Exam 14: Initial Public Offerings, Investment Banking, and Financial Restructuring

Going public establishes a market value for the firm's shares, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.

Alpha and Pure Trading System are the two electronic communications networks used by dealers in the trading floor of the TSX exchange.

The trading of existing equity issues among investors occurs in the primary market.

With no recourse, firms prefer to use project financing for risky but small capital investments.

Which statement concerning common stock and the investment banking process is NOT true?

Which statement is describes a general disadvantage of going public?

An underwriter follows a best efforts basis to sell 2 million shares at $10 a piece. Such a public offering price has included a $1 spread. How much will the issuer receive if only 1.5 million shares are sold in this issue?

Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations and assume that the firm's tax rate is zero. The company's decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds?

Personal assets and "love money" are the two major sources of equity capital for a start-up company.

Scenario: ABC Waste ABC Waste (ABCW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 8.4% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. ABCW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. -Refer to Scenario: ABC Waste. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will be the net increase or decrease in the annual flotation cost tax savings if refunding takes place?

Which statement regarding debt refunding is true?

What is an example of a seasoned equity offering?

Which term refers to the money offered to fund a start-up company?

Consider the following information about an IPO underwriting transaction. The net proceeds to the issuing firm are $141.75 million. The public offering price is $50 per share. The spread is $2.75 per share. Two million shares are sold. How many shares are issued in this IPO?

Which of the following statements best describes private placements?

When a firm refunds a debt issue, the firm's stockholders gain and its bondholders lose. This points out the risk of a call provision to bondholders and explains why a noncallable bond will typically command a higher price than an otherwise similar callable bond.

Syndicated offerings gain publicity because institutional investors are involved with marketing functions.

Who benefits the least from a syndicated offering?

A bought deal occurs when an underwriter buys an issue from a firm and sells the securities to investors without preparing a prospectus.

The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price. Since this dilutes the value of the public stockholders, it "carves out" some of their value.