Question 1

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?

Accepted Answer

A)  $9 million 
B)  $10 million 
C)  $18 million 
D)  $20 million

Question 2

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?

Accepted Answer

A)  The number of shares outstanding will fall to 1.6 million. 
B)  The firm will raise $13.33 million. 
C)  The stock price will fall to $65. 
D)  The total value of the firm will equal $124 million.

Question 3

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

Accepted Answer

A)  issue of new securities. 
B)  selection of an underwriter. 
C)  increase in authorized capital. 
D)  private placement of securities.

Question 4

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?

Accepted Answer

A)  6.98% 
B)  7.19% 
C)  7.75% 
D)  8.33%

Question 5

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

Accepted Answer

A)  underwriters desire to reduce the risk of a firm commitment. 
B)  demand for a new issue is typically too high. 
C)  underwriters earn low rates of return. 
D)  issuing firms demand that equity be underpriced.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

The answer of Why does private placement of securities appear...

Question 8

A secondary offering IPO occurs when:

Accepted Answer

A)  new shares are sold to provide the company with additional funds. 
B)  the second public issue of equity becomes available. 
C)  the company's founders or venture capitalists market a portion of their shares. 
D)  not all of the shares in a primary IPO were sold.

Question 9

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?

Accepted Answer

The answer of The liquidity of Baja Corporation has been...

Question 10

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?

Accepted Answer

A)  $75.00 
B)  $80.00 
C)  $85.00 
D)  $90.00

Question 11

Privately placed securities may be difficult to remarket.

Accepted Answer

A) True 
 B)False

Question 12

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?

Accepted Answer

The answer of Ajax Corporation has received a firm commitment...

Question 13

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.

Accepted Answer

The answer of The financial analyst at GoodBuys reasoned that...

Question 14

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?

Accepted Answer

A)  $35.00 
B)  $41.67 
C)  $45.00 
D)  $46.00

Question 15

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

Accepted Answer

A)  a private placement because lower rates of return can be offered. 
B)  a private placement because it is cheaper than a public issue. 
C)  a public issue because it is cheaper than a private placement. 
D)  a public issue because more exposure will be achieved.

Question 16

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

Accepted Answer

A)  offer a firm commitment on the issue. 
B)  set the initial stock price below its true value. 
C)  sell the securities in foreign countries. 
D)  offer price rebates on the stock purchases.

Question 17

When securities are issued under a rights issue:

Accepted Answer

A)  existing shareholders have the opportunity to expand their holdings. 
B)  shares are offered to the public at a discount. 
C)  the existing shares will increase in price. 
D)  current shareholders have the right to resell their stock to the issuer.

Question 18

Economies of scale are apparent in the issuance of securities.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  Bonds 
B)  Convertibles 
C)  Seasoned equity offerings 
D)  IPOs

Question 20

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?

Accepted Answer

A)  $56.67 
B)  $60.00 
C)  $70.00 
D)  $71.33

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:

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.

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?