Deck 19: Raising Capital

Question 1

Which one of these parties is primarily responsible for the pricing and selling of new securities to the general public?

A)Underwriter
B)Investment advisor
C)Specialist
D)Securities dealer
E)Venture capitalist

Answer 1

Underwriter

Question 2

Assume the SEC approved the registration statement for a new securities issue this morning.Which one of the following statements must be true about this issue?

A)The red herrings can now be distributed as their distribution was awaiting the SEC approval.
B)The waiting period started when the approval was received this morning.
C)The final prospectuses were all delivered or the SEC would not have approved the issue.
D)The issuer is following all of the required rules and regulations in regards to this issue.
E)The SEC believes the issue will be a profitable investment for all purchases made at the offer price.

Answer 2

The issuer is following all of the required rules and regulations in regards to this issue.

Question 3

What is the legal document called that is provided to potential investors and describes a new security offering?

A)Prospectus
B)Security agreement
C)Formal filing
D)Registration statement
E)Public statement

Answer 3

Prospectus

Question 4

Which one of the following projects is most apt to be financed with venture capital?

A)Seasonal merchandise for a major retailer
B)New product for an international manufacturing company
C)Domestic outlet for a large global importer
D)Additional warehouse space for a profitable trucking firm
E)Prototype for a newly patented tool by an individual inventor

Question 5

Which stage of venture capital financing provides the funding needed to develop a working model of a new product?

A)Start-up
B)First-round
C)Mezzanine
D)Seed money
E)Second-round

Question 6

Which one of the following statements is correct?

A)The underwriters must approve any increase in the authorized number of shares for a firm.
B)A prospectus must be provided to all investors who purchase shares of a new equity offering.
C)The corporate CEO has the authority to authorize additional shares of stock for a new issue.
D)When issuing new securities,the first step is the distribution of the prospectus.
E)Written offers can be made for new securities during the waiting period.

Question 7

Arctic Adventures just filed the required paperwork with the SEC that contains all of the material information related to their upcoming IPO.What is the name associated with this paperwork?

A)Comment letter
B)Registration statement
C)Security agreement
D)Prospectus
E)Red herring

Question 8

Prior to receiving SEC approval,a company selling new securities can

A)accept both written and oral offers to purchase shares.
B)determine the offer price and accept all offers to purchase shares.
C)not distribute any information or communicate with any investors regarding the securities.
D)distribute red herrings and accept oral offers to purchase shares.
E)presell shares but cannot determine the final selling price.

Question 9

Which one of the following is a type of underwriting of securities where the final offer price is determined by investor bids?

A)Private placement
B)Best efforts
C)Initial public offering
D)Green Shoe option
E)Dutch auction

Question 10

A publicly traded company plans to issue an additional 10,000 shares of common stock to the general public in the near future.Which term applies to this issue of securities?

A)Initial public offering
B)Private placement
C)In-house offering
D)Rights offering
E)Seasoned equity offer

Question 11

A Green Shoe provision can be defined as a(n):

A)privileged subscription.
B)guarantee of sale for all shares offered.
C)overallotment option.
D)public price auction.
E)private price auction.

Question 12

The difference between the price an underwriter pays to a securities' issuer and the price at which the securities are offered for sale is called the

A)agents' fee.
B)commission.
C)spread.
D)rights price.
E)private price.

Question 13

What is the length of the SEC registration waiting period?

A)10 days
B)45 days
C)20 days
D)90 days
E)180 days

Question 14

BL Lumber just authorized 5,000 new shares that is the number of shares they expect to sell over the next 2 years.These shares will be sold as,and if,funds are needed.This situation best describes which one of the following terms?

A)Shelf cash offer
B)Timed placement
C)Competitive firm cash offer
D)Dutch auction
E)Direct placement

Question 15

What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering?

A)Underwriting cartel
B)Syndicate
C)Firm commitment group
D)Dutch auction group
E)Venture capitalists

Question 16

Which one of the following best describes an initial public offering?

