Ch12 Verified Test Bank Raising Long-Term Financing

Chapter 12 – Raising long-term financing

MULTIPLE CHOICE

1. A security offering that raises capital for companies is called:

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

2. A bond sold by foreign corporations to US investors is called:

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking

LOC: understand shares and bonds

3. A bank that helps companies to acquire external capital is called:

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

4. Which of the following is not considered an advantage of going public?

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

5. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is 7.25%. If the offering price of the share is set at $11.80 per share, what is the per share proceeds that Bavarian will receive?

11.80(1 – 0.0725) = 10.95

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

6. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is $1.18 per share. If the offering price of the share is set at $11.80 per share, what is the percentage underwriting discount?

1.18/11.80 = 0.10

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

7. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is 7.25%. If the offering price of the share is set at $11.80 per share and the company is planning on issuing 1.1 million shares, what are the total proceeds that Bavarian will receive?

11.80(1 – 0.0725)1 100 000 = 12 038 950

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

8. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is $1.18. If the offering price of the share is set at $11.80 per share and the company is planning on issuing 1.1 million shares, what are the total proceeds that Bavarian will receive?

(11.80 – 1.18)1 100 000 = 11 682 000

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

9. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is 7.25%. If the offering price of the share is set at $11.80 per share, how many shares does the company have to issue to raise $70 million?

70 000 000/(11.80)(1 – 0.0725) = 6 395 906

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

10. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is $1.18. If the offering price of the share is set at $11.80 per share, how many shares does the company have to issue to raise $70 million?

70 000 000/(11.80 – 1.18) = 6 591 337

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

11. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is $1.18. Legal and other expenses total $1 350 000. If the offering price of the share is set at $11.80 per share, how many shares does the company have to issue to raise $70 million?

(70 000 000 + 1 350 000)/(11.80 – 1.18) = 6 718 456

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

12. Bavarian Brewhouse is planning on going public. Under the underwriting agreement, the underwriting discount is 7.25%. Legal and other expenses total $1 350 000. If the offering price of the share is set at $11.80 per share, how many shares does the company have to issue to raise $70 million?

(70 000 000 + 1 350 000)/[11.80(1 – 0.0725)] = 6 519 256

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 13 to 17.

Bavarian Brewhouse is planning an IPO. Under the terms of the IPO, Bavarian Brewhouse will issue 8.5 million shares at an offer price of $26 per share. The underwriter charges a 9% underwriting fee and direct costs are estimated to be $7 million. The share is expected to trade at $31 at the end of the first trading day.

13. What is the total amount of funds raised by Bavarian Brew through the IPO?

Net proceeds per share = 26(1 – 0.09) = 23.66

Net proceeds = 23.66 (8 500 000) – 7 000 000 = 194 110 000

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

14. What is the initial return earned by investors on this Bavarian Brewhouse IPO?

(31 – 26)/26 = 0.192

PTS: 1 DIF: E

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

15. What are the total underwriting fees for this Bavarian Brewhouse IPO?

(0.09)(26)(8 500 000) + 7 000 000 = 26 890 000M or roughly 26.9 million

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

16. Refer to Bavarian Brewhouse IPO. What are the total costs caused by underpricing?

5(8 000 000) = 42 500 000

PTS: 1 DIF: E

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

17. What are the total costs (underwriting and underpricing) of the Bavarian Brewhouse IPO?

26 890 000 + 42 500 000 = 69 390 000 or roughly 69.4

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

18. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise $11 million, what are the total dollar costs?

11 000 000/(1 – 0.09) – 11 000 000 = 1 087 912

PTS: 1 DIF: H

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

19. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise net $11 million, what is the total amount of money that needs to be raised?

11 000 000/(1 – 0.09) = 12 087 912

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 20 to 22.

Smith Enterprises recently conducted an IPO. In this, Smith received $14 per share from the underwriter, the offering price per share was $16 and the share price rose to $19 on the first day of trading.

20. Refer to Smith Enterprises. What is the underwriter’s discount?

2/16 = 0.125

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

21. Refer to Smith Enterprises. What is the first day return on an investment in the IPO?

3/16 = 0.1875

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire an understanding of risk and return

22. Refer to Smith Enterprises. What is the total percentage cost of the IPO (underwriting and underpricing)?

(19 – 14)/14 = 0.357

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 23 and 24.

