Chapter 11—Raising Long-Term Financing

Chapter 11—Raising Long-Term Financing

MULTIPLE CHOICE

1. Which law mandated the separation of investment and commercial banking?a. Gramm-Leach-Bliley Actb. McFadden Actc. Glass-Steagall Actd. none of the above

ANS: C DIF: E REF: 11.1 The Basic Choices in Long-Term Financing

2. A security offering that raises capital for firms is called a(n)a. primary security offeringb. secondary security offeringc. securitizationd. all of the above

ANS: A DIF: E REF: 11.1 The Basic Choices in Long-Term Financing

3. A bond sold by foreign corporations to U.S. investors is called a(n)a. Eurobondb. foreign bondc. Yankee bondd. none of the above


4. A bank that helps firms to acquire external capital is called aa. commercial bankb. savings bankc. investment bankd. credit union

ANS: C DIF: EREF: Investment Banking and the Public Sale of Securities

5. Which of the following is not considered an advantage of going public?a. new capital for the companyb. listed stock for use as compensationc. stock price emphasisd. personal wealth and liquidity

ANS: C DIF: MREF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

6. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, what is the per share proceeds that Bavarian will receive?a. $11.59b. $10.67c. $13.41d. $12.50

ANS: A$12.50(1-.0725) = $11.59

DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities

7. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.25 per share. If the offering price of the stock is set at $12.50 per share, what is the percentage underwriting discount??a. 8%b. 9%c. 10%d. 11%

ANS: C$1.25/$12.50 = .10


8. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share and the company is planning on issuing 1 million shares, what are the total proceeds that Bavarian will receive?a. $12,500,000b. $11,593,750c. $10,750,000d. $13,275,500

ANS: B12.50(1-.0725)1,000,000 = 11,593,750


9. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.25. If the offering price of the stock is set at $12.50 per share and the company is planning on issuing 1 million shares, what are the total proceeds that Bavarian will receive?a. 12,500,000b. 11,250,000c. 13,750,000d. 10,875,000

ANS: B(12.50-1.25)1,000,000 = 11,250,000


10. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million?a. 6,000,000b. 6,469,003c. 5,567,400d. 5,000,000

ANS: B

75,000,000/(12.50)(1-.0725) = 6,469,003


11. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.30. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million?a. 6,000,000b. 5,789,452c. 5,000,000d. 6,696,429

ANS: D75,000,000/(12.50-1.30) = 6,696,429


12. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.30. Legal and other expenses amount to $1,350,000. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million?a. 6,696,429b. 6,816,964c. 6,000,000d. 5,769,345

ANS: B(75,000,000 + 1,350,000)/(12.50 - 1.30) = 6,816,964

DIF: M REF: 11.2 Investment Banking and the Public Sale of Securities

13. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. Legal and other expenses amount to $1,350,000. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million?a. 6,108,000b. 6,585,445c. 6,696,429d. 7,124,359

ANS: B(75,000,000 + 1,350,000)/(12.50(1-.0725)) = 6,585,445

DIF: M REF: 11.2 Investment Banking and the Public Sale of Securities

NARRBEGIN: Bavarian Brewhouse IPOBavarian Brewhouse IPOBavarian Brewhouse is planning an IPO. Under the terms of the IPO, Bavarian Brewhouse will issue 8 million shares at an offer price of $25 per share. The underwriter charges an 9% underwriting fee and direct costs are estimated to be $7 million. The stock is expected to trade at $30 at the end of the first trading day.NARREND

14. What is the total amount of funds raised by Bavarian Brew through the IPO?a. $175 million

b. $182 millionc. $200 milliond. $150 million

ANS: Anet proceeds per share: 25(1-.09) = 22.75net proceeds = 22.75(8,000,000) - 7,000,000 = 175,000,000

DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)NAR: Bavarian Brewhouse IPO

