Question 1

The risk that new securities will be sold at a loss is transferred from the issuing firm to the underwriter in best efforts underwriting.

Accepted Answer

A) True 
 B)False  False

Question 2

Which of the following is a characteristic of an IPO?

Accepted Answer

A)  They are usually sold as a private placement. 
B)  Small issues are predominately sold on a firm commitment basis. 
C)  The general form of offer is a rights offering. 
D)  IPOs are typically overpriced. 
E)  Determination of the correct offering price is relatively difficult. 
A)  They are usually sold as a private placement. 
B)  Small issues are predominately sold on a firm commitment basis. 
C)  The general form of offer is a rights offering. 
D)  IPOs are typically overpriced. 
E)  Determination of the correct offering price is relatively difficult. E

Question 3

Which of the following best defines the term overallotment option?

Accepted Answer

A)  Loans, usually long term in nature, provided directly by a limited number of investors. 
B)  Allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price. 
C)  An underwriting provision that permits syndicate members to purchase additional shares at the original offering price. 
D)  The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock. 
E)  A company's first equity issue made available to the public. Also an unseasoned new issue. 
A)  Loans, usually long term in nature, provided directly by a limited number of investors. 
B)  Allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price. 
C)  An underwriting provision that permits syndicate members to purchase additional shares at the original offering price. 
D)  The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock. 
E)  A company's first equity issue made available to the public. Also an unseasoned new issue. C

Question 4

Which of the following best defines the term ex rights?

Accepted Answer

A)  The date on which existing shareholders on company records are designated as the recipients of stock rights. Also the date of record. 
B)  An issue of securities offered for sale to the general public on a cash basis. 
C)  Underwriter buys the entire issue, assuming full financial responsibility for any unsold shares. 
D)  Period when stock is selling without a recently declared right, normally beginning two business days before the holder-of-record date. 
E)  The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction. 
A)  The date on which existing shareholders on company records are designated as the recipients of stock rights. Also the date of record. 
B)  An issue of securities offered for sale to the general public on a cash basis. 
C)  Underwriter buys the entire issue, assuming full financial responsibility for any unsold shares. 
D)  Period when stock is selling without a recently declared right, normally beginning two business days before the holder-of-record date. 
E)  The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

Question 5

The Do Drop Inn requires $1.5 million to expand its dining room and catering services. The firm's underwriters require a 7.5 % spread and have set the stock price at $38 a share. The estimated issue costs are $145,000. How many shares of stock will Do Drop need to sell if it has a firm commitment underwriting?

Accepted Answer

A)  46,490 shares 
B)  46,800 shares 
C)  46,920 shares 
D)  47,100 shares 
E)  47,400 shares 
A)  46,490 shares 
B)  46,800 shares 
C)  46,920 shares 
D)  47,100 shares 
E)  47,400 shares

Question 6

A general cash offer is an offering of debt or equity securities to fewer than 40 investors.

Accepted Answer

A) True 
 B)False

Question 7

Each of the following is sometimes performed by underwriters EXCEPT:

Accepted Answer

A)  They stand ready to take up the slack if some of the shares in a best-efforts offering are not purchased. 
B)  They purchase and resell extra shares from the issuer in an oversubscribed offering. 
C)  They spread the risk of issuing the securities by forming a syndicate. 
D)  They provide advice to the issuing firm. 
E)  They act as an intermediary between the company selling the securities and the investing public. 
A)  They stand ready to take up the slack if some of the shares in a best-efforts offering are not purchased. 
B)  They purchase and resell extra shares from the issuer in an oversubscribed offering. 
C)  They spread the risk of issuing the securities by forming a syndicate. 
D)  They provide advice to the issuing firm. 
E)  They act as an intermediary between the company selling the securities and the investing public.

Question 8

Calculate the value of a right given the following information: 2 of rights to buy one share; subscription price of $9; $25 common share price during the rights-on period.

Accepted Answer

A)  $5.33 
B)  $5.50 
C)  $6.15 
D)  $6.30 
E)  $6.80 
A)  $5.33 
B)  $5.50 
C)  $6.15 
D)  $6.30 
E)  $6.80

Question 9

____________ considered an indirect flotation cost.

Accepted Answer

A)  The underwriter's spread is. 
B)  Underpricing is. 
C)  Filing fees are. 
D)  Legal fees are. 
E)  Taxes incurred as a result of the issue are. 
A)  The underwriter's spread is. 
B)  Underpricing is. 
C)  Filing fees are. 
D)  Legal fees are. 
E)  Taxes incurred as a result of the issue are.

Question 10

The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets. The net present value of the project is $20,000. Equity shares will be issued as the sole means of financing the project. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented given the following current information on the firm?

Accepted Answer

A)  $10.00 
B)  $10.37 
C)  $12.07 
D)  $14.68 
E)  $15.04 
A)  $10.00 
B)  $10.37 
C)  $12.07 
D)  $14.68 
E)  $15.04

Question 11

A Toronto firm is considering a new project which requires the purchase of $250,000 of new equipment. The net present value of the project is $100,000. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented given the following current information on the firm?