Smith Enterprises wants to conduct an IPO. The offering price of the share is $15, the underwriter’s discount is 6%, and legal and other expenses are estimated to be $1 500 000.

23. Refer to Smith Enterprises 2. What are the net proceeds per share?

15(1 – 0.06) = 14.10

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

24. Refer to Smith Enterprises 2. If the company issues 1 000 000 shares, what are the net proceeds of the IPO?

1 000 000(1 – 0.06)(15) – 1 500 000 = 12 600 000

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

25. When a financial intermediary repackages loans and other traditional bank-based credit products into securities that can be sold to public investors, it is called:

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

26. In the US, companies that need to raise capital externally prefer to issue:

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

27. A bond sold in the US by a German-based company is an example of:

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking

LOC: understand shares and bonds

28. An investment banking company that generally occupies the lead or co-lead manager’s position in large security offerings is referred to as:

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

29. Lead Investment Banking Corp. is the lead underwriter for the equity issuance of NewCorp. Lead is responsible for 80% of the issue at a discount of $1.70 per share. If Lead is responsible for selling 1 300 000 shares then what is the total compensation to the underwriting syndicate?

1 300 000/0.8 = 1 625 000 × 1.7 = 2 762 500

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

30. In general, what is the determining factor in the underwriting spread charged by investment banks?

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

31. Which of the following should not be considered a benefit to a company that is issuing an IPO?

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

32. Which of the following factors might be most important for an entrepreneur considering an IPO in an industry where a company’s strategy is its most important asset?

Strategy can be interpreted as withholding private information. Therefore, disclosure is the most onerous choice.

PTS: 1 DIF: H

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

33. If Company X intends to distribute shares of its wholly owned subsidiary to its current shareholders in an effort to make the subsidiary a publicly traded company, then Company X is contemplating:

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

34. If you are anticipating purchasing shares of companies that will be offering shares to the public for the first time, your most profitable strategy for purchasing those shares will be:

Note: buying options on pre-IPO shares is not possible

PTS: 1 DIF: H

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

35. If you were to purchase the shares of a company one month after its IPO, buy the shares of a comparably sized (matched) company on the same day and then hold both shares for five years, you would expect:

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire an understanding of risk and return

36. If you are an investor who owns shares in a company that you believe is about to issue additional equity, then you would expect the price of your shares to:

REF: 12.4 Seasoned Equity Offerings NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

37. If a company is going to issue additional equity by offering existing shareholders the right, or the ability to sell the right, to purchase the offering, then that is called:

REF: 12.4 Seasoned Equity Offerings NAT: Reflective thinking

LOC: understand shares and bonds

38. If a company sold private placement securities to a __________, the company would mostly likely get in trouble for selling to this investor?

REF: 12.4 Seasoned Equity Offerings NAT: Reflective thinking

LOC: understand shares and bonds

39. A non-US-based company would like to issue a form of its ordinary equity in the USA. A current method for doing so would be:

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

40. Most of the short-term capital gains of share privatisation IPOs are captured by:

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

41. You purchase shares of a company that recently executed an IPO at the post-offering market price of $32 per share, and you hold the shares for one year. You then sell your shares for $36 per share. The company does not pay dividends, and you are not subject to capital gains taxation. What net return did you earn on your share investment?

(36 – 32)/32 = 0.1250

PTS: 1 DIF: E

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Analytic skills

LOC: acquire an understanding of risk and return

42. You purchase shares of a company that recently executed an IPO at the post-offering market price of $50 per share, and you hold the shares for one year. You then sell your shares for $52.50 per share. The company does not pay dividends, and you are not subject to capital gains taxation. What net return did you earn on your share investment?

(52.50 – 50)/50 = 0.0500

PTS: 1 DIF: E

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Analytic skills

LOC: acquire an understanding of risk and return

Use the following information to answer questions 43 to 45.

Sea Grove Beach Corporation is executing an initial public offering. The company will sell 12 million shares at an offer price of $20 per share, and the underwriter will charge a 7% underwriting fee. The shares are expected to sell for $27.50 per share by the end of the first day’s trading. Assuming this IPO is executed as expected.