15. What is the initial return earned by investors on this Bavarian Brewhouse IPO?a. 20%b. 15%c. 17%d. 22%

ANS: A(30-25)/25 = .20

DIF: E REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)NAR: Bavarian Brewhouse IPO

16. What are the total underwriting fees for this Bavarian Brewhouse IPO?a. $18 millionb. $7 millionc. $25 milliond. $10 million

ANS: C(.09)25(8,000,000) + 7,000,000 = 25,000,000


17. Refer to Bavarian Brewhouse IPO. What are the total costs caused by underpricing?a. $8 millionb. $40 millionc. $32 milliond. $25 million

ANS: B$5(8,000,000) = 40,000,000

DIF: E REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)NAR: Bavarian Brewhouse IPO

18. What are the total costs (underwriting and underpricing) of the Bavarian Brewhouse IPO?a. $25 millionb. $40 millionc. $65 milliond. $80 million

ANS: C25,000,000 + 40,000,000 = 65,000,000


19. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise $10 million, what are the total dollar costs?a. $900,000b. $989,011c. $856,788d. $1,000,000

ANS: B10,000,000/(1-.09) - 10,000,000 = 989,011

DIF: H REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

20. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise net $10 million, what is the total amount of money that needs to be raised?a. $10,800,000b. $10,989,011c. $12,456,875d. $8,458,950

ANS: B10,000,000/(1-.09) = 10,989,011

DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

NARRBEGIN: Smith EnterprisesSmith EnterprisesSmith Enterprises recently conducted an IPO. In this, Smith received $14 per share from the underwriter, the offering price per share was $16 and the stock price rose to $19 on the first day of trading.NARREND

21. Refer to Smith Enterprises. What is the underwriter’s discount?a. 14.3%b. 12.5%c. 16.3%d. 10.2%

ANS: B2/16 = ..125

DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)NAR: Smith Enterprises

22. Refer to Smith Enterprises. What is the first day return on an investment in the IPO?a. 21.42%b. 15.79%c. 18.75%d. 12.56%

ANS: C3/16 = .1875


23. Refer to Smith Enterprises. What is the total percentage costs of the IPO (underwriting and underpricing)?a. 35.7%b. 14.3%c. 18.8%d. 21.4%

ANS: A(19-14)/14 = .357


NARRBEGIN: Smith Enterprises 2Smith Enterprises 2Smith Enterprises wants to conduct an IPO. The offering price of the stock is $15, the underwriter’s discount is 6% and legal and other expenses are estimated to be $1,500,000.NARREND

24. Refer to Smith Enterprises 2. What are the net proceeds per share?a. $15b. $16c. $14.10d. $17.20

ANS: C15(1-.06) = 14.10

DIF: E REF: 11.2 Investment Banking and the Public Sale of SecuritiesNAR: Smith Enterprises 2

25. Refer to Smith Enterprises 2. If the company issues 1,000,000 shares, what are the net proceeds of the IPO?a. $13,500,000b. $15,000,000c. $12,600,000d. $10,500,000

ANS: C1,000,000(1-.06)(15) - 1,500,000 = 12,600,000

DIF: E REF: 11.2 Investment Banking and the Public Sale of SecuritiesNAR: Smith Enterprises 2

26. The dominant source of financing for U.S. corporations isa. debt financing.b. new equity.c. internal cash flow.d. none of the above.


27. An institution that raises capital by issuing liabilities against itself is aa. financial intermediary.b. financial broker.c. financial agent.d. none of the above.


28. The 1933 law that prohibited commercial banks from underwriting corporate security issues, as well as a host of other things isa. the Glass-Steagall Act.b. the McFadden Act.c. the Gramm-Leach-Bliley Act.d. none of the above

ANS: A DIF: M REF: 11.1 The Basic Choices in Long-Term Financing

29. When a financial intermediary repackages loans and other traditional bank-based credit products into securities that can be sold to public investors we call thata. privatization.b. securitization.c. asset substitution.d. none of the above

ANS: B DIF: E REF: 11.1 The Basic Choices in Long-Term Financing

30. In the U.S., firms that need to raise capital externally, prefer to issuea. common stock.b. preferred stock.c. debt.d. hybrid securities.


