Corporate Finance Chapter 20

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.

A

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. D. move up or down depending on whether a small investor wanted to exercise his/his rights. E. None of the above

A

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 overvalued. 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.

A

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

A

The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below. A. prestige B. ability to manage selling syndicates C. role as a firm commitment buyer D. role as a best efforts seller E. None of the above

A

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. E. None of the above

A

To determine the value of a rights offering, the stockholder needs to know the following 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. E. None of the above.

A

A new public equity issue from a company with equity previously outstanding is called a(n): A. initial public offering. B. seasoned equity issue. C. unseasoned equity issue. D. private placement. E. syndicate.

B

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 existing 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.

B

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.

B

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.

B

Assuming everything else is constant, if a stock's old price is $40 and the ex-rights or new stock price is $32, then the value of the right is: A. $-8. B. $8. C. impossible to determine without the subscription price. D. impossible to determine without the number of rights needed to buy one share.

B

Dilution refers to: A. the increase in stock value due to wider ownership of stock. B. the loss in existing shareholder's equity. C. the loss in new shareholder's equity. D. the loss in all shareholder's equity, both existing shareholders and new shareholders. E. None of the above.

B

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. E. None of the above.

B

In terms of costs of issuing equity, Professor Clifford W. Smith finds that the ranking of methods, from cheapest to most expensive, is: A. rights issue with standby underwriting, equity issue with underwriting, pure rights issue. B. pure rights issue, rights issue with standby underwriting, equity issue with underwriting. C. pure rights issue, preferred stock and debt issue with underwriting for an IPO, rights issue with standby underwriting. D. equity issue with underwriting, rights issue with standby underwriting, pure rights issue. E. equity issue with underwriting, pure rights issue, rights issue with standby underwriting.

B

Potential investors learn of the information concerning the firm and its new issue from the: A. pre-underwriting negotiating meeting. B. red herring. C. letter of commitment. D. emails from their former finance professor. E. rights offering.

B

Professor Clifford W. Smith, in evaluating issuance costs from underwritten issues, rights issues with standby underwriting, and a pure rights issues, found that 90% 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 upon price and disburse the funds sooner. B. investment bankers can increase the price received by increasing confidence in the issue, and they will buy the issue at an agreed upon price and disburse the cash sooner. C. investment bankers provide other services including price counseling, increasing public confidence, and providing funds to the issuer sooner. D. investment bankers know how to price the issue, and would not need to set as low as a price as the subscription price and provide price counseling. E. None of the above.

B

The Overland 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. 1 B. 10 C. 40 D. 400 E. indeterminate without the subscription price.

B

The Shields Corporation intends to issue 100,000 new shares to raise funds for expansion of current plant facilities. The current share price is $20 and there are 500,000 shares outstanding. The number of rights needed to buy a share of stock should be: A. 1 B. 5 C. 20 D. 50 E. indeterminate without the subscription price

B

The first public equity issue made by a company is a(n): A. initial private offering. B. initial public offering. C. secondary offering. D. seasoned new issue. E. None of the above.

B

The key difference between a negotiated offer and a competitive offer is that: A. the underwriters can not set the spread in a negotiated bid but can in a competitive offer. B. the issuing firm can offer its securities to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used. C. the issuing firm works the underwriter for the best spread in a negotiated bid which will be less than that available in a competitive offer. D. the underwriter will not do a full investigation in a negotiated bid because the company is at their mercy, while in a competitive bid the underwriter must be extra diligent. E. None of the above.

B

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

B

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. E. the venture capitalists jobs as CEOs and CFOs

B

. 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. E. None of the above.

C

. 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. Both A and B. E. Both B and C.

C

A registration statement is effective on the 20thday after filing unless: A. the SEC is backlogged with statements. B. a tombstone ad is issued indicating its demise. C. a letter of comment suggesting changes is issued by the SEC. D. a syndicate can be formed sooner. E. None of the above

C

A shareholder who has rights is: A. always better off to exercise the rights. B. always better off to sell the rights into the market. C. able to exercise their rights or sell them. D. never in the same ownership position again with rights. E. None of the above.

C

Bradley Power wants to raise $40 million in new equity. The subscription price is $25. There are currently 5 million shares outstanding, each with 1 right. How many rights are needed to purchase 1 share? A. 1.000 B. 3.000 C. 3.125 D. 4.525 E. 6.525

C

Debt capacity is often given as a reason for the value of the stock falling when equity is issued. The reason for this is: A. the high issue costs of a debt offering must be paid by the shareholders. B. the priority position of the equity is lowered. C. management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital. D. All of the above. E. None of the above

C

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, then 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. E. call their broker and sell some CBOE options to make any money.

C

Professor Jay Ritter found best-efforts offerings are: A. reserved for the premier customers because they deserve 'best-efforts'. B. used most often with seasoned equity issues. C. used with small IPO issues. D. attractive because of price stability. E. None of the above.

C

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. 0.60 B. 1.20 C. 1.67 D. 2.00 E. Insufficient data to determine

C

The six components that make up the total costs of 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. E. None of the above.