43. Refer to Sea Grove Beach Corporation. What is the initial return earned by investors’ allocated shares in the IPO?

(27.50 – 20)/20 = 0.375

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire an understanding of risk and return

44. How much will Sea Grove Beach Corporation receive from the offering?

12 × 20 × 0.93 = 223.20 ===> 223.2 million

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

45. What is the total cost (underwriting fee and underpricing) of this issue to Sea Grove Beach Corporation?

12 × 27.50 – 12 × 20 × 0.93 = 106.80 ===> 106.8 million

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

46. Montigo Magic Petroleum Corporation is interested in selling ordinary shares to raise capital for a new oil well. The company has contacted First Bank of Manhattan, a large underwriting company, which believes that the share can be sold for $40 per share. The underwriter also believes, after careful research, that its administrative costs will be 2.75% of the sale price, and its selling costs will be 2.40% of the sale price. If the underwriter requires a profit equal to 1.25% of the sale price, how much will the spread have to be in dollars to cover the underwriter’s costs and profit?

0.0275 + 0.024 + 0.0125 = 0.064

40 × 0.064 = 2.56

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 47 and 48.

Sea Grove Beach Company needs to raise $30 million of new equity capital. Its ordinary shares are currently selling for $44 per share. The investment bankers require an underwriting spread of 7% of the offering price, and the company’s legal, accounting and printing expenses associated with the seasoned offering are estimated to be $500 000.

47. Refer to Sea Grove Beach Company. How many new shares must the company sell to net $30 million?

30 000 000 = x × 0.93 × 44 – 500 000

x = 745 357

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

48. What is the net price per share that Sea Grove Beach Company will receive from this offering?

0.07 × 44 = 3.08

Net = 44 – 3.08 = 40.92

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 49 and 50.

Panama City Beach Company needs to raise $60 million of new equity capital. Its ordinary shares are currently selling for $70 per share. The investment bankers require an underwriting spread of 5% of the offering price, and the company’s legal, accounting and printing expenses associated with the seasoned offering are estimated to be $200 000.

49. What is the net price per share that Panama City Beach Company will receive from this offering?

0.05 × 70 = 3.50

Net = 70 – 3.50 = 66.50

PTS: 1 DIF: H

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

50. Refer to Panama City Beach Company. How many shares must be sold to net $60 million?

0.05 × 70 = 3.50

Net = 70 – 3.50 = 66.50

62 000 000/66.50 = 905 263

PTS: 1 DIF: H

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 51 and 52.

Brooks Corporation has just received $40 million in net proceeds from a seasoned offering. The offering was underwritten by ABC Investments, an investment bank that focuses on small company offerings. For the offering, 8 million shares were issued and the underwriting expenses for ABC Investments were $800 000.

51. Refer to Brooks Corporation. For ABC Investments to make a profit on this offering, what is the minimum price it must sell each share for on the secondary market?

Breakeven = 8 × x – 40 – 0.8 = 0

x = 5.10

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

52. Refer to Brooks Corporation. ABC Investments is able to sell shares on the secondary market at $6 each. What is the profit for ABC Investments for underwriting this seasoned offering?

Profit = 8 × 6 – 40 – 0.8 = $7.2

PTS: 1 DIF: M

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 53 and 54.

Three companies went public last month with IPOs. The offer price and first day closing price are shown below for the three companies. An investor was able to purchase 100 shares of each company at the offer price and then flip the shares at the end of the day for the full return.

53. Refer to Flipping shares 1. What was the total dollar value of this investment at the end of the first day? (Ignore any tax implications for this question.)

A = 100 × 12.50 = 1250

B = 100 × 9 = 9600

C = 100 × 55 = 5500

Total = $16 350

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

54. Refer to Flipping shares 1. What was the return on this investment at the end of the first day? (Ignore any tax implications.)

Avg. return = (1/13) × (0.25) + (8/13) × (0.2) + (4/13) × (0.375) = 0.258 

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire an understanding of risk and return

Use the following information to answer questions 55 and 56.

Three companies went public last month with initial public offerings (IPO). An investor was able to purchase shares of each company at the offer price and then ‘flip’ the shares at the end of the day for the full return. The shares of each company sold for a $20 offer price. The number of shares purchased and the first day return are shown below.

55. Refer to Flipping shares 2. What was the return on this investment at the end of the first day? (Ignore any tax implications.)

50/200 × 0.2 + 75/200 × 0.12 + 75/200 × 0.05 = 0.1138

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire an understanding of risk and return

56. Refer to Flipping shares 2. What was the dollar value of the IPO investment after the first day? (Ignore any tax implications.)

