firm's existing shares tends to:

Accepted Answer

A) increase. 
B) decrease. 
C) remain constant. 
D) respond but the direction of the response is not predictable as shown by past studies. 
E) decrease momentarily and then immediately increase substantially within an hour following the announcement. 
A) increase. 
B) decrease. 
C) remain constant. 
D) respond but the direction of the response is not predictable as shown by past studies. 
E) decrease momentarily and then immediately increase substantially within an hour following the announcement.

Question 10

What is a prospectus?

Accepted Answer

A) a letter issued by the SEC authorizing a new issue of securities 
B) a report stating that the SEC recommends a new security to investors 
C) a letter issued by the SEC that outlines the changes required for a registration statement to be approved 
D) a document that describes the details of a proposed security offering along with relevant information about the issuer 
E) an advertisement in a financial newspaper that describes a security offering 
A) a letter issued by the SEC authorizing a new issue of securities 
B) a report stating that the SEC recommends a new security to investors 
C) a letter issued by the SEC that outlines the changes required for a registration statement to be approved 
D) a document that describes the details of a proposed security offering along with relevant information about the issuer 
E) an advertisement in a financial newspaper that describes a security offering

Question 11

A.K.Stevenson wants to raise $7.5 million through a rights offering.The subscription price is set at $24.Currently,the company has 2.1 million shares outstanding with a current market price of $25 a share.Each shareholder will receive one right for each share of stock they currently own.How many rights will be needed to purchase one new share of stock in this offering?

Accepted Answer

A) 6.40 rights 
B) 6.67 rights 
C) 6.72 rights 
D) 6.87 rights 
E) 7.00 rights 
A) 6.40 rights 
B) 6.67 rights 
C) 6.72 rights 
D) 6.87 rights 
E) 7.00 rights

Question 12

Precise Machining is considering a rights offer.The company has determined that the ex-rights price would be $46.The current price is $53 per share,and there are 7 million shares outstanding.The rights offer would raise a total of $70 million.What is the subscription price?

Accepted Answer

A) $26.48 
B) $27.06 
C) $27.50 
D) $28.18 
E) $29.10 
A) $26.48 
B) $27.06 
C) $27.50 
D) $28.18 
E) $29.10

Question 13

The Warm Shoe Co.has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering.It has correctly determined that as a result of the rights offering,the share price will fall from $100 to $90 ($100 is the rights-on-price; $90 is the ex-rights price,also known as the when-issued price).The company is seeking $18 million in additional funds with a per-share subscription price of $50.How many shares of stock are outstanding,before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.)

Accepted Answer

A) 324,000 
B) 360,000 
C) 500,000 
D) 1,440,000 
E) 3,600,000 
A) 324,000 
B) 360,000 
C) 500,000 
D) 1,440,000 
E) 3,600,000

Question 14

Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering.The firm will issue one right for each share of stock outstanding.The offering consists of a total of 860,000 new shares.The current market price of the stock is $38.Currently,there are 5.16 million shares outstanding.What is the value of one right?

Accepted Answer

A) $0.97 
B) $0.86 
C) $0.48 
D) $0.52 
E) $0.60 
A) $0.97 
B) $0.86 
C) $0.48 
D) $0.52 
E) $0.60

Question 15

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

Accepted Answer

A) best efforts underwriting 
B) firm commitment underwriting 
C) general cash offer 
D) rights offer 
E) herring offer 
A) best efforts underwriting 
B) firm commitment underwriting 
C) general cash offer 
D) rights offer 
E) herring offer

Question 16

An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:

Accepted Answer

A) an IPO is substantially oversubscribed than when it is not. 
B) the knowledgeable investors feel the issue is underpriced. 
C) an IPO is severely underpriced. 
D) an IPO is undersubscribed. 
E) he or she has a standing order with the underwriter to purchase shares in every IPO handled by that underwriter. 
A) an IPO is substantially oversubscribed than when it is not. 
B) the knowledgeable investors feel the issue is underpriced. 
C) an IPO is severely underpriced. 
D) an IPO is undersubscribed. 
E) he or she has a standing order with the underwriter to purchase shares in every IPO handled by that underwriter.

Question 17

Atlas Corp.wants to raise $4 million via a rights offering.The company currently has 450,000 shares of common stock outstanding that sell for $40 per share.Its underwriter has set a subscription price of $24 per share and will charge the company a 7 percent spread.Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering.How much can you get for selling all of your rights?

Accepted Answer

A) $24,911.21 
B) $25,362.84 
C) $25,792.19 
D) $27,094.95 
E) $32,811.16 
A) $24,911.21 
B) $25,362.84 
C) $25,792.19 
D) $27,094.95 
E) $32,811.16

Question 18

The total direct costs of underwriting an equity IPO:

Accepted Answer

A) tends to increase on a percentage basis as the proceeds of the IPO increase. 
B) is generally between 7 and 8 percent, regardless of the issue size. 
C) can be as high as 25 percent for small issues. 
D) excludes the gross spread. 
E) excludes both the gross spread and the underpricing cost. 
A) tends to increase on a percentage basis as the proceeds of the IPO increase. 
B) is generally between 7 and 8 percent, regardless of the issue size. 
C) can be as high as 25 percent for small issues. 
D) excludes the gross spread. 
E) excludes both the gross spread and the underpricing cost.

Question 19

Outdoor Living needs $7.5 million to finance modifications to its production equipment because the design of its all-season tents has changed dramatically.The underwriters estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5 percent underwriting spread.This would be a firm commitment underwriting.The estimated issue costs are $125,000.How many shares of stock will Outdoor Living need to sell to finance this project?

Accepted Answer

A) 568,500 shares 
B) 488,917 shares 
C) 452,311 shares 
D) 559,180 shares 
E) 562,400 shares 
A) 568,500 shares 
B) 488,917 shares 
C) 452,311 shares 
D) 559,180 shares 
E) 562,400 shares

Question 20

What is a seasoned equity offering?

Accepted Answer

A) an offering of shares by shareholders for repurchase by the issuer 
B) shares of stock that have been recommended for purchase by the SEC 
C) equity securities held by a firm's founder that are being offered for sale to the general public 
D) sale of newly issued equity shares by a firm that is currently publicly owned 
E) a set number of equity shares that are issued and offered to the public annually 
A) an offering of shares by shareholders for repurchase by the issuer 
B) shares of stock that have been recommended for purchase by the SEC 
C) equity securities held by a firm's founder that are being offered for sale to the general public 
D) sale of newly issued equity shares by a firm that is currently publicly owned 
E) a set number of equity shares that are issued and offered to the public annually

Exam 15: Raising Capital

With firm commitment underwriting,the issuing firm:

Before a seasoned stock offering,you owned 7,500 shares of a firm that had 500,000 shares outstanding.After the seasoned offering,you still owned 7,500 shares but the number of shares outstanding rose to 625,000.Which one of the following terms best describes this situation?

If an IPO is underpriced then the:

The Securities and Exchange Commission:

Tony currently owns 12,000 shares of GL Tools.He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public.What is this type of an offer called?

Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale.The underwriters sold a total of 53,000 shares to the public.The additional 3,000 shares were purchased in accordance with which one of the following?

Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.

When a firm announces an upcoming seasoned stock offering,the market price of the firm's existing shares tends to:

What is a prospectus?

Precise Machining is considering a rights offer.The company has determined that the ex-rights price would be $46.The current price is $53 per share,and there are 7 million shares outstanding.The rights offer would raise a total of $70 million.What is the subscription price?

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:

The total direct costs of underwriting an equity IPO:

What is a seasoned equity offering?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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