F15

Plasti-tech Inc. has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share. The underwriter then sold them to the public for $22 each. Plasti-tech also encountered $0.5 million in administrative fees. Soon after the issue, the stock price rose to $25. Find Plasti-tech Inc.'s total cost of this issue.

$10.5 million.

An underwriter issues a firm commitment to sell 1 million shares at $20 each, including a $2 spread. How much does the issuing firm receive if only 500,000 shares are sold?

$18 million

What will be the share price after the rights issue?

Award: 2.00 points What will be the share price after the rights issue? The current value of the firm is $40 million, and there are 1 million shares outstanding. When the rights are exercised, the firm will raise $4 million, and total value will increase to $44 million. Share outstanding will increased to 2.2 million. Price per share will be $22/2.2 = $10

Sometimes new issues are dramatically underpriced

True

A general cash offer is necessary when issuing a private placement.

False

A prospectus certificate indicates equity ownership in a firm.

False

Bought deals are more common in the U.S. than in Canada.

False

What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm?

$6 million

A firm decides to raise $1 million with a rights issue. The issue will be based on a subscription price of $20, with 50,000 shares to be issued. Assume the shares outstanding currently trade for $35. Calculate the Ex-rights price of the company stock.

A Ex rights price = 1/(N + 1) × (N × initial stock price + subscription price) The expected ex rights price is(4 × $35 + $20)/5 = $160/5= $32.

What is venture capital?

A unique service that is provided to firms by a venture capitalist.

What is the expected stock price after the rights are issued?

After the issue there are 6.25 million shares. The total value of the firm is $30 million plus $6.25 million. The new share price is $36.25 million/$6.25 million shares = $5.80 per share.

Detail the difference between a prospectus and a red herring prospectus?

At the same time that the issuing firm and its investment bank prepare the registration statement to be filed with the Securities Commission, they must also prepare a preliminary version of the public offering's prospectus called the red herring prospectus. The red herring prospectus is similar to the registration statement, but is distributed to potential equity buyers. Once the Securities Commission registers the issue, the red herring prospectus is replaced with the official or final prospectus.

Venture capital is traded for an equity interest rather than a debt interest in the new firm.

True

Stock that is sold through a rights issue:

is limited for sale to existing shareholders.

When underwriters are unsure of the demand for a new offering, they:

undertake the issue on a best efforts basis.

If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share, the spread per share is:

$2.00.

What was the market price of a share of stock before a rights issue if one share of new stock could be purchased at $100 for every four shares that were previously owned? The stock price after the successful rights issue was $200.

$225

If an investor can earn 20% on underpriced IPOs, but will lose 10% on overpriced IPOs in which he was awarded $2,000 worth of the overpriced issue, how much of the underpriced issue must he be awarded in order to gain $500?

$3,500

A firm has just issued $250 million of equity, which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue.(Use value in millions)

$30.0 million

A South African group needs to raise $4 million to pay for its diamonds in the near future. It will raise the funds by offering rights of 400,000 each, and which entitles the owner to buy one new share. The company currently has one million shares outstanding priced at $40 each. What must be the subscription price on the rights the company plans to offer?

$4 million/400,000 = $20.

An investor exercises her right to buy one additional share at $20 for every five shares held. How much should each share be worth after the rights issue if they previously sold for $50 each?

$45.00

A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own. What should be the stock price after the rights issue if the stock sells for $80 per share before the issue?

$70.00

How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees.

$8,490,000

What would you expect to be the market price of stock after a sold-out rights issue if each existing shareholder purchases one new share at $60 for each three that they currently hold and the current share price is $100?

$90.00

Underwriters are commercial banking firms that act as financial midwives to a new issue.

False

Underwriters are guaranteed to profit by at least the amount of the spread.

False

Underwriters typically try to overprice the initial public offering.

False

What risk is assumed by an underwriter when issuing a firm commitment to a corporation? Will the corporation be better off with the firm commitment?