A)The first sale of equity shares to the general public
B)Any newly issued shares offered to the general public
C)Shares sold to the public in exchange for cash
D)Shares held by a firm's founder
E)Any shares initially offered to a firm's existing shareholders

Question 17

Individual or limited partner venture capitalists generally

A)seek an exit strategy.
B)provide only seed money to start-up firms.
C)tend to be long-term investors.
D)are easy to contact.
E)request less than 25 percent ownership.

Question 18

Kite Flyers recently offered 6,000 shares of stock for sale but only received payment from its underwriters for the 4,500 shares they sold.This must have been a ________ underwriting.

A)standby
B)best efforts
C)firm commitment
D)Dutch auction
E)private placement

Question 19

An individual who wishes to participate in crowdfunding a company must

A)have at least 10 years of investment experience and a net worth of $500,000 or more.
B)have a net worth of at least $1 million and net income of $200,000 or more in 2 of the last 3 years.
C)be an SEC registered investor and have annual income of $250,000 or more.
D)have a net worth of at least $500,000,annual net income of $200,000 or more in 2 of the last 3 years,and a minimum of 10 years of investment experience.
E)have net income of $250,000 or more in 2 of the last 3 years along with a minimum net worth of $2 million.

Question 20

Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?

A)Initial public offering
B)Best efforts underwriting
C)Firm commitment underwriting
D)Rights offer
E)Private placement

Question 21

Galactic Travel wants to do an IPO but is quite concerned that the underwriters might underprice the issue.Which one of the following might the firm consider to address this concern?

A)Extended lockup period
B)Dutch auction underwriting
C)Extended quiet period
D)Best efforts underwriting
E)Standby underwriting

Question 22

Assume ABC stock declines by 2 percent following the announcement of a new stock offering.Also assume the prices in the overall market remained steady on the announcement date.ABC's price decline is best categorized as

A)a direct expense of the issue.
B)a part of the issue's underpricing.
C)an abnormal return.
D)the spread.
E)the overallotment cost.

Question 23

What is the primary reason why securities are sometimes offered through a rights offering?

A)To avoid corporate taxation of excessive profits
B)To provide additional income to the current shareholders
C)To assist current shareholders in maintaining their current proportional ownership position
D)To replace a regular stock dividend
E)To allow shareholders to avoid taxes by purchasing shares directly from the issuer

Question 24

The cost of the time managers spend on an issue of securities is

A)considered to be part of the abnormal return.
B)a direct cost of the issue and must be reported on the prospectus.
C)reimbursed when the issuer invokes the Green Shoe option.
D)an indirect expense of the issue.
E)not considered an expense of the issue because it is a sunk cost.

Question 25

Going public offers which two major benefits?

A)Decreased costs of raising capital and firm growth from increased name recognition
B)Increased ability to raise external capital and reduced market risk
C)Shareholder loyalty and increased availability of external capital
D)Increased equity capital and lowered firm risk
E)Diversification for shareholders and increased ability to raise capital

Question 26

Which one of these conditions must exist if a rights offering is to be successful?

A)The rights cannot be resold.
B)The book value per share must be less than the subscription price.
C)Shareholders must be able to obtain one new share for every right they receive.
D)The issuer must guarantee to repurchase the rights at the offer price if the market price declines.
E)The subscription price must be less than the market price.

Question 27

Generally speaking,stock prices tend to ________ following a new debt announcement and ________ following a new equity announcement.

A)increase;increase
B)increase;decrease
C)remain steady;increase
D)remain steady;decrease
E)decrease;increase

Question 28

The primary purpose of a lockup agreement is to ensure

A)the lead underwriter maintains an economic interest in the IPO it is managing.
B)company insiders maintain an economic interest in the issuer of an IPO for a minimum period of time.
C)research reports are issued.
D)the issuer of new securities receives a minimally agreed upon amount from the issue.
E)investors purchasing shares at the offer price hold those shares for a stated number of days following the IPO.

Question 29

In the Brau and Fawcett survey,which one of these was most cited by CFOs as the motive for going public?

A)Creating public shares for use in future acquisitions
B)Allowing the firm's principals to diversify their holdings
C)Establishing a market value for the firm
D)Minimizing the firm's cost of capital
E)Allowing venture capitalists to cash out

Question 30

The specified period of time following an IPO when insiders are prevented from selling their shares is called the:

A)lockup period.
B)quiet period.
C)comment period.
D)Green Shoe period.
E)waiting period.

