Deck 20: Issuing Equity Securities to the Public

Question 1

An equity issue sold to the firm's existing stockholders is called:

A) a rights offer.
B) a general cash offer.
C) a private placement.
D) an underpriced issue.
E) an investment banker's issue.

Answer 1

a rights offer.

Question 2

A group of investment bankers who pool their efforts to underwrite a security are known as a/an:

A) amalgamate.
B) conglomerate.
C) greenshoe group.
D) syndicate.

Answer 2

syndicate.

Question 3

The six components that make up the total costs of a new issues are:

A) the spread, other direct expenses such as filing fees, indirect expenses such as management time, economies of scale, abnormal returns and the Green-Shoe option.
B) the discount, other direct expenses such as filing fees, indirect expenses such as management time, due diligence costs, abnormal returns and the Green-Shoe option.
C) the spread, other direct expenses such as filing fees, indirect expenses such as management time, abnormal returns, underpricing and the Green-Shoe option.
D) the spread, other direct expenses such as filing fees, economies of scale, due diligence costs, abnormal returns and underpricing.

Answer 3

the spread, other direct expenses such as filing fees, indirect expenses such as management time, abnormal returns, underpricing and the Green-Shoe option.

Question 4

Which of the following is not normally an example of the services offered by investment bankers?

A) Aiding in the sale of securities
B) Facilitating mergers
C) Acting as brokers to both individuals and institutional clients
D) Offering checking accounts to corporations

Question 5

During the OSC waiting period the potential issuing company can issue a preliminary prospectus which contains:

A) exactly the same information as the final prospectus except and indication of SEC approval.
B) exactly the same information as the final prospectus including red writing stating it is a red herring.
C) very limited financial information and red writing stating it is preliminary.
D) only a description of what the funds are to be used for.
E) information very similar to the final prospectus without a price nor with SEC approval.

Question 6

A firm commitment arrangement with an investment banker occurs when:

A) the syndicate is in place to handle the issue.
B) The spread between the buying and selling price is less than one percent.
C) The issue is solidly accepted in the market evidenced by a large price increase.
D) When the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.
E) When the investment banker sells as much of the security as the market can bear without a price decrease.

Question 7

In a best efforts offering the investment banker makes their money primarily by:

A) earning the spread between the buying and offering price.
B) earning a commission on each share sold.
C) earning the discount between the buying and offering price.
D) charging a flat fee for all services.

Question 8

Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally:

A) drop, perhaps because the new issue reflects management's view that common stock is currently overpriced.
B) remain about the same since an efficient market anticipates a new equity issue.
C) increase, perhaps because the issues are associated with positive NPV projects.
D) increase, because the market supply is always less than demand.
E) increase, because underwriters exercise their green shoe option.

Question 9

Regional Power wants to raise $10 million in new equity. The subscription price is $20. There are currently 3 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share?

A) 1
B) 3
C) 5
D) 6

Question 10

Companies use tombstone advertisements in the financial press to:

A) announce the death of the company.
B) announce the failure of a financial strategy.
C) announce the availability of a new issue of a corporate security.
D) notify the public of foreclosure.

Question 11

Empirical evidence suggests that new equity issues are generally:

A) priced efficiently by the market.
B) overpriced by investor excitement concerning a new issue.
C) overpriced resulting from SEC regulation.
D) underpriced, in part, to counteract the winner's curse.
E) underpriced resulting from SEC regulation.

Question 12

The winner's curse is used to describe:

A) the payoff you receive on lottery tickets.
B) getting a full allocation of undesirable IPO shares.
C) acquiring all underpriced IPO issues.
D) a fully underwritten issue.

Question 13

Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent.

A) best efforts; firm commitment
B) firm commitment; best efforts
C) general cash offer; best efforts
D) competitive offer; negotiated offer
E) seasoned; unseasoned

Question 14

A rights offering is:

A) the issuing of options on shares to the general public to acquire stock.
B) the issuing of an option directly to the shareholders to acquire stock.
C) the issuing of proxies which are used by shareholders to exercise their voting rights.
D) strictly a public market claim on the company which can be traded on an exchange.
E) the awarding of special perquisites to management.