The firm commitment obligates the underwriter to purchase the entire issue from the firm at the agreed price. The responsibility for selling the issue then lies entirely with the underwriter; the firm has already received its funds. Is this method a sure gain to the firm? Not necessarily, since underwriters should be assumed rational. It would seem logical that the underwriter will increase the spread in response for taking on the added risk. Further, the underwriter may be inclined to set the price to the public lower than it would have been on a best efforts basis. If there is more underpricing with a firm commitment, then the firm might have been better off to accept a best efforts bid from the underwriter. Finally, the underwriter takes on conceivably even more risk when there is a syndication, since the price to the public cannot be reduced unless the syndication is broken. It is unclear whether the firm receives more funds with a firm commitment.

How do firms make initial public offerings and what are the costs of such offerings?

The initial public offering is the first sale of shares in a general offering to investors. The sale of the securities is usually managed by an underwriting firm which buys the shares from the company and resells them to the public. The underwriter helps to prepare a prospectus, which describes the company and its prospects. The costs of an IPO include direct costs such as legal and administrative fees, as well as the underwriting spread-the difference between the price the underwriter pays to acquire the shares from the firm and the price the public pays the underwriter for those shares. Another major implicit cost is the underpricing of the issue-that is, shares are typically sold to the public somewhat below the true value of the security. This discount is reflected in abnormally high average returns to new issues on the first day of trading.

Which of the following is correct if an underwriter is selling stock to the public at $40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold, and the issuing firm receives $111 million from the underwriter?

The issue included 3 million shares.

Midlands marketing research cost is $300 million. The firm issues an additional $50 million of stock, but as a result the stock price falls by 2%. What is the cost of the price drop to existing shareholders as a fraction of the funds raised?

The lost value to the original shareholders is 2% of $300 million = $6 million. This is 6% of the value of the funds raised.

What is the total amount of new money raised?

The number of new shares is 5 million/2 = 2.5 million. Each share is sold for $2.50, so new money raised is $6.25 million.

Discuss the potential agency issue with managers' issuance of new equity.

The potential agency issue provides a different rationale for the observed decrease in share price that occurs when a new equity issue is announced. Originally, this decrease was explained in terms of supply and demand; the increased supply of shares will result in a lower equilibrium value for each share in the market. However, when it is remembered that managers are privy to all information concerning the use for newly acquired funds and the returns that will be generated, it is speculated that managers would not be as likely to issue equity unless the equity is overpriced. Thus, the mere announcement of a new equity issue signals to prospective investors that the issue is overpriced, and they will accordingly reduce the value of shares in the market to compensate. This explanation, then, does not rely on supply and demand to explain the reduction in value.

Issue costs for debt are considerably lower than issue costs for equity securities.

True

One advantage to private placements is the low cost associated with its issue.

True

Private placement contracts may be custom tailored for each individual investor.

True

Privately placed securities may be difficult to remarket.

True

The evidence indicates that stock prices decrease by approximately 3%, on average, when new equity issues are announced.

True

The winner's curse theory assumes that the informed investor receives the majority of the underpriced IPOs.

True

Typical firms that engage in private placements usually have a low degree of risk.

True

Underwriters usually play a triple role-first providing the company with procedural and financial advice, then buying the stock, and finally reselling it to the public.

True

When securities are issued under a firm commitment, the underwriter bears the risk of low sales.

True

Studies have shown that, on average, new security issues are:

Underpriced.

Why is it likely that venture capital is disbursed in installments, rather than issuing all necessary funds at once?

Venture capitalists are unlikely to issue all necessary funds at once for at least two reasons. First of all, the majority of individual projects that receive venture capital funding do not succeed. Thus, it is more likely for the venture capitalist to be able to cut losses earlier if fewer funds have been distributed. The next reason relates to potential agency problems. Specifically, the entrepreneur may feel fewer ties to the venture capitalist if all funds are distributed at the beginning of the project. This may even cause the entrepreneur-whether consciously or subconsciously-to be less cautious than is optimal. Finally, the venture capitalist may receive better accountability for the spending of the funds if they are disbursed in installments.

Studies show that recent returns on venture capital investments have been:

nearly 20%, on average.

Which of the following would not be included among benefits of shelf registration?

no additional registration necessary for five years

Private placement of securities involves:

non-public sale of securities to a limited number of investors.

Which of the following statements is incorrect concerning private placements?

only a small amount of corporate debt is financed in this manner.

Securities exchanges will not permit securities to be sold:

prior to approval of the registration statements.

Second-stage financing occurs:

prior to the initial public offering.