Question 31

What was the average first-day return on IPOs for the period 1980−2015 in the United States?

A)22.7 percent
B)17.2 percent
C)9)2 percent
D)11.4 percent
E)15.6 percent

Question 32

A stock with a file price range of ________,a final offer price of ________,and a first-day closing price of ________ is the best example of the partial adjustment phenomenon.

A)$14−$16;$15;$16
B)$10−$12;$16;$15
C)$16−$18;$15;$12
D)$10−$12;$24;$24
E)$11-$13;$22;$29

Question 33

Which one of these statements is true concerning issue costs?

A)Issue costs tend to be higher for debt than for equity issues.
B)Underwriter spreads for IPOs tend to range from 10 to 15 percent.
C)The costs of SEOs generally exceed the costs of IPOs.
D)Convertible bonds generally have the lowest issue costs.
E)Underwriting spreads tend to decrease as issue size increases.

Question 34

A lockup agreement:

A)temporarily supports the market price of IPO shares.
B)maximizes the return on an IPO to a firm's original owners.
C)increases the volume of trading for shares of a recent IPO.
D)limits price volatility on the first day shares of an IPO trade.
E)guarantees a minimum number of IPO shares sold.

Question 35

A company enters a quiet period at the time it seriously considers an IPO.This period ends ________ calendar days following the IPO.

A)1
B)5
C)20
D)40
E)50

Question 36

The Green Shoe option is most apt to be exercised when an IPO is ________ and ________.

A)underpriced;undersubscribed
B)underpriced;oversubscribed
C)correctly priced;neither over nor undersubscribed
D)overpriced;oversubscribed
E)overpriced;undersubscribed

Question 37

Currently,you own 7 percent of the outstanding stock of Metals Unlimited.The firm has decided to issue additional shares of stock and has given you the first option to purchase 7 percent of those additional shares.Which one of the following will you be participating in if you opt to purchase the shares you have been offered?

A)Red herring offer
B)Rights offer
C)Private placement
D)IPO
E)General cash offer

Question 38

Which of the following have been offered as justification for stock price declines following an SEO announcement? I.Investors assume managers issue stock when shares are overvalued.
II)Corporate taxes imposed on stock offerings lower the value of the issuer's cash flows.
III)Issuing equity may be considered a signal that the issuer has too much debt.
IV)Issue costs reduce the value of the issuing firm.

A)I and III only
B)II and IV only
C)I,III,and IV only
D)II,III,and IV only
E)I,II,III,and IV

Question 39

In the United States,the period from 1960 to 2015 illustrates that

A)both the number of IPO offerings and the amount of underpricing vary significantly over time.
B)the number of IPO offerings is relatively constant over time but the amount of underpricing varies considerably.
C)both the number of IPO offerings and the amount of underpricing follow a set pattern.
D)IPO underpricing is relatively constant over time but the number of offerings varies quite dramatically.
E)the level of underpricing steadily increased over the period while the number of offerings consistently decreased.

Question 40

Which of the following have been offered as explanations of IPO underpricing? I.Underpricing helps offset the "winner's curse."
II)Underpricing helps ensure investors will be long-term holders of the IPO securities.
III)Underpricing helps ensure investment bank customers will earn a profit on average.
IV)Underpricing is needed to convince investors to accept the risks associated with IPOs.

A)II only
B)IV only
C)II and III only
D)I,III,and IV only
E)I,II,III,and IV only

Question 41

Ariel and Todd both own rights on TL stock that grant each of them the right to purchase 10 shares at $15 a share.Ariel does not sell or exercise her rights.Thus,Todd purchases 20 shares at the subscription price.Todd exercised

A)a neglected rights offer.
B)a shareholder takedown offer.
C)an oversubscription privilege.
D)a standby fee arrangement.
E)a standby underwriting.

Question 42

Spring Aire is attempting to sell 600 shares of stock via a Dutch auction.The bids received were Bidder A,200 shares at $47;Bidder B,300 shares at $46;Bidder C,600 shares at $45;and Bidder D,500 shares at $43.How many shares will Bidder A be able to purchase?