31. A bond sold in the U.S. by a German based company is an example of a(n)a. Eurobond.b. Yankee bond.c. Samurai bond.d. none of the above

ANS: B DIF: E REF: 11.1 The Basic Choices in Long-Term Financing

32. An investment banking firm that generally occupies the lead or co-lead manager’s position in large security offerings is referred to asa. a bulge bracket firm.b. a green shoe firm.c. a Wall Street firm.d. none of the above.

ANS: A DIF: MREF: 11.2 Investment Banking and the Public Issuance of Securities

33. Lead Investment Banking Corp. is the lead underwriter for the equity issuance of NewCorp. Lead is responsible for 80% of the issue at a discount of $1.70 per share. If Lead is responsible for selling 1,300,000 shares then what is the total compensation to the underwriting syndicate?

a. $1,768,000b. $2,210,000c. $2,762,500d. none of the above

ANS: C1,300,000 / .8 = 1,625,000 1.7 = 2,762,500

DIF: M REF: 11.2 Investment Banking and the Public Issuance of Securities

34. In general, what is the determining factor in the underwriting spread charged by investment banks?a. the size of the issueb. the risk inherent in the security to be issuedc. the name recognition of the underwriterd. none of the above

ANS: B DIF: MREF: 11.2 Investment Banking and the Public Issuance of Securities

35. The most important law governing the sale of new securities isa. the Glass-Steagall Act.b. the Securities Act of 1933.c. the Securities and Exchange Commission Act of 1934.d. none of the above.

ANS: B DIF: MREF: 11.2 Investment Banking and the Public Issuance of Securities

36. Which of the following should not be considered a benefit to a firm that is issuing an IPO?a. access to additional capitalb. provide an alternative to cash for future acquisistionsc. have another source, other than cash for executive compensationd. limits the founder’s ownership dilution

ANS: D DIF: MREF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

37. Which of the following factors might be most important for an entrepreneur that is considering an IPO in an industry where a firm’s strategy is its most important asset.a. the use of stock as a compensation vehicleb. the investment banking feec. the disclosure requirments of publicly traded firmsd. all of the above are most import to such a firm

ANS: Cstrategy can be interpreted as private information ===> disclosure is the most onerous choice.


38. If Company X intends to distribute shares of its wholly owned subsidiary to its current shareholders in an effort to make the subsidiary a publicly traded company, then Company X is contemplating a(n)a. equity carve-outb. spin-offc. LBOd. none of the above

ANS: B DIF: MREF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

39. If you are anticipating purchasing shares of companies that will be offering shares to the public for the first time, your most profitable strategy for purchasing those shares will bea. to buy them in the primary market.b. to buy them in the secondary market.c. buy options on the shares before the IPO date.d. none of the above.

ANS: ANote: buying options on pre-IPO shares is not possible


40. If you were to purchase the shares of a firm one month after its IPO as well as the shares of a comparable sized (matched) firm on the same day and then hold both shares for five years, you would expecta. that the return of the IPO firm’s stock to be greater than that of the matched firm.b. that the return of the matched firm’s stock to be greater than that of the IPO firm.c. that the return of the two stocks to be equal.d. that since the two firms are likely to be uncorrelated the relation cannot be predicted.

ANS: B DIF: HREF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

41. If you are an investor that owns shares in a firm that you believe is about to issue additional equity, then you would expect the price of your shares toa. increase.b. be unaffected.c. decrease.d. all three of the above could happen with equal probability.

ANS: C DIF: MREF: 11.4 Seasoned Equity Offerings in the United States

42. If a firm is going to issue additional equity by offering existing shareholders the right, or the ability to sell to someone else that right, to purchase the offering then that is called a a. general cash offering.b. rights offering.c. seasonal rights offering.d. none of the above.