Question 15

In comparison to debt issuance expenses the total direct costs of equity issues are:

A) considerably less because the equity market is more liquid than the debt market.
B) about the same once cost are amortized over the life of the instrument.
C) meaningless because debt can not have any indirect costs like equity can.
D) considerably greater because of the risk of market movement and price change is greater.

Question 16

Potential investors learn of the information concerning the firm and its new issue from the:

A) registration statement.
B) prospectus.
C) letter of commitment.
D) tombstone.
E) rights offering.

Question 17

A new public equity issue from a company with equity previously outstanding is called a/an:

A) initial public offering.
B) seasoned equity issue.
C) unseasoned equity issue.
D) private placement.
E) syndicate.

Question 18

An equity issue sold directly to the public is called:

A) a rights offer.
B) a general cash offer.
C) a restricted placement.
D) a fully funded sales.
E) a standard call issue.

Question 19

The order of listing of investment bankers on tombstone advertisements reflects their:

A) prestige.
B) ability to manage selling syndicates.
C) role as a firm commitment buyer.
D) role as a best efforts seller.

Question 20

Management's first step in any issue of securities to the public is:

A) to file a registration form with the OSC.
B) to distribute copies of the preliminary prospectus.
C) to distribute copies of the final prospectus.
D) to obtain approval from the board of directors.
E) to prepare the tombstone advertisement.

Question 21

Which of the following statements is true?

A) The subscription price is generally above the old stock price.
B) The subscription price is generally above the ex-rights price.
C) The subscription price is generally below the old stock price.
D) The ex-rights price is generally above the old stock price.

Question 22

If a shareholder or investor wants to acquire new stock under a rights plant they must:

A) acquire new stock in the market to get a controlling fraction of shares to be eligible for rights.
B) simply pay a registration fee and turn in the subscription price.
C) acquire the correct rights per share desired, turn the rights and the total subscription price into the subscription agent.
D) acquire the correct rights and wait for the company to send you the stock.

Question 23

For a particular stock the old stock price is $20, the ex-rights price is $15, and the number of rights needed to buy a new share is 2. Assuming everything else constant, the subscription price is:

A) $5.
B) $13.
C) $17.
D) $18.
E) $20.

Question 24

Assuming everything else is constant, if a stock's old price is $25 and the ex-rights or new stock price is $19, then the value of the right is:

A) $-6.
B) $6.
C) impossible to determine without the subscription price.
D) impossible to determine without the number of rights needed to buy one share.

Question 25

Assuming everything else is constant, when a stock goes ex-rights its price should:

A) decrease since the stockholder is losing an option.
B) increase since the corporation no longer has the right to force the stockholder to convert.
C) remain the same since an efficient market would anticipate this change.

Question 26

Assuming everything else is constant, if a stock's old price is $25 and the ex-rights or new stock price is $19, then the value of the right is:

A) $6.00.
B) -$6.00.
C) impossible to determine without the subscription price.
D) impossible to determine without the number of rights needed to buy one share.

Question 27

The market for venture capital refers to the:

A) private financial marketplace for servicing small, young firms.
B) bond markets.
C) market for selling rights to individuals who already own shares.
D) market for selling equity securities for firms with equity already outstanding.

Question 28

The Holyoke Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 20 rights at a subscription price of $6 per share.
Calculate the ex-rights price that would make a new stockholder indifferent between buying shares at the old stock price and exercising the rights or buying the shares ex-rights.

Question 29

To determine the value of a rights the stockholder needs to know what two pieces of information in addition to the current stock price:

A) the subscription price and the number of rights needed to acquire a new share.
B) the amount of new equity to be raised and the number of rights needed to acquire a new share.
C) the amount of new equity to be raised and standby fee.
D) the detachment date and the subscription price.

