Exam 18: Issuing Capital and the Investment Banking Process

Calculating Costs of Issuing Stock 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?

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 $7,800,000.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 $7,800,000)of $51,200 on this loan commitment.You remember that the back-end fee was 112 basis points.Calculate the front-end fee on this loan commitment.

Which of the following is an unsecured short-term promissory note issued by a public firm to raise short-term cash,often to finance working capital requirements?

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 raised through this debt offering?

Calculating Costs of Issuing Stock 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.

Which of these is the type of loan where the firm makes fixed interest payments over the life of the loan?

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

Explain the process by which securities are underwritten.

Contrast best efforts underwriting and firm commitment underwriting.

Calculating Fees on a 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.

Calculating Costs of Issuing Debt R&D,Inc.,needs to raise $200 million to finance firm expansion.In discussions with its investment bank,R&D'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 3 percent of the gross price.How many bonds will R&D need to sell in order to receive the $200 million they need?

Calculating Costs of Issuing Debt Just Add Water,Inc.,with the help of its investment bank recently issued $200,000,000 of new debt.The offer price on the debt was $1,000 per bond and the underwriter's spread was 4 percent of the gross proceeds.What amount of capital funding did Just Add Water raise through this bond issue?

Calculating Costs of Issuing Debt American Movers,Inc.,needs to raise $5 million to finance an expansion.In discussions with its investment bank,American learns that the bankers recommend a debt issue with gross proceeds of $1,000 per bond and they will charge an underwriter's spread of 5 percent of the gross proceeds.How many bonds will American Movers need to sell in order to receive the $5 million they need?

Which of the following is the type of financing that includes capital funds invested or venture capitalists?

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

Explain what venture capital is and how it encourages entrepreneurship.

What information is included in the registration statement filed with the SEC for getting shares of stock to the investing public?

All of the following are advantages of an IPO EXCEPT:

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

Sipe's Paint and Wallpaper,Inc.,needs to raise $1.05 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 $22 per share and that 50,000 shares of stock be sold.If the net proceeds on the stock sale leave Sipe's Paint and Wallpaper with $1.05 million,what percent of the stock price does the underwriter's spread represent?