ANS: B DIF: MREF: 11.4 Seasoned Equity Offerings in the United States

43. Which of the following would most likely get a firm in trouble if it sold private placement securities to this investor?a. pension fundb. venture capitalistc. retireed. none of the above

ANS: C DIF: MREF: 11.4 Seasoned Equity Offerings in the United States

44. Which of the following is a valid concern for an investor who is considering purchasing a bond which has been issued under Rule 144A?a. Rule 144A issues are less liquid than public issuesb. Rule 144A issues are traded in the secondary market too actively to accurately value themc. Rule 144A issues can never be repurchased by the issuing firmd. none of the above

ANS: ASecurities issued under Rule 144A are private issues which are less liquid than public issues.

DIF: M REF: 11.4 Seasoned Equity Offerings in the United States

45. One reason that a U.S. based firm might want to issue its equity in international markets isa. that the firm will be able to raise markedly more capital, through a much higher security

price, in the international markets.b. that an international issue may help a company integrate itself into a international local

business scene.c. that U.S. Securities Law states that international ownership has no voting rights.d. none of the above.

ANS: B DIF: M REF: 11.5 International Common Stock Offerings

46. A non-U.S. based company would like to issue a form of its common equity in the U.S. A current method for doing so would bea. to contract for a U.S. investment back to issue a sponsored ADR.b. to let a U.S. investment bank issue an unsponsored ADR.c. to sell put options on its own stock to U.S. investors.d. none of the above.

ANS: A DIF: H REF: 11.5 International Common Stock Offerings

47. American Depository Receipts provide U.S. Investors witha. the ability to purchase foreign securities in the foreign companies domestic currency.b. the ability to purchase foreign securities in U.S. dollars.c. the ability to purchase U.S. securities in foreign currency denominations.d. none of the above.

ANS: B DIF: M REF: 11.5 International Common Stock Offerings

48. An example of a share privatization issue would bea. the public issue of securities representing ownership in the telephone system which is

currently owned by the government of a foreign country.b. the public issue of securities representing ownership in a firm that is currently privately

owned by a foreign citizen.c. the private issue of securities representing ownership in a firm that is currently privately

owned by a foreign citizen.d. none of the above.

ANS: A DIF: H REF: 11.5 International Common Stock Offerings

49. Most of the short-term capital gains of share privatization IPOs are captured bya. investors and citizens who vote in the country of the firm that is being privatized.b. the investor base that is determined to pay the maximum price for the IPO.c. the international monetary fund that helped inject much of the initial capital for the initial

start up.d. none of the above.

ANS: A DIF: M REF: 11.5 International Common Stock Offerings

50. One characteristic of share privatizations isa. that they are generally much larger than the IPOs of their private-sector counterparts.b. that they are generally much smaller than the IPOs of their private-sector counterparts.c. that the decision to privatize is made solely on economic grounds.d. none of the above.

ANS: ANote: C is incorrect because much of the economic benefit flows to voters rather than investors that might maximize the price of the IPO.

DIF: M REF: 11.5 International Common Stock Offerings

51. Assume that you purchase shares of a company that recently executed an IPO at the post-offering market price of $32 per share, and you hold the shares for one year. You then sell your shares for $36 per share. The company does not pay dividends, and you are not subject to capital gains taxation. What net return did you earn on your share investment?a. 11.11%b. 12.00%c. 12.50%d. 13.00%

ANS: C=($36-$32)/$32 = .1250

DIF: E REF: 11.1 The Basic Choices in Long-Term Financing

52. Assume that you purchase shares of a company that recently executed an IPO at the post-offering market price of $50 per share, and you hold the shares for one year. You then sell your shares for $52.50 per share. The company does not pay dividends, and you are not subject to capital gains taxation. What net return did you earn on your share investment?a. 2.50%b. 4.81%c. 5.00%d. 7.50%