Which of the following methods may be particularly cost effective to smaller issuers of securities?

private placement

Prospective investors are advised of a stock's potential risks by the:

prospectus.

Provincial securities regulations exist in order to:

protect investors from deceptive firms.

Firms go public to:

raise additional capital.

The primary reason for an underwriters' syndication is to:

reduce the risk of selling a large issue.

A private placement avoids which of the following costs?

registration with the SEC

Which of the following is least likely to explain why entrepreneurs contribute their personal funds to start-up projects? Their contribution:

repays debt held by the venture capitalist.

In regards to new issues of common stock, economists have found that the announcement of a new issue:

results in the stock price falling.

When underwriters issue securities on a best efforts basis, they:

sell as much of the stock as possible, but with no guarantee.

One strategy that appears to be used by certain underwriters to reduce the risk of marketing a stock is to:

set the initial stock price below its true value.

Shelf registration in the U.S. was enacted to allow:

single registration of limited future financing plans.

Private placement of debt securities occurs more frequently in:

smaller-sized firms.

The "winner's curse" is a reminder that:

successful bidders may often overpay for an object.

A secondary offering IPO occurs when:

the company's founders or venture capitalists market a portion of their shares.

All of the following are advantages of shelf registration except:

the issuing firm can avoid competition from underwriters.

Some investors believe that the decision by management to issue equity as opposed to issuing debt is a signal that:

the stock is currently overvalued.

Currently, M & S Inc. has 2 million shares outstanding selling at $70 a share. A rights issue will be made that allows 1 share to be purchased for every 5 shares currently held by stockholders for $40 each. Which of the following is true?

the stock price will fall to $65.

Which of the following is correct for stock issued under a firm commitment where the underwriter is to receive an 8% spread?

the underwriter may suffer a loss on the issue.

The most likely reason that underpricing of new issues occurs more frequently than overpricing is the:

underwriters' desire to reduce the risk of a firm commitment.

The direct expense of a stock issue includes the:

underwriting spread and other expenses.

Those subject to the winner's curse are:

uninformed investors.

Money that is offered to finance a new business is known as:

venture capital.

If a corporation's management, with its superior knowledge of proposed investments, considers a security issue to be underpriced, it may react by:

withdrawing the issue.

The Ajax Corporation has received a firm commitment from its underwriter to purchase 1 million shares of stock that will be marketed to the general public at $23 per share. The underwriter's spread is $1.90 per share and the issuing firm will pay an additional $1.65 million in legal and other fees. The issue was fully sold on the first day and the stock closed at $27.50 on that day. Calculate both the direct expense of issuance and the indirect (i.e., underpricing) expense. What % of the market value of the shares is represented by these costs?

Underwriter's spread 1 million x $1.90 = $1,900,000 legal & other expense = 1,650,000 Total Direct Expense = $ 3,550,000 Underpricing1 million x $4.50 = $4,500,000 Therefore, total issuance costs = $8,050,000

MaDonna's has just completed an initial public offering. The firms sold 6 million shares at an offer price of $16 per share. The underwriting spread was $.50 per share. The price of the stock closed at $22 per share at the end of the first day of trading. The firm incurred $200,000 in legal, administrative, and other costs. What were flotation costs as a fraction of funds raised?

Underwriting costs for MaDonna's: Underwriting spread: $.50 x $6 million = $3 million Underpricing: $3.00 x 6 million = 18 million Other direct costs: = .2 milllion Total = $21.2 million Funds raised = $16 x 6 million = $96 million Flotation cost/funds raised = 21.2/96 = 22%

What are the advantages and disadvantages to a new or small firm of getting capital funding from a venture capital firm?

Venture capital firms receive unsolicited proposals for funding from new and small firms. The venture capital firms reject the majority of these requests. Venture capital firms look for two things in making their decisions to invest in a firm. The first is a high return. Venture capital firms are willing to invest in high-risk new and small firms. However, they require high levels of returns to take on these risks. The second is an easy exit. Venture capital firms realize a profit on their investments by eventually selling their firm interests. They want a quick and easy exit opportunity when it comes time to sell. Venture capital firms provide equity funds to new, unproven, and young firms. This willingness separates venture capital firms from commercial banks and investment firms, which prefer to invest in existing, financially secure businesses.

Companies making smaller security issues may prefer to issue them through:

a private placement because it is cheaper than a public issue.