C

Which of the following is not one of the four main functions that underwriters provide? A. Risk bearing B. Marketing C. Auditing the financial statements D. Certification E. Monitoring

C

. Corporations are allowed to use the shelf registration method if they: A. are rated investment grade and have aggregate market stock value of more than $150 million. B. have not violated the 1934 Securities Act in the past 12 months. C. have not defaulted on its debt in the past 3 years. D. All of the above. E. None of the above

D

. The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share. The stock is now selling ex-rights for $26. The price rights-on is: A. $22.00 B. $24.00 C. $26.00 D. $28.00 E. impossible to determine without the cum-rights price.

D

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.

D

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

D

A study by Lee, Lockhead, Ritter, and Zhao that examined the underwriting discount and other direct costs of going public with a debt or equity offering, found: A. the direct expenses are higher for equity than debt offerings. B. substantial economies of scale are prevalent. C. underpricing, on average, is similar in magnitude to total direct expenses. D. All of the above. E. None of the above.

D

An IPO of a firm formerly financed by venture capital is carried out for what primary purposes? A. Insiders can sell their shares or cash out B. Generate cash to pay down bank indebtedness C. To establish a market value for the equity and provide funds for operations D. All of the above. E. None of the above.

D

Arguments to explain why most equity issues are underwritten versus sold through a rights offering are: A. underwriters buy at an agreed upon price and bear some risk of selling the issue. B. cash proceeds are available sooner in underwriting and the issue is available to a wider market. C. investment bankers can provide market advice and certify the issue for potential investors. D. All of the above. E. None of the above

D

Corporations use the shelf registration method of security sales because: A. preregistered securities can be quickly brought to market. B. the main registration process is eliminated for up to two years. C. their stock is below investment grade. D. Both A and B. E. Both B and C

D

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.

D

In comparison to debt issuance expenses, the total direct costs of equity issues are: A. considerably less. B. about the same. C. meaningless. D. considerably greater. E. None of the above.

D

Investment banks perform which of the following services for corporate issuers: A. formulating the method used to issue the securities. B. pricing the new securities. C. selling the new securities. D. All of the above. E. None of the above.

D

Management's first step in any issue of securities to the public is: A. to file a registration form with the SEC. 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.

D

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 E. 8

D

Rule 144A provides the framework for the issuance of private securities to qualified institutional investors. To buy private securities, institutional investors: A. must be willing to hold a less liquid security and manage a fund. B. must be willing to make a market in the security and be a primary market dealer. C. must be a limited partner in the issue and willing to reduce the illiquidity of the security. D. must be willing to hold a less liquid security and have $100 million under management. E. None of the above.

D

The Holly Corporation has a new rights offering that allows you to buy one share of stock with 4 rights and $25 per share. The stock is now selling ex-rights for $30. The price rights-on is: A. $21.00 B. $25.00 C. $30.00 D. $31.25 E. impossible to determine without the cum-rights price.

D

The Schroeder Corporation has 20,000 shares outstanding at $20 each. They expect to raise $200,000 by a rights offering with a subscription price of $25. How many rights must you turn in to get a new share? A. 1.25 B. 1.50 C. 2.00 D. 2.50 E. Insufficient data to determine

D

The offering price is set to make an issue attractive to the market and provide a good price to the issuer. Which of the following is/are true? A. Empirical studies by Ritter have shown that the average firm commitments have had a 17.8% underpricing on the first day of trading. B. Empirical studies have shown that best efforts sales have underpricing on the first day of trading. C. Some issues which rose dramatically on the first day of trading were viewed as successfully priced by the underwriter because it helped build a long-term investment base. D. All of the above. E. None of the above.

D

The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer. Investment bankers maintain their reputation by: A. certifying the issue. B. monitoring the issuing firm's management and performance. C. pricing issues fairly. D. All of the above. E. None of the above.

D

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 E. Both C and D

D

A company must file a registration statement with the SEC providing various financial and company history information. The registration statement does not need to be filed if: A. the issue is less than $50 million. B. the loan matures within 9 months. C. the issue is less than $5.0 million. D. Both A and B. E. Both B and C

E

A group of investment bankers who pool their efforts to underwrite a security are known as a(n): A. amalgamate. B. conglomerate. C. green shoe group. D. klatch. E. syndicate.

E

Arguments against the use of the shelf-registration are: A. only technology and manufacturing-based firms can use it. B. less current information available to investors might raise the cost of debt. C. possible market overhang from future issues depressing price. D. Both A and C. E. Both B and C.

E

During the SEC waiting period the potential issuing company can issue a preliminary prospectus which contains: A. exactly the same information as the final prospectus except an indication of SEC approval. B. all the 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.

E

Regulation A security issues are exempt from full SEC registration filing and use only a brief offering statement if: A. the issue is for less than $5,000,000. B. insiders sell no more than $1,500,000 of stock. C. insiders sell no more than 100,000,000 shares. D. Both A and C. E. Both A and B.

E

The first public equity issue that is made by a company is referred to as: A. a rights issue. B. a general cash offer. C. an initial public offering. D. an unseasoned issue. E. Both C and D.

E

The green shoe option is used to: A. cover oversubscription. B. cover excess demand. C. provide additional reward to the investment bankers for a risky issue. D. provide additional reward to the issuing firm for a risky issue. E. Both A and B.

E

Types of dilution include: A. dilution of percentage ownership B. dilution of market share C. dilution of book value and earnings per share D. A and C E. All of the above

E

Underpricing can possibly be explained by: A. oversubscription of an issue. B. strong demand by investors. C. undersubscription of an issue. D. Both B and C. E. Both A and B.

E