Accepted Answer

A)  $6.86 
B)  $7.94 
C)  $8.00 
D)  $8.08 
E)  $8.76 
A)  $6.86 
B)  $7.94 
C)  $8.00 
D)  $8.08 
E)  $8.76

Question 12

The main difference between direct private long-term debt financing and public issues of debt is that it is easier to renegotiate a term loan or private placement in the event of a default.

Accepted Answer

A) True 
 B)False

Question 13

Historically, IPO underpricing:

Accepted Answer

A)  Ranges between 2 and 30 %. 
B)  Is relatively constant over time. 
C)  Increased significantly from 2000 to 2003. 
D)  Is a new phenomenon which began in the 1970's. 
E)  Has exceeded 100 % on occasion. 
A)  Ranges between 2 and 30 %. 
B)  Is relatively constant over time. 
C)  Increased significantly from 2000 to 2003. 
D)  Is a new phenomenon which began in the 1970's. 
E)  Has exceeded 100 % on occasion.

Question 14

Assume that Classique decides to set the subscription price at $4 rather than $2. Now what will the value of a right be? (Assume all other information remains the same.)

Accepted Answer

A)  $0.25 
B)  $0.40 
C)  $0.80 
D)  $1.20 
E)  $2.50 
A)  $0.25 
B)  $0.40 
C)  $0.80 
D)  $1.20 
E)  $2.50

Question 15

Winter's Edge needs $45 million to finance a new facility and new snow removal equipment. The management has met with underwriters who feel that the firm could sell additional shares of stock at $26 a share with an 8 % underwriting spread. The estimated issue costs are $475,000. How many shares of stock will Winter's Edge need to sell if they choose firm commitment underwriting for their new facility and equipment?

Accepted Answer

A)  1,749,038 shares 
B)  1,871,471 shares 
C)  1,901,129 shares 
D)  1,948,718 shares 
E)  2,053,219 shares 
A)  1,749,038 shares 
B)  1,871,471 shares 
C)  1,901,129 shares 
D)  1,948,718 shares 
E)  2,053,219 shares

Question 16

Arguments that have been presented to support IPO underpricing include diminishing the risk to the underwriter who has agreed to a firm commitment underwriting.

Accepted Answer

A) True 
 B)False

Question 17

Why is it so difficult to determine the appropriate price for an IPO? Who do you think has the most input: the issuing firm, the underwriter, or investors? Explain.

Accepted Answer

It is impossible to accurately determine

Question 18

Electrical Services, Inc. would like to expand its operations and would require $2 million in additional funding to do this. After discussing this with shareholders, Electrical Services has decided to raise the necessary funds through a rights offering with a subscription price of $24 a share. The current market price of their stock is $30 a share. How many shares of stock will Electrical Services need to sell through the rights offering to fund the expansion plans?

Accepted Answer

A)  66,667 shares 
B)  83,333 shares 
C)  133,333 shares 
D)  166,667 shares 
E)  333,333 shares 
A)  66,667 shares 
B)  83,333 shares 
C)  133,333 shares 
D)  166,667 shares 
E)  333,333 shares

Question 19

An Edmonton firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What will the firm be worth after the offering?

Accepted Answer

A)  $96.0 million 
B)  $98.4 million 
C)  $105.0 million 
D)  $112.0 million 
E)  $115.8 million 
A)  $96.0 million 
B)  $98.4 million 
C)  $105.0 million 
D)  $112.0 million 
E)  $115.8 million

Question 20

Which one of the following is an indirect cost of an IPO?

Accepted Answer

A)  The spread. 
B)  Management time. 
C)  Accounting fees. 
D)  Abnormal return. 
E)  Legal costs. 
A)  The spread. 
B)  Management time. 
C)  Accounting fees. 
D)  Abnormal return. 
E)  Legal costs.

Exam 15: Raising Capital

The risk that new securities will be sold at a loss is transferred from the issuing firm to the underwriter in best efforts underwriting.

Which of the following is a characteristic of an IPO?

Which of the following best defines the term overallotment option?

Which of the following best defines the term ex rights?

A general cash offer is an offering of debt or equity securities to fewer than 40 investors.

Each of the following is sometimes performed by underwriters EXCEPT:

Calculate the value of a right given the following information: 2 of rights to buy one share; subscription price of $9; $25 common share price during the rights-on period.

____________ considered an indirect flotation cost.

The main difference between direct private long-term debt financing and public issues of debt is that it is easier to renegotiate a term loan or private placement in the event of a default.

Historically, IPO underpricing:

Assume that Classique decides to set the subscription price at $4 rather than $2. Now what will the value of a right be? (Assume all other information remains the same.)

Arguments that have been presented to support IPO underpricing include diminishing the risk to the underwriter who has agreed to a firm commitment underwriting.

Why is it so difficult to determine the appropriate price for an IPO? Who do you think has the most input: the issuing firm, the underwriter, or investors? Explain.

An Edmonton firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What will the firm be worth after the offering?

Which one of the following is an indirect cost of an IPO?

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate 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

Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Enterprise Risk Management

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

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