A)0 shares
B)50 shares
C)140 shares
D)109 shares
E)200 shares

Question 43

Zebra Stripes would like to sell 400 shares of stock using the Dutch auction method.The bids received were Bidder A,200 shares at $28;Bidder B,300 shares at $27;Bidder C,500 shares at $26;and Bidder D,400 shares at $25.How much will Bidder B have to pay to purchase her allocated shares?

A)$8,100
B)$7,610
C)$6,480
D)$7,240
E)$6,730

Question 44

The Corner Market is offering 75,000 shares of stock to the public in a general cash offer.The offer price is $29 a share,and the underwriter's spread is 8.5 percent.The administrative costs are estimated at $360,000.How much will the company net from this stock offering assuming the issue is completely sold?

A)$2,319,525
B)$1,546,000
C)$1,630,125
D)$1,610,000
E)$2,257,048

Question 45

The Golden Nickel just arranged a 2-year direct business loan.Which one of the following matches this loan arrangement?

A)Public note
B)Public bond
C)Private placement
D)Shelf loan
E)Term loan

Question 46

Isaac placed an order with his broker to purchase 300 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $24 a share.He received allocations of 300 shares of A,25 shares of B,and 250 shares of C.On their respective first days of trading Stock A closed at $20 a share,Stock B closed at $29 a share,and Stock C closed at $25 a share.How much less did he earn on his combined first day of trading than he would have had he received his full allocation of shares for all three stocks?

A)−$1,440
B)-$1,375
C)-$1,500
D)-$1,425
E)-$1,225

Question 47

Which one of these statements is correct?

A)Equity issues must be registered with the SEC,but bond issues do not have to be registered.
B)Less than 25 percent of debt is privately placed.
C)Bond registration statements must indicate an indenture.
D)Publicly issued debt generally carries a higher interest rate than privately issued debt.
E)Term loans have a minimum maturity of 5 years.

Question 48

Which one of these is not a reason given for issuing shares without a rights offering?

A)The risk of the subscription price exceeding the market price is significant.
B)Underwriters provide a wider distribution of shares than would be possible with a rights offering.
C)Rights must be exercised by their original owner or forfeited.
D)Underwritten issues provide funds faster than rights offerings do.
E)Investment bankers provide valuable advice.

Question 49

Newton Water Works would like to sell 500 shares of stock using a Dutch auction.The bids received were Bidder A,100 shares at $26;Bidder B,300 shares at $25;Bidder C,200 shares at $25;Bidder D,500 shares at $24;and Bidder E,800 shares at $22.Bidder D will be able to purchase ________ shares at total cost of ________.Assume allocated shares are rounded to the nearest whole share.

A)500;$24
B)227;$5,675
C)227;$5,448
D)500;$25
E)0;$0

Question 50

Given an efficient market,a rights offer

A)provides a means for current shareholders to sell their shares for more than their actual worth.
B)increases the wealth of the firm's current shareholders.
C)neither creates nor destroys shareholder value.
D)provides a means of creating value for only those who exercise their rights.
E)imposes losses on the firm's current shareholders.

Question 51

Lisa owns 750 of the 7,500 outstanding shares of Maple Industries.Assume the company issues another 750 shares to the general public and Lisa does not purchase any of them.As a result,Lisa

A)will automatically be given an additional 75 shares through a stock dividend.
B)retains 10 percent of the voting power of the company although her shares lose value.
C)automatically lost 10 percent of her investment's value.
D)suffers from dilution of percentage ownership.
E)will automatically receive 10 percent higher dividends per share.

Question 52

Which one of these statements is correct?

A)A decline in EPS indicates market dilution.
B)Market dilution results from negative NPV investments.
C)Accounting dilution causes market dilution.
D)Accounting dilution and market dilution must be directly related.
E)Accounting dilution causes EPS to rise.

Question 53

Rowyn placed an order with her broker to purchase 300 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $16 a share.She received allocations of 300 shares of A,240 shares of B,and 50 shares of C.On their respective first days of trading,Stock A closed at $15 a share,Stock B closed at $16 a share,and Stock C closed at $22 a share.What is her combined total first-day profit or loss on these three IPOs?

