Exam 15: Financial Leverage and Capital Structure Policy

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

Steve is the founder of Jefferson & Westover.Recently, the firm decided to issue an IPO with Steve retaining 30 percent ownership of the firm.The IPO agreement contained both a Green Shoe provision and a 6-month lockup agreement.Steve's cost basis per share is $15.The offering price for the IPO was $16.On the first day of trading, the market price per share rose to $28.20 and closed for the day at $25.60.Now, six months after the IPO release, the stock is valued at $15.40 a share.Explain who benefited the most during the lockup period, an outside investor or Steve, and why.

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

Which one of the following is a key goal of the aftermarket period?

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?

You own 15 percent or 13,500 shares of Printers, Etc.These shares have a total market value of $435,000.By what percentage will the total value of your investment in this firm change if the company sells an additional 10,000 shares of stock at $30 a share and you do not buy any?

The Woods Co.and the Mickelson Co.have both announced IPOs at $43 per share.One of these is undervalued by $20, and the over is overvalued by $14, but you have no way of knowing which is which.You plan on buying 1,000 shares of each issue.If an issue is underpriced, it will be rationed, and only half your order will be filled.What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson?

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?

Explain why there is a tendency for IPOs to be underpriced.

The Educated Horses Corporation needs to raise $20 million to finance its expansion into new markets.The company will sell new shares of equity via a general cash offering to raise the needed funds.Suppose the offer price is $40 per share and the company's underwriters charge an 8 percent spread.The SEC filing fee and associated administrative expenses of the offering are $660,000.How many shares need to be sold?

A group of five private investors recently loaned $6 million to Henderson Hardware for ten years at 9 percent interest.This loan is best described as a:

Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 a share.Isabelle is a shareholder who exercised her rights option by buying all of the rights to which she was entitled based on the number of shares she owns.Currently, there are six shareholders who have opted not to participate in the rights offering.Isabelle would like to purchase the unsubscribed shares.Which one of the following will allow her to do so?

Mountain Teas wants to raise $11.6 million to open a new production center.The company estimates the issue costs including the legal and accounting fees will be $440,000.The underwriters have set the stock price at $17.50 a share and the underwriting spread at 9 percent.How many shares of stock does Mountain Teas have to sell to meet its cash need?

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?

It can be argued that the decision to accept venture capital is one of the most critical decisions an entrepreneur must make.Explain why.

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?

Birds and More is considering a project which requires the purchase of $175,000 of fixed assets.The net present value of the project is $4,500.Equity shares will be issued as the sole means of financing this 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?

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.

High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so.After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share.The current market price of the firm's stock is $22 a share.How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans?

Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing, and distributing healthy soups in a dried form.The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public.What is this type of an equity offering called?