ANS: C=($52.50-$50)/$50 = .0500

DIF: E REF: 11.1 The Basic Choices in Long-Term Financing

NARRBEGIN: Sea Grove Beach Corp.Sea Grove Beach CorporationSea Grove Beach Corporation is executing an initial public offering with the following characteristics. The company will sell 12 million shares at an offer price of $20 per share, the underwriter will charge a 7 percent underwriting fee, and the shares are expected to sell for $27.50 per share by the end of the first day’s trading. Assuming this IPO is executed as expected.NARREND

53. Refer to Sea Grove Beach Corporation. What is the initial return earned by investors allocated shares in the IPO?

a. 20.27%b. 27.27%c. 30.50%d. 37.50%

ANS: D=($27.50-$20)/$20 = .375

DIF: M REF: 11.2 Investment Banking and the Issuance of Public SecuritiesNAR: Sea Grove Beach Corp.

54. How much will Sea Grove Beach Corporation receive from the offering?a. $6.30 millionb. $223.20 millionc. $240.50 milliond. $306.90 million

ANS: B= 12*$20*.93 = $223.20


55. What is the total cost (underwriting fee and underpricing) of this issue to Sea Grove Beach Corporation?a. $6.30 millionb. $16.80 millionc. $106.80 milliond. $125.00 million

ANS: C= 12*$27.50 - 12*$20*.93 = $106.80


56. Montigo Magic Petroleum Corporation is interested in selling common stock to raise capital for a new oil well. The firm has contacted First Bank of Manhattan, a large underwriting firm, which believes that the stock can be sold for $40 per share. The underwriter also believes, after careful research, that its administrative costs will be 2.75 percent of the sale price and its selling costs will be 2.40 percent of the sale price. If the underwriter requires a profit equal to 1.25 percent of the sale price, how much will the spread have to be in dollars to cover the underwriter’s costs and profit?a. $0.64b. $1.80c. $2.16d. $2.56

ANS: D= 2.75% + 2.40% + 1.25% = 6.40%= $40*6.40% = $2.56

DIF: E REF: 11.2 Investment Banking and the Issuance of Public Securities

NARRBEGIN: Sea Grove Beach Co.Sea Grove Beach Company

Sea Grove Beach Company needs to raise $30 million of new equity capital. Its common stock is currently selling for $44 per share. The investment bankers require an underwriting spread of 7 percent of the offering price, and the company’s legal, accounting, and printing expenses associated with the seasoned offering are estimated to be $500,000.NARREND

57. Refer to Sea Grove Beach Company. How many new shares must the company sell to net $30 million?a. 745,357b. 745,857c. 746,127d. 746,327

ANS: A= $30,000,000 = X * .93 * $44 - $500,000X = 745,357

DIF: M REF: 11.2 Investment Banking and the Issuance of Public SecuritiesNAR: Sea Grove Beach Co.

58. What is the net price per share that Sea Grove Beach Company will receive from this offering?a. $40.24b. $40.92c. $42.24d. $43.93

ANS: B= .07*$44 = $3.08Net = $44 - $3.08 =$40.92

DIF: M REF: 11.2 Investment Banking and the Issuance of Public SecuritiesNAR: Sea Grove Beach Co.

NARRBEGIN: Panama CityPanama City Beach CompanyPanama City Beach Company needs to raise $60 million of new equity capital. Its common stock is currently selling for $70 per share. The investment bankers require an underwriting spread of 5 percent of the offering price, and the company’s legal, accounting, and printing expenses associated with the seasoned offering are estimated to be $200,000.NARREND

59. What is the net price per share that Panama City Beach Company will receive from this offering?a. $66.00b. $66.20c. $66.50d. $67.00

ANS: C= .05*$70 = $3.50Net = $70 - $3.50 =$66.50

DIF: H REF: 11.2 Investment Banking and the Issuance of Public SecuritiesNAR: Panama City

