The flotation cost for a firm is computed as:
A. the arithmetic average of the flotation costs of both debt and equity.
B. the weighted average of the flotation costs associated with each form of financing.
C. the geometric average of the flotation costs
the weighted average of the flotation costs associated with each form of financing.
Jones & Co. is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is this type of funding called?
Venture Capital
What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?
Registration Statement
What is an issue of securities that is offered for sale to the general public on a direct cash basis called?
General Cash Offer
What is a seasoned equity offering?
sale of newly issued equity shares by a firm that is currently publicly owned
D.L. Jones & Co. recently went public. The firm received $20.80 a share on the entire offer of 25,000 shares. Keeser & Co. served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share. What type of underwriting was this?
Firm Commitment
The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period.
Quiet
Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following?
A. Green shoe provision
Green Shoe Provision
If an IPO is underpriced then the:
issuing firm receives less money than it probably should have.
With Dutch auction underwriting:
all successful bidders pay the same price.
Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering. The investment firm is serving as a(n):
underwriter.
What is a prospectus?
a document that describes the details of a proposed security offering along with relevant information about the issuer
Tony currently owns 12,000 shares of GL Tools. He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What
Rights Offer
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 t
Initial Public Offering
Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:
Tombstones
Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to:
Dilution
The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:
Gross Spread
Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares. Which one of the following terms best describes this
Best Efforts
Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell independent of these rights. Which one of the following terms applies to tomorrow in relation to this stock?
ex-rights date
Pearson Electric recently registered 250,000 shares of stock under SEC Rule 415. The firm plans to sell 150,000 shares this year and the remaining 100,000 shares next year. What type of registration was this?
Shelf Registration
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. Curr
oversubscription privilege
Direct business loans typically ranging from one to five years are called:
Term loans
Trevor is the CEO of Harvest Foods, which is a privately-held corporation. What is the first step he must take if he wishes to take Harvest Foods public?
gain board approval
Which one of the following statements concerning venture capitalists is correct?
A. Venture capitalists assume management responsibility for the firms they finance.
B. Exit strategy is a key consideration when selecting a venture capitalist.
C. Venture ca
Exit strategy is a key consideration when selecting a venture capitalist.
Miller & Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering?
Regulation A
Which one of the following is a preliminary prospectus?
A. tombstone
B. green shoe
C. registration statement
D. rights offer
E. red herring
Red Herring
What is the definition of a syndicate?
a group of underwriters sharing the risk of selling a new issue of securities
The date on which a shareholder is officially listed as the recipient of stock rights is called the:
holder-of-record date.
A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.
standby
The amount paid to an underwriter who participates in a standby underwriting agreement is called a(n):
standby fee.
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:
private placement.
Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed. She knows a venture capitalist who has offered to finance her business to the point
Seed Money
Which one of the following is probably the most successful means of finding venture capital?
A. internet searches
B. Dutch auctions
C. newspaper advertisements
D. personal contacts
E. personal letters to venture capital firms
Personal Contacts
Which one of the following statements concerning venture capital financing is correct?
A. Venture capitalists desire shares of common stock but avoid preferred stock.
B. Venture capital is relatively easy to obtain.
C. Venture capitalists rarely assume ac
Venture capitalists often require at least a forty percent equity position as a condition of financing.
Which of the following should be considered when selecting a venture capitalist?
I. level of involvement
II. past experiences
III. termination of funding
IV. financial strength
I, II, III, and IV
All new interstate security issues are regulated by the:
Securities Act of 1933.
The Securities and Exchange Commission:
is concerned only that an issue complies with all rules and regulations.
Underwriters generally:
receive less compensation under a competitive agreement than under a negotiated agreement.
With firm commitment underwriting, the issuing firm:
knows up-front the amount of money it will receive from the stock offering.
Which of the following have been offered as supporting arguments in favor of IPO underpricing?
I. Underpricing counteracts the "winner's curse".
II. Underpricing rewards institutional investors for sharing their opinions of a stock's market value.
III. Un
I, II, III, and IV
An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:
an IPO is undersubscribed.
When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:
decrease.
The total direct costs of underwriting an equity IPO:
can be as high as 25 percent for small issues.
Existing shareholders:
may or may not have a preemptive right to newly issued shares.
To purchase shares in a rights offering, a shareholder generally just needs to:
submit the required number of rights along with the subscription price.
The value of a right depends upon:
I. the number of rights required to purchase one new share.
II. the market price of the security.
III. the subscription price.
IV. the price-earnings ratio of the stock.
I, II, and III only
Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding. After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000. Which one of the following terms best d
percentage ownership dilution
Which one of the following statements concerning dilution is correct?
A. Dilution of percentage ownership occurs whenever an investor participates in a rights offer.
B. Market value dilution increases as the net present value of a project increases.
C. Ma
Market value dilution occurs when the net present value of a project is negative.
Which one of the following statements is correct concerning the issuance of long-term debt?
A. A direct long-term loan has to be registered with the SEC.
B. Direct placement debt tends to have more restrictive covenants than publicly issued debt.
C. Distr
Direct placement debt tends to have more restrictive covenants than publicly issued debt.
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:
2 years.
Aaron's Sailboats has decided to take the company public by offering a total of 120,000 shares of common stock to the public. The firm has hired an underwriter who arranges a full commitment underwriting and suggests an initial selling price of $25 a shar
Total cash received = 120,000 � $25 (1 - 0.07) = $2,790,000
Nelson Paints recently went public by offering 65,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $16 a share and the gross spread was $2. After completing th
Total cash received = 57,500 � ($16 - $2) = $805,000
Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs.