Before a stock can be sold in Canada it must:

be Approved by the applicable Provincial Commission.

Which of the following security issues might have the lowest direct costs?

bonds

Ying Corporation, Inc. plans to issue 10 million additional shares of its stock. The investment bank recommends net proceeds of $19.90 per share and will charge an underwriter's spread of 5.5% of the gross proceeds. In addition, Ying Corporation must pay $2 million in legal and other administrative expenses. Calculate the gross proceeds and the total funds received by Ying Corporation from the sale of the 10 million shares of stock.

10,000,000 x $19.90 = $199,000,000 = Total funds received by Howett PockettLegal and other admin expenses per share = $2,000,000/10,000,000 = $0.20Underwriter's spread + Net proceeds = Gross proceeds((.055 x Gross proceeds) + $0.20) + $19.90 = Gross proceeds => Gross proceeds - (.055 x Gross proceeds) = 19.90 + $0.20 => Gross proceeds = $20.10/(1 - .055) = $21.27 Gross proceeds = $21.27 x 10,000,000 = $212,700,000

When issuing new stock, a firm received $50 million while the underwriting spread was $4 million and total direct expenses were $6 million. The %age of the proceeds absorbed by direct expenses was:

10.71%.

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $34 each to an underwriter and the underwriter sells the shares at $40 each?

15.83%

Tetus Corporation went public with an initial public offering of 2.5 million shares of stock. The underwriter used a firm commitment offering in which the net proceeds was $8.05 per share and the underwriter's spread was 8% of the gross proceeds. Tetus also paid legal and other administrative costs of $250,000 for the IPO. Calculate the gross proceeds and the total funds received from the sale of the 2.5 million shares of stock.

2,500,000 x $8.05 = $20,125,000 = Total funds receivedUnderwriter's spread + Net proceeds = Gross proceeds(.08 x Gross proceeds) + $8.05 = Gross proceeds = > Gross proceeds - (.08 x Gross proceeds) = $8.05Gross proceeds = $8.05/(1 - .08) = $8.75 x 2,500,000 = $21,875,000

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. In %age terms, how much market value is absorbed by the total cost (direct expenses plus underpricing cost)?

43.33%

What %age of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

7.75%

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. What is the cost of underpricing?

81 million

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each. By the end of the first day's trading, the issuing company's stock price had risen to $70. What is the total cost (direct expenses plus underpricing cost)?

91 million

The costs of underpricing an equity issue are borne mostly by the underwriter.

False

Firms are attracted to the private placement of debt because of the lower average interest rates.

False

IPOs are generally overpriced in order to raise large amounts of cash.

False

Rights offerings are gaining in popularity in Canada although they are declining on a foreign basis.

False

Stanfield Inc. needs to raise $12.5 million in capital. The company's investment bankers recommend an offer price (or gross proceeds) of $15 per share; and Stanfield will receive $14 per share. How many shares of stock will Don's need to sell in order to receive the $12.5 million they need? Calculate the underwriter's spread on the issue.

Funds needed = $12.5 million = $14 x Number of shares sold Number of shares sold = $12.5 million/$14 = 892,857 shares Underwriter's spread = Gross proceeds - Net proceeds= $15 - $14 = $1

My investment record indicates the following sample of IPO's

IPO Initial Return A 8% B 16

What are the net proceeds, gross proceeds and underwriter's spread? How does each affect the funds received by a public firm when debt or equity securities are issued?

In a firm commitment underwriting, the investment bank purchases stock from the issuing firm for a guaranteed price (called the net proceeds) and resells them to investors at a higher price (called the gross proceeds). The difference between the gross proceeds and the net proceeds on an issue (called the underwriter's spread) is compensation for the expenses and risks incurred by the investment bank.

Why do provincial securities commissions deem it necessary to require the issuance of a prospectus prior to security issuance?

In the case of newly issued securities being purchased by experienced financial analysts, it is doubtful that a prospectus would have been necessary. However, it is not always the case that experienced financiers are purchasing the issue, and the commissions therefore feels an obligation to protect an unsuspecting public from potentially unscrupulous firms. The prospectus informs the prospective investor that the regulatory agency is reviewing the firm's upcoming issue-not to issue a stamp of approval to the project itself-but rather to verify that the firm has complied with all legal requirements of disclosure. The prospectus will further attempt to warn the investor of the investment's risk. More specifically, if the prospectus is taken at face value, it may prove difficult to sell any of the new issue. The issue boils down to the observation that in the complicated world of finance, it may be difficult for prospective investors to evaluate the riskiness of a project for themselves. Thus, the prospectus attempts to inform them of potential downfalls associated with this investment.