A)−$120
B)$0
C)−$30
D)$70
E)$300

Question 54

Which one of the following statements concerning debt issues is correct?

A)A prospectus is required for public issues of equity but not for debt.
B)The only difference between a term loan and a private placement is the size of the issue.
C)Direct long-term loans must be registered with the SEC.
D)Firms often pay higher interest rates on term loans than on public issues of debt.
E)Public debt tends to have more restrictive covenants than private debt.

Question 55

Youngwood's wants to raise funds for an expansion project by issuing new equity shares.Management estimates the issue will cost the firm $246,000 for direct issue costs.The underwriting spread is 7.75 percent and the issue price is $14 per share.The firm has determined that 266,822 shares of stock must be sold for the firm to receive sufficient funds for the expansion.What is the expansion cost?

A)$2,950,001
B)$3,200,006
C)$3,350,002
D)$3,000,004
E)$3,140,008

Question 56

Which one of the following best fits the description of a private placement?

A)3-year commercial bank loan
B)10-year loan from an insurance company
C)2-year direct business loan
D)3-year loan to a firm by its original founder
E)20-year bonds sold in the public markets

Question 57

Danielle placed an order with her broker to purchase 400 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $22 a share.She received allocations of 320 shares of A,0 shares of B,and 400 shares of C.On their respective first days of trading,Stock A closed at $23 a share,Stock B closed at $39 a share,and Stock C closed at $17 a share.What is her combined total first-day profit or loss on these three IPOs?

A)-$1,680
B)-$1,220
C)−$780
D)$1,020
E)$5,200

Question 58

The Cookie Co.would like to sell 500 shares of stock using the Dutch auction method.The bids received were Bidder A,200 shares at $40;Bidder B,300 shares at $39;Bidder C,500 shares at $38;and Bidder D,400 shares at $37.What will be the gross proceeds from this auction?

A)$19,700
B)$19,200
C)$19,000
D)$20,000
E)$19,500

Question 59

Iver Mfg.wants to raise $11.6 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $284,000 for accounting,legal,and other costs.The underwriting spread is 6.5 percent and the issue price is $24 per share.How many shares of stock must be sold if the firm is to receive sufficient funds to purchase all its desired equipment?

A)544,799 shares
B)502,108 shares
C)529,590 shares
D)640,759 shares
E)633,333 shares

Question 60

To be eligible to use Rule 415,a firm must

A)not have defaulted on its debt anytime in the past 5 years.
B)guarantee the new shares will be sold evenly over a period of 3 years.
C)have a market value of common stock in excess of $250 million.
D)never have violated any of the provisions of the Securities Act of 1934.
E)have an investment-grade rating.

Question 61

The Bread Basket needs to raise $11.7 million to expand its operations nationally.The company will sell new shares of common stock using a general cash offering.The underwriters spread is 8.15 percent spread,the administrative costs are $485,000,and the offer price is $22 per share.How many shares of stock must be sold for the company to receive the total funds it desires?

A)603,009 shares
B)638,311 shares
C)663,022 shares
D)814,141 shares
E)833,333 shares

Question 62

DDP has 120,000 shares of stock outstanding at a market price per share of $52.The firm plans a rights offering of 20,000 shares with an offer price of $46 a share.What will be the ex-rights stock price if each outstanding share is granted one right?

A)$51.10
B)$50.67
C)$51.14
D)$50.54
E)$51.40

Question 63

The Down Under is an all-equity firm with 210,000 shares of stock outstanding.The book value per share is $23,and the market value per share is $46.The current net income is $310,800.An expansion project will cost $1.1 million.Assume the price-earnings ratio remains constant.What must be the new total net income of the firm if the market price per share is to remain at $46?

A)$357,394
B)$346,191
C)$386,221
D)$359,630
E)$378,542

Question 64

Kurt's Campers issued 60,000 shares of stock last week,received $31.54 a share,and incurred direct costs of $328,000.The offer price was $34 a share.Within the first hour of trading,the stock price increased to $36 a share.What was the flotation cost as a percentage of the funds raised?