Total cash received = 1,800 � $20 = $36,000
Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids received are as follows: How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.
Total cash received = 1,200 � $10 = $12,000
Webster Electrics is offering 1,500 shares of stock in a Dutch auction. The bids include: How much cash will Webster Electrics receive from selling these shares? Ignore all transaction and flotation costs.
Total cash received = 1,500 � $22 = $33,000
You are a broker and have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. The client is allocated 500 shares
Total profit = [500 � ($23.50 - $25)] + [100 � ($29 - $25)] = -$350
Richard has an outstanding order with his stock broker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, a
Total profit = [1,000 � ($28.25 - $30)] + [400 � ($32 - $30)] + [100 � ($38.75 - $30)] = -$75
Two IPOs will commence trading next week. Scott places an order to buy 300 shares of IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B. Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve i
Scott's profit = 100 � ($22.70 - $20) = $270
Steve's profit = [100 � ($22.70 - $20)] + [300 � ($18.60 - $20)] = -$150
Difference = $270 - (-$150) = $420
Wear Ever is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $35 a share. It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue. The un
Total value of issue = ($12,600,000 + $340,000)/(1 - 0.07) = $13,913,978.49
Number of shares needed = $13,913,978.49/$35 = 397,542.24 shares
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 sp
Total value of issue = ($11,600,000 + $440,000)/(1 - 0.09) = $13,230,769
Number of shares needed = $13,230,769/$17.50 = 756,044 shares
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 wit
Total value of issue = ($7,500,000 + $125,000)/(1 - 0.075) = $8,243,243.24
Number of shares needed = $8,243,243.24/$14.50 = 568,500 shares
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 subscriptio
$3.5m/$18 = 194,444 shares
Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities. How many shares of stock will the firm need to sell through this offering if the current market price is
$14.2m/$31 = 458,064.52 shares
The Motor Plant wants to raise $21.4 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $11 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price
Number of rights issued = 1 � 2.6m = 2.6m; Number of shares needed = $21.4m/$11 = 1,945,454.55;
Rights needed for each new share = 2.6m/1,945,454.55 = 1.34 rights
Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the fir
Number of rights issued = 1 � 540,000 = 540,000; Number of shares needed = $8.6m/$33 = 260,606.06; Rights needed for each new share = 540,000/260,606.06 = 2.07 rights
Jefferson Refining is issuing a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $19 plus 3 rights. The current market price of the stock is $23 a share. What
Value per share excluding right = [$19 + (3 � $23)]/(1 + 3) = $22.00
Value of one right = $23 - $22.00 = $1.00
The stock of Cleaner Home Products is currently selling for $26.40 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered ar
Cost per share = [$25 + (5 � $26.40)]/(1 + 5) = $26.17
Value of right = $26.40 - $26.17 = $0.23
Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding. The offering consists of a total of 860,000 new shares. The current market price
Subscription price = $27.52m/860,000 shares = $32 a share
Number of shares issued = 1 � 5.16m = 5.16m Number of rights needed = 5.16m/860,000 = 6
You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $28. One right will be issued for each share of outstanding stock. This offering will provide
Number of shares owned = 0.08 � 3.5m = 280,000 shares
Number of shares offered = $9m/$28 = 321,428.57 shares
New ownership position = 280,000/(3.5m + 321,428.57) = 7.33 percent
Jennifer owns 14,000 shares of Calico Clothing. Currently, there are 1.6 million shares of stock outstanding. The company has just announced a rights offering whereby 200,000 shares are being offered for sale at a subscription price of $14 a share. The cu
New ownership percentage = 14,000/(1.6m + 0.2m) = 0.78 percent
Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets. The net present value of the project is $22,500. Equity shares will be issued as the sole means of financing the project. What will the new book valu
Current market value per share = $936,000/60,000 = $15.60
Number of new shares needed = $498,000/$15.60 = 31,923.08 shares
New book value per share = ($720,000 + $498,000)/(60,000 + 31,923.08) = $13.25
Wagner Trucking is considering investing in a new project that will cost $13 million and increase net income by 6.5 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.25 million shares of stock outstand
New earnings per share = ($1.82 � 1.25m � 1.065)/[1.25m + ($13m/$42)] = $1.55
The Huff Co. has just gone public. Under a firm commitment agreement, Huff received $21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per share, and the stock rose to $31.42 per share in the first few minutes of trading.
Net amount raised = 6m ($21.50) - $1,260,000 - $390,000 = $127,350,000
Total direct costs = $1,260,000 + ($23.65 - $21.50) (6m) = $14,160,000
Total indirect costs = $390,000 + ($31.42 - $23.65) (6m) = $47,010,000
Total costs = $14,160,000 + $47,010,000 =
Atlas Corp. wants to raise $4 million via a rights offering. The company currently has 450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $24 per share and will charge the company a 7 pe
Net proceeds to firm = $24 (1 - 0.07) = $22.32
New shares offered = $4m/$22.32 = 179,211.47 Number of rights needed per share = 450,000/179,211.47 = 2.511
PEx = [$24 + 2.511($40)]/(1 + 2.511) = $35.44
Right value = $40 - $35.44 = $4.56
Sale proceeds = $4.