Xerat Corporation issued 5 million shares of new stock. The offer price on the stock was $12.50 per share and the company received a total of $57.5 million from the offering. Calculate the net proceeds and the underwriter's spread charged by the underwriter. What percentage of the gross proceeds is the investment bank charging for underwriting the stock issue?

Net proceeds = $57,500,000/5,000,000 = $11.50Gross funds received = $12.50 x 5,000,000 = $62,500,000 Underwriter's funds = $62,500,000 - $57,500,000 = $5,000,000 Underwriter's spread = $5,000,000/5,000,000 = $1.000 Investment bank's %age of gross = $1.000/$12.50 = .08 or 8%

LiveBetter can choose between the two following issues: a. A public issue of $10 million face value of 10-year debt. The interest rate on the debt would be 8.5% and the debt would be issued at face value. The underwriting spread would be 1.5% and other expenses would be $80,000.b. A private placement of $10 million face value of 10-year debt. The interest rate on the debt would be 9% and the total issuing expenses would be $30,000. Which deal should LiveBetter choose?

Net proceeds of public issue = $10,000,000 - $150,000 - $80,000 = $9,770,000Net proceeds of private placement = $9,970,000; The extra interest paid on the private placement is: 0.005 x $10 million = $50,000 per year The present value of 5 payments of $50,000 for 10 years at 8.55% = $328,067This exceeds the savings in direct issue costs ($200,000) so the public issue appears to be the better deal in monetary terms. However, the private placement has the advantages that the terms of the debt can be custom-tailored and that the terms can be more easily renegotiated. (Note that we use a discount rate of 8.5%, rather than 9%, because 8.5% is the yield to maturity at which public investors are willing to invest in the bond when the company pays the cost of the issue directly to the underwriters. In the private placement, part of the 9% coupon rate should be considered compensation for issuance costs that are not charged for explicitly.)

Discuss the potential benefits to a corporation of POP registration, coupled with bought deals.

POP registration allows short-form filing since much of the information contained in a regular prospectus is already expected to be filed annually. Regulators clear the POP registration in about five days, rather than in several weeks in the case of regular registration. Bought deals involve presold share blocks to large investment dealers who decide how to market these shares strategically to their customers. So POP and bought deals work well together to satisfy regulators about market making and security and disclosure. So a quick regulatory commitment is combined with a quick purchase commitment from the market, saving the issuing firm time and risk in two ways, while safeguarding markets.

Differentiate between regular underwriting, firm commitment underwriting, and best efforts underwriting.

Regular underwriting is the purchase of securities from the issuing company by an investment banker for resale to the public. With a firm commitment, the underwriter buys the entire issue of securities at an agreed upon price from the issuer, and assumes responsibility for reselling them. With best efforts, the underwriter promises to sell as much as possible at the offer price, but unsold securities are returned to the issuer.

The liquidity of Baja Corporation has been heading downward, and it contemplates a rights issue. There are currently 2 million shares outstanding with a market value of $60 each. The firm needs to raise $24 million and wants you to design a rights issue that will allow the new stock price to be no lower than $55 and for there to be no more than 2.5 million shares outstanding after the issue. How many shares must be held to obtain the right to one new share, and what will be the price of the new share?

Since no more than 500,000 shares are to be raised, a 'one share for every four currently held' would be feasible.To raise $24 million with no more than 500,000 new shares, the price must be set at $48 per share. Then, 4(60) + 48 = 5 × new stock price 240 + 48 = 5 × new stock price $57.60 = new stock price Thus, the terms of the right issue are one share priced at $48 for every four held. The price will stay above the floor of $55, and will specifically be $57.60. Note that students could use other issue ratios as long as $24 million is raised, no more than 500,000 shares are issued, and price does not fall more than $5 per share. At least 400,000 shares must be issued, and that would not allow the price per share to drop below $60.

Discuss the functions conducted by security underwriters.