50/200 × 0.2 + 75/200 × 0.12 + 75/200 × 0.05 = 0.1138

20 × (50 + 75 + 75) × (1.1138) = 4455

PTS: 1 DIF: H

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

Use the following information to answer questions 57 to 60.

The managers of ABC Logistics (ABC) have decided to expand the company’s operations into a few new markets. To fund this opportunity, ABC has decided to launch a seasoned equity offering to raise new equity capital. ABC currently has 12 million shares outstanding, and yesterday’s closing market price was $40 per ABC share. The company plans to sell 3 million newly issued shares in its seasoned offering. The investment banking company of Armstrong Incorporated has agreed to underwrite the new share issue for a 4% discount from the offering price, which ABC and Armstrong have agreed should be $0.50 per share lower than ABC’s closing price the day before the offering is sold.

57. If ABC’s share price closes at $39 the day before the offering, what will be the net proceeds for ABC from this offering?

3 × 0.96 × 38.50 = 110.88 

PTS: 1 DIF: M

REF: 12.4 Seasoned Equity Offerings NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

58. If ABC’s share price closes at $39 the day before the offering, calculate the return earned by ABC’s existing shareholders on their shares from the time before the seasoned offering was announced through the time it was actually sold for $38.50 per share.

(38.50 – 40)/40 = –0.0375

PTS: 1 DIF: M

REF: 12.4 Seasoned Equity Offerings NAT: Analytic skills

LOC: acquire an understanding of risk and return

59. If ABC’s share price closes at $39 the day before the offering, calculate the total cost of the seasoned equity offering to ABC’s existing shareholders as a percentage of the offering proceeds.

Proceeds from offer = 3 × 0.96 × 38.50= 110.88

Market value of company’s shares after offering = 15 × 38.50 = 577.50

Wealth loss for existing holders = 12 × 1.50 = 18

Underwriting fee = 0.04 × 3 × 38.50 = 4.62

Wealth loss + Underwriting fee = 22.62

Cost of issue = 22.62/110.88 = 0.2040

PTS: 1 DIF: H

REF: 12.4 Seasoned Equity Offerings NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

60. If ABC’s share price closes at $46.75 the day before the offering, calculate the total cost of the seasoned equity offering to ABC’s existing shareholders as a percentage of the offering proceeds.

Proceeds from offer = 5 × 0.95 × 46= 218.50

Market value of company’s shares after offering = 20 × 46 = 920

Wealth loss for existing holders = 15 × 4 = 60

Underwriting fee = 0.05 × 5 × 46 = 11.50

Wealth loss + Underwriting fee = 71.50

Cost of issue = 71.50/218.50 = 0.3272

PTS: 1 DIF: H

REF: 12.4 Seasoned Equity Offerings NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

61. What is the term for the repackaging of loans and other traditional bank-based credit products into securities that can be sold to public investors?

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

62. Which statement is false regarding the issuance of securities by investment banks?

REF: 12.2 Investment Banking and the Public Sale of Securities

NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

63. Which of the following is not a benefit of going public for a private company?

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

64. Which of the following key financial decisions depends upon the capital budgeting process of a particular company?

REF: 12.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

65. Which of the following statements is true of Rule 144A?

REF: 12.4 Seasoned Equity Offerings NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

66. Which of the following statements concerning non-US IPOs is false?

REF: 12.3The Market for Initial Public Offerings (IPOs) NAT: Reflective thinking

LOC: acquire knowledge of financial markets and interest rates

67. Louis International needs $100 million in new equity capital; currently shares are trading at $40 per share. Morgan Steely (the investment banker) requires a 6% spread of the offer price, which will be $38 per share, and is fully subscribed at that price. The fixed costs (e.g. legal, accounting) are estimated at $250 000. What is the net price per share the company will receive?

0.94 × 38 = 35.72

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

68. Roxy International needs $200 million in new equity capital; currently shares are trading at $50 per share. Morgan Steely (the investment banker) requires a 6% spread of the offer price, which will be $45 per share, and is fully subscribed at that price. The fixed costs (e.g. legal, accounting) are estimated at $750 000. What is the net price per share the company will receive?