Question 30

The ZYX Corporation has a new rights offering, you can buy one share of stock with 3 rights and $20 per share. The stock is now selling ex-rights for $26. The value of the right and the price rights-on are:

A) $2.00, $22.00.
B) $6.00, $28.00.
C) $2.00, $28.00.
D) $6.00, $32.00.

Question 31

Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing entrepreneurs give:

A) a high interest rate debt instrument and control.
B) an equity position and usually board of director positions.
C) up the right to have an initial public offering.
D) control to a court appointed trustee.

Question 32

Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of $3. Prove that a stockholder with 100 shares would be indifferent between purchasing a new share for 10 rights at $3 or purchasing a new share for 20 rights at $6.

Question 33

The Holyoke Corporation has 120,000 shares outstanding with a current market price of $8.10 per share. The company needs to raise an additional $36,000 to finance new expenditures, and has decided on a rights issue. The issue will allow current stockholders to purchase one additional share for 20 rights at a subscription price of $6 per share.
If the Ex-Rights price were set at $7.90, would you as a potential new stockholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?

Question 34

If the subscription price for a new equity issue is $15, and the ex-rights price of the stock is $20.5, and the old stock price is $22.5, then the number of rights needed to purchase a new share is:

A) 2.0.
B) 2.5.
C) 2.75.
D) 5.5.
E) 7.5.

Question 35

The ZYX Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities. The current share price is $40 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be:

A) 0.10
B) 40.00.
C) 400.00.
D) 10.00.

Question 36

Smith in evaluating issuance costs from underwritten issues, rights issues with standby underwriting and a pure rights issues found that 90 percent of the issues are underwritten which was the most expensive method. This is done because:

A) investment bankers know more than CFOs and they may buy the issue at an agreed price and disburse the funds sooner.
B) investment bankers can increase the price received by increasing confidence in the issue, they will buy the issue at an agreed upon price and disburse the cash sooner.
C) investment bankers provide other services including price counsel, increase public confidence and provide funds to the issuer sooner.
D) investment bankers know how to price the issue, would not need to set as low as a price as the subscription price and provide price counsel.

Question 37

The Wordsmith Corporation has 10,000 shares outstanding at $30 each. They expect to raise $150,000 by a rights offering with a subscription price of $25 how many rights must you turn in to get a new share?

A) 2.00
B) 1.20
C) 0.60
D) 1.67

Question 38

A standby underwriting arrangement provides the:

A) company with methods to cancel the offering.
B) company with an alternate investment banker if there is conflict between the issuer and the agent.
C) investment banker with an oversubscription privilege to ensure profits are earned.
D) company with an alternative avenue of sale to ensure success of the rights offering.
E) investment bankers with an added syndication for the rights offering.

Question 39

The evidence on IPO sales is varied from issue to issue, but there are three common themes; underpricing, underperformance, and the reasons for going public. Explain these three themes.

Question 40

A shareholder who has rights is:

A) not always better off to exercise the rights.
B) not always better off to sell the rights into the market.
C) never better off to let them expire.
D) never in the same ownership position again with rights.

Question 41

Yoma Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price for the 125,00 new shares will be $40 per share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. What will the price per share be if all rights are exercised?

Question 42

Yoma Inc. is attempting to raise $5,000,000 in new equity with a rights offering. The subscription price will be $40 peer share. The stock currently sells for $50 per share and there are 250,000 shares outstanding. How many rights are needed to buy a new share?

Question 43

The Direct Interactive Publishing Company is planning to raise $200 million dollars in new capital. There are currently 50 million shares outstanding with an estimated market price of $60 each. The corporate officers are debating whether to use a rights offering (with or without a standby underwriting) or have the issue fully underwritten. The company is currently listed on a regional exchange and plans to list on a national exchange after the security issue. List and explain three advantages/disadvantages of each method.