60. Refer to Panama City Beach Company. How many shares must be sold to net $60 million?

a. 905,263b. 902,256c. 885,715d. 857,143

ANS: A= .05*$70 = $3.50Net = $70 - $3.50 =$66.50$62,000,000/$66.50 = 905,263

DIF: H REF: 11.2 Investment Banking and the Issuance of Public SecuritiesNAR: Panama City

NARRBEGIN: Brooks CorporationBrooks CorporationBrooks Corporation has just received $40 million in net proceeds from a seasoned offering. The offering was underwritten by ABC Investments, an investment bank that focuses on small company offerings. For the offering, 8 million shares of stock were issued and the underwriting expenses for ABC Investments were $800,000.NARREND

61. Refer to Brooks Corporation. For ABC Investments to make a profit on this offering, what is the minimum price they must sell the stock for on the secondary market? a. $5.00b. $5.04c. $5.10d. $5.15

ANS: CBreak even = 8*X - $40 - $0.8 = $0X = $5.10

DIF: M REF: 11.2 Investment Banking and the Issuance of Public SecuritiesNAR: Brooks Corporation

62. Refer to Brooks Corporation. ABC Investments is able to sell the stock on the secondary market at $6.00. What is the profit for ABC Investments for underwriting this seasoned offering? a. $7.2 millionb. $7.6 millionc. $8.0 milliond. $8.8 million

ANS: AProfit = 8*$6 - $40 - $0.8 = $0Profit = $7.2

DIF: M REF: 11.2 Investment Banking and the Issuance of Public SecuritiesNAR: Brooks Corporation

NARRBEGIN: "Flip" shares 1"Flip" shares 1Three companies went public last month with initial public offerings (IPO). The offer price and first day closing price are shown below for the three firms. An investor was able to purchase 100 shares of each company at the offer price and then “flip” the shares at the end of the day for the full return.

Stock Offer Price Closing PriceA $10 $12.50B $80 $96.00C $40 $55

NARREND

63. Refer to "Flip" shares 1. What was the total dollar value of this investment at the end of the first day? (Ignore any tax implications for this question)a. $13,000b. $14,650c. $15,850d. $16,350

ANS: DA: 100*$12.50 = $1250B: 100*$96.00= $9600C: 100*$55 = $5500TOTAL: $16,350

DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)NAR: "Flip" shares 1

64. Refer to "Flip" shares 1. What was the return on this investment at the end of the first day? (Ignore any tax implications for this question)a. 23.1%b. 25.8%c. 27.5%d. 29.1%

ANS: Bavg. return = (1/13)*(25%)+(8/13)*(20%)+(4/13)*(37.5%) = 25.8%


NARRBEGIN: "Flip" shares 2"Flip" shares 2Three companies went public last month with initial public offerings (IPO). An investor was able to purchase shares of each company at the offer price and then “flip” the shares at the end of the day for the full return. The shares of each company sold for a $20 offer price. The number of shares purchased and the first day return are shown below.

StockShares

BoughtFirst Day

ReturnA 50 20%B 75 12%C 75 5%

NARREND

65. Refer to "Flip" shares 2. What was the return on this investment at the end of the first day? (Ignore any tax implications for this question)a. 11.38%

b. 11.61%c. 11.88%d. 12.33%

ANS: A=50/200*20%+75/200*12%+75/200*5%= 11.38%


66. Refer to "Flip" shares 2. What was the dollar value of the IPO investment after the first day? (Ignore any tax implications for this question)a. $4,493b. $4,477c. $4,455d. $4,400

ANS: C=50/200*20%+75/200*12%+75/200*5%= 11.38%=$20*(50+75+75)*(1.1138) = $4,455

DIF: H REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)NAR: "Flip" shares 2

NARRBEGIN: ABC LogisticsABC LogisticsThe managers of ABC Logistics (ABC) have decided to expand the company’s operations into a few new markets. To fund this opportunity, ABC has decided to launch a seasoned equity offering to raise new equity capital. ABC currently has 12 million shares outstanding, and yesterday’s closing market price was $40.00 per ABC share. The company plans to sell 3 million newly issued shares in its seasoned offering. The investment banking firm of Armstrong Incorporated has agreed to underwrite the new stock issue for a 4 percent discount from the offering price, which ABC and Armstrong have agreed should be $0.50 per share lower than ABC’s closing price the day before the offering is sold.NARREND