A)38.07%
B)33.49%
C)27.92%
D)36.33%
E)29.04%

Question 65

Arnold's Construction is an all-equity firm with 80,000 shares of stock outstanding.The book value per share is $23,and the market value per share is $50.The current net income is $216,000.The firm is considering a new project that will cost $2.6 million and will increase net income by $120,000.The project will be all-equity financed.The project will be financed with new equity shares.The current earnings per share is ________ and it will be ________ if the project is accepted.

A)$2.60;$2.48
B)$2.70;$2.52
C)$2.60;$2.55
D)$2.70;$2.55
E)$2.70;$2.61

Question 66

BL Timber stock sells for $48 a share.The firm has a rights offer outstanding for new equity shares.Lisa is a current stockholder and owns 350 shares.She just received one right for every share she owns.To purchase one new share she must submit four rights and $40.What is the value of one right?

A)$1.80
B)$1.60
C)$)91
D)$1.33
E)$1.46

Question 67

Butterfield's is an all-equity firm with 132,000 shares of stock outstanding.The book value per share is $14,and the market value per share is $31.The current net income is $301,000.The firm is considering a new project that will cost $1.4 million and increase net income by $87,000.The current earnings per share is ________ and it will be ________ if the project is accepted.

A)$2.24;$2.12
B)$2.24;$2.08
C)$2.24;$2.21
D)$2.28;$2.19
E)$2.28;$2.11

Question 68

Disaster Cleanup stock sells for $29 a share.The firm has a rights offer outstanding for new equity shares.Antonio currently owns 400 shares.He just received one right for every share he owns.To purchase one new share he must submit five rights and $22.What is the value of one right?

A)$1.17
B)$1.33
C)$)91
D)$)84
E)$1.09

Question 69

Deep Hollow Oil issued 140,000 shares of stock last week,received $23.15 a share,and incurred direct costs of $287,000.The offer price was $29 a share.Within the first hour of trading,the stock price increased to $34 a share.What was the flotation cost as a percentage of the funds raised?

A)49.72%
B)53.49%
C)64.47%
D)54.55%
E)61.14%

Question 70

Max's Outlet stock currently sells for $43 a share.The firm has a rights offer outstanding for new equity shares with one right granted for each outstanding share.To purchase one new share,you must submit five rights and $38.What is the ex-rights stock price?

A)$42.17
B)$41.25
C)$42.45
D)$41.55
E)$41.97

Question 71

Kitchens and More is an all-equity firm with 125,000 shares of stock outstanding.The book value per share is $22,and the market-to-book ratio is 2.4.The current net income is $166,250.An expansion project will cost $1.08 million.Assume the price-earnings ratio remains constant.By what amount must the new project increase the net income for the stock price to remain constant?

A)$27,205
B)$31,750
C)$87,080
D)$112,400
E)$108,500

Question 72

Denver Mines is offering 50,000 shares of stock to the public in a best efforts cash offer.The offer price is $48 a share and the underwriter's spread is 9.3 percent.The administrative costs are estimated at $320,000.How much will Denver Mines net from this stock offering assuming 95 percent of the issue is sold?

A)$1,629,000
B)$1,646,000
C)$1,747,960
D)$1,705,450
E)$1,988,950

Question 73

Wood Cabinet's is an all-equity firm with 180,000 shares of stock outstanding that sell for $42 per share.The current net income is $320,400.An expansion project will cost $1.26 million.Assume the price-earnings ratio remains constant.By what amount must the new project increase the net income for the stock price to remain at $42?

A)$51,300
B)$57,600
C)$59,700
D)$62,100
E)$53,400

Question 74

Marti owns 300 shares of ABC stock with a current value of $26 a share.The firm just issued one right for each of the 14,200 shares outstanding.The purchase of a share through the offering requires four rights plus $23.Assume Marti decides to sell her rights.All else constant,Marti will have ________ in cash and stock valued at ________ once the rights offering is completed.

A)$240;$7,740
B)$180;$7,620
C)$380;$7,600
D)$60;$7,920
E)$220;$7,760

Question 75

DJ's stock currently sells for $32 a share.The firm has a rights offer outstanding for new equity shares with each current share receiving one right.To purchase one new share,you must submit two rights and $28.What is the ex-rights stock price?

A)$29.02
B)$31.64
C)$29.45
D)$30.67
E)$30.36