0.94 × 45 = 42.3

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

69. Emma International needs $250 million in new equity capital; currently shares are trading at $20 per share. Morgan Steely (the investment banker) requires a 4% spread of the offer price, which will be $19 per share, and is fully subscribed at that price. The fixed costs (e.g. legal, accounting) are estimated at $750 000. What is the net price per share the company will receive?

0.96 × 19 = 18.24

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

70. Louis International needs $100 million in new equity capital; currently shares are trading at $40 per share. Morgan Steely (the investment banker) requires a 6% spread of the offer price, which will be $38 per share, and is fully subscribed at that price. The fixed costs (e.g. legal, accounting) are estimated at $250 000. How many shares must be sold to reach $100 million? (Round to the nearest dollar.)

100 000 000/35.72 = 2 799 552

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

71. Roxy International needs $200 million in new equity capital; currently shares are trading at $50 per share. Morgan Steely (the investment banker) requires a 6% spread of the offer price, which will be $45 per share, and is fully subscribed at that price. The fixed costs (e.g. legal, accounting) are estimated at $750 000. How many shares must be sold to reach $200 million? (Round to the nearest dollar.)

200 000 000/42.30 = 4 728 132

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

72. Emma International needs $250 million in new equity capital; currently shares are trading at $20 per share. Morgan Steely (the investment banker) requires a 4% spread of the offer price, which will be $19 per share, and is fully subscribed at that price. The fixed costs (e.g. legal, accounting) are estimated at $750 000. How many shares must be sold to reach $250 million? (Round to the nearest dollar.)

250 000 000/18.24 = 13 706 140

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

73. Louis International recently conducted an IPO and received $22 per share. The offer price was $25 per share, and the share price rose to $35 per share. What was the underwriter discount?

(25 – 22)/25 = 0.12

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

74. Emma International recently conducted an IPO and received $52 per share. The offer price was $54 per share, and the share price rose to $59 per share. What was the underwriter discount?

(54 – 52)/54 = 0.037

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

75. Roxy International recently conducted an IPO and received $32 per share. The offer price was $34 per share, and the share price rose to $35 per share. What was the underwriter discount?

(34 – 32)/34 = 0.0588

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

76. Louis International recently conducted an IPO and received $22 per share. The offer price was $25 per share, and the share price rose to $35 per share. What was the one day return?

(35 – 22)/35 = 0.3714

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

77. Roxy International recently conducted an IPO and received $32 per share. The offer price was $34 per share, and the share price rose to $35 per share. What was the one day return?

(35 – 34)/34 = 0.0294

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

78. Emma International recently conducted an IPO and received $52 per share. The offer price was $54 per share, and the share price rose to $59 per share. What was the one day return?

(59 – 54)/54 = 0.9259

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

79. Louis International recently conducted an IPO and received $22 per share. The offer price was $25 per share, and the share price rose to $35 per share. What was the total percentage cost of the IPO?

(35 – 22)/22 = 0.5909

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

80. Roxy International recently conducted an IPO and received $32 per share. The offer price was $34 per share, and the share price rose to $35 per share. What was the total percentage cost of the IPO?

(35 – 32)/32 = 0.09375

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

81. Emma International recently conducted an IPO and received $52 per share. The offer price was $54 per share, and the share price rose to $59 per share. What was the total percentage cost of the IPO?

(59 – 52)/52 = 0.1346

PTS: 1 DIF: M

REF: 12.3 The Market for Initial Public Offerings (IPOs) NAT: Analytic skills

LOC: acquire knowledge of financial markets and interest rates

SHORT ANSWER

1. What is the preferred source of financing for companies?

PTS: 1 DIF: E

REF: 12.1 The Basic Choices in Long-Term Financing

2. What is the function of financial intermediaries?

PTS: 1 DIF: E

REF: 12.1 The Basic Choices in Long-Term Financing

3. Why do companies least prefer to raise ordinary equity?

PTS: 1 DIF: E

REF: 12.1 The Basic Choices in Long-Term Financing

4. What is the definition of bulge bracket?

PTS: 1 DIF: E

REF: 12.2 Investment Banking and the Public Sale of Securities

5. Distinguish between an equity carve-out and a spin-off.

PTS: 1 DIF: E

REF: 12.3 The Market for Initial Public Offerings (IPOs)

6. Indicate three benefits of having publicly traded shares (IPO).

PTS: 1 DIF: E

REF: 12.3 The Market for Initial Public Offerings (IPO)