There are three basic functions performed by underwriters. First, they operate as advisor to firms that contemplate new security issues. It is rather doubtful in this function that there exists much of an agency problem; reputation is quite important to the underwriter and if they encouraged issues that were ultimately unsuccessful, they would rapidly see their business going to other underwriters. Next, underwriters, acting either on a firm commitment or best efforts basis, will purchase the issue of securities from the firm. This is without recourse under the firm commitment basis. Finally, the underwriter will sell the securities to the general public. This effort is conducted either alone or in syndication with other underwriters in the case of a large issue. A portion of the success of the sale can come from that which the underwriter has selected, which of course deals with issues such as reputation and sales network. In return for these services, the underwriter earns a spread on the securities that are underwritten.

Why does private placement of securities appear to be more popular with small- or medium-sized firms?

This observation is due to the fact that larger firms, assumed to be more stable, are likely to have better bargaining power with underwriters and literally more avenues available to them for debt issuance. Furthermore, it is more likely that larger firms will be raising a large enough amount of funds to take advantage of economies of scale present in the issuance of securities. Also important may be the fact that there are fewer analysts following small firms. Information about these smaller firms may be less reliable, which makes their debt issues riskier and may require more individualized terms of lending or debt covenants.

What is a security?

To obtain cash for 90 days, a business firm would most probably go to the money market in which it would sell a 90-day security. To obtain cash for 10 years, a firm would sell a security in the capital market.

What is a shelf registration? Why would a public firm want to issue securities using a shelf registration?

To reduce registration time and costs, and still protect the public by requiring issuers to disclose information about the firm and the security to be issued, the US Securities & Exchange Commission passed a rule in 1982 allowing for "shelf registration." A shelf registration allows firms that plan to offer multiple issues of stock over a two-year period to submit The registration statement summarizes the firm's financing plans for the two-year period. Thus, the securities are shelved for up to two years until the firm is ready to issue them. Once the issuer and its investment bank decide to issue shares during the two-year shelf registration period, they prepare and file a short form statement with the SEC. Upon SEC approval, the shares can be priced and offered to the public usually within one or two days of deciding to take the shares "off the shelf." Thus, shelf registration allows a firm to get stocks into the market quickly if the firm feels conditions (especially the price they can get for the new stock) are right, without the time lag generally associated with full SEC registration.

A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.

True

Economies of scale are apparent in the issuance of securities.

True

The difference between an IPO and a secondary offering is that:

additional, non-outstanding shares are sold to new investors from the early investors.

A major purpose of the prospectus is to:

advise investors of the security's potential risk.

POP System allows for:

allows a reduction in the cost of acquiring additional funds.

A firm's first offering of stock to the general public is known as:

an IPO.

In return for providing funds, venture capitalists receive:

an equity position in the firm.

What is the primary reason for a reduction in share value after a successful rights issue? The new shares:

are offered at attractive prices.

Underwriters are used for all of the following except:

assisting a company in raising cash.

The most important function of an underwriter is to:

buy the issue of securities from the firm and resell to the public.

The allowance of POP registration in Canada is likely to have increased:

competition among underwriters.

Which of the following statements is generally true concerning the costs of security issue?

debt is cheaper to issue than equity.

Major international banks are:

engaged in underwriting a significant portion of securities.

Issue costs for equity are higher than those for debt for all of the following reasons except:

equity issues have lower economies of scale.

When securities are issued under a rights issue:

existing shareholders have the opportunity to expand their holdings.

To be successful, a start-up business will require:

funds from a venture capitalist.

When a public company offers shares to the general public, it does so under a(n):

general cash offer.

When underwriters offer a firm commitment on a stock issue, they:

guarantee the proceeds to the issuing firm.

One of the primary reasons for disbursing venture-capital funds in installments is to:

identify and cut losses early.

The consent of a corporation's shareholders must be received prior to any:

increase in authorized capital.

The POP system allows firms to:

incur only short time delays in selling securities.

Stock underwriters are:

investment banking firms that coordinate equity offerings.

Second-stage financing:

involves issuing more stock.

In a firm commitment, the underwriter:

is allowed to sell the shares at a price slightly higher than the price they paid to the company.

If the announcement of a new equity offering causes current equity values to drop, then signaling theory would predict that:

management knows the issue to be overpriced.