67. If ABC’s stock price closes at $39.00 the day before the offering, what will be the net proceeds for ABC from this offering?a. $109.55 millionb. $110.88 millionc. $112.32 milliond. $117.00 million

ANS: B= 3*.96*38.50 =$110.88 million

DIF: M REF: 11.4 Seasoned Equity Offerings in the United StatesNAR: ABC Logistics

68. If ABC’s stock price closes at $39.00 the day before the offering, calculate the return earned by ABC’s existing stockholders on their shares from the time before the seasoned offering was announced through the time it was actually sold for $38.50 per share.a. -3.75%b. -2.00%c. 1.25%d. 3.75%

ANS: A= ($38.50-$40)/$40 = -0.0375

DIF: M REF: 11.4 Seasoned Equity Offerings in the United StatesNAR: ABC Logistics

69. If ABC’s stock price closes at $39.00 the day before the offering, calculate the total cost of the seasoned equity offering to ABC’s existing stockholders as a percentage of the offering proceeds.a. 16.23%b. 18.51%c. 20.10%d. 20.40%

ANS: DProceeds from offer = 3*.96*$38.50=$110.88market value of firm’s shares after offering = 15*38.50 =$577.50Wealth loss for existing holders = 12 * $1.50 = $18Underwriting fee = .04*3*$38.50 = $4.62Wealth loss + underwriting fee = $22.62

Cost of issue = $22.62/$110.88 = 20.40%

DIF: H REF: 11.4 Seasoned Equity Offerings in the United StatesNAR: ABC Logistics

70. If ABC’s stock price closes at $46.75 the day before the offering, calculate the total cost of the seasoned equity offering to ABC’s existing stockholders as a percentage of the offering proceeds.a. 32.72%b. 31.65%c. 30.17%d. 29.89%

ANS: AProceeds from offer = 5*.95*$46=$218.50market value of firm’s shares after offering = 20*46 =$920Wealth loss for existing holders = 15 * $4 = $60Underwriting fee = .05*5*$46 = $11.50Wealth loss + underwriting fee = $71.50

Cost of issue = $71.50/$218.50 = 32.72%

DIF: H REF: 11.4 Seasoned Equity Offerings in the United StatesNAR: ABC Logistics

71. What is an institution that raises funds by issuing liabilities against itself?a. Financial intermediaryb. Mutual fund companyc. Investment bankd. Initial public offering


72. What is the term for the repackaging of loans and other traditional bank-based credit products into

securities that can be sold to public investors?

a. Privatizationb. Asset Bundlingc. Securitizationd. Primary offering


73. Which statement is FALSE regarding the issuance of securities by investment banks?

a. The profits for an investment bank are determined by the size of the underwriting spread.b. The prospectus is the legal document that describes the terms of the IPO.c. Banks charge higher spreads for seasoned equity offerings than unseasoned equity

offerings.d. Banks charge higher spreads on equity issues than debt issues.

ANS: C DIF: MREF: 11.2 Investment Banking and the Issuance of Public Securities

74. What is the most important federal law regarding the issue of new securities?

a. Securities Act of 1923b. Securities Act of 1933c. Securities Act of 1943d. Securities Act of 1953

ANS: B DIF: EREF: 11.2 Investment Banking and the Issuance of Public Securities

75. Which of the following is NOT a benefit of going public for a private firm?

a. New capital for the company.b. Publicly traded stock for acquisitionsc. Personal wealth and liquidityd. Low managerial cost in issuing the IPO.

ANS: D DIF: MREF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

Chapter 11—Raising Long-Term Financing

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Transcript of Chapter 11—Raising Long-Term Financing