Corporate Finance Final

What is the definition of a syndicate?

a group of underwriters sharing the risk of selling a new issue of securities

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 $34 a share and the subscription price is $31 a share?

$14.2m/$31 = 458,064.52 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 subscription price of $18 a share. The current market price of the firm's stock is $22 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans?

$3.5m/$18 = 194,444 shares

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.

With Dutch auction underwriting:

all successful bidders pay the same price.

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 underwriting?

Best Efforts

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 are priced at $25 plus five rights. What is the value of one right?

Cost per share = [$25 + (5 × $26.40)]/(1 + 5) = $26.17 Value of right = $26.40 - $26.17 = $0.23

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.

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

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. Distribution costs are lower for public debt than for private debt. D. It is easier to renegotiate public debt than private debt. E. Wealthy individuals tend to dominate the private debt market.

Direct placement debt tends to have more restrictive covenants than publicly issued debt.

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

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 to the general public. What is this type of an equity offering called?

Initial Public Offering

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

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 current stock price is $16 a share. Assume that Jennifer sells her rights and that all rights are exercised. What percentage of the firm will Jennifer own after the rights offering?

New ownership percentage = 14,000/(1.6m + 0.2m) = 0.78 percent

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

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 of the stock is $38. Currently, there are 5.16 million shares outstanding. What is the value of one right?

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

Direct business loans typically ranging from one to five years are called:

Term loans

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

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

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 share with a 7 percent spread. As it turns out, the underwriters only sell 97,400 shares. How much cash will Aaron's Sailboats receive from its first public offering?

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 their sales efforts, the underwriters determined that they sold a total of 57,500 shares. How much cash did Nelson Paints receive from its IPO?

Total cash received = 57,500 × ($16 - $2) = $805,000

The total direct costs of underwriting an equity IPO:

can be as high as 25 percent for small issues.

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

decrease.

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

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

Underwriters generally:

receive less compensation under a competitive agreement than under a negotiated agreement.

The date on which a shareholder is officially listed as the recipient of stock rights is called the:

holder-of-record date.

The Securities and Exchange Commission:

is concerned only that an issue complies with all rules and regulations.

If an IPO is underpriced then the:

issuing firm receives less money than it probably should have.

With firm commitment underwriting, the issuing firm:

knows up-front the amount of money it will receive from the stock offering.

Existing shareholders:

may or may not have a preemptive right to newly issued shares.

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. Currently, there are six shareholders who have opted not to participate in the rights offering. Isabelle would like to purchase the unsubscribed shares. Which one of the following will allow her to do so?

oversubscription privilege

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 describes this situation?

percentage ownership dilution

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.

What is a seasoned equity offering?

sale of newly issued equity shares by a firm that is currently publicly owned

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.

To purchase shares in a rights offering, a shareholder generally just needs to:

submit the required number of rights along with the subscription price.

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 value per share be after the project is implemented given the following current information on the firm?

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

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 capitalists limit their services to providing money to start-up firms. D. Most venture capitalists are long-term investors in a firm. E. A venture capitalist normally invests in a new idea and finances that idea until the newly-formed firm can issue an IPO.

Exit strategy is a key consideration when selecting a venture capitalist.

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

General Cash Offer

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 B. Red herring provision C. quiet provision D. lockup agreement E. post-issue agreement

Green Shoe Provision

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. Market value dilution occurs when the net present value of a project is negative. D. Neither book value dilution nor market value dilution has any direct bearing on individual shareholders. E. Book value dilution is the cause of market value dilution.

Market value dilution occurs when the net present value of a project is negative.

Miller & Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering?

Regulation A

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 is this type of an offer called?

Rights Offer

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 is the value of one right?

Value per share excluding right = [$19 + (3 × $23)]/(1 + 3) = $22.00 Value of one right = $23 - $22.00 = $1.00

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

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 associated with each form of financing. D. one-half of the flotation cost of debt plus one-half of the flotation cost of equity. E. a weighted average based on the book values of the firm's debt and equity.

the weighted average of the flotation costs associated with each form of financing.

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.

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

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. Underpricing diminishes the underwriting risk of a firm commitment underwriting. IV. Underpricing reduces the probability that investors will sue the underwriters.

I, II, III, and IV

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

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

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. Huff paid $1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The flotation costs were what percentage of the funds raised?

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 = $61,170,000 Flotation cost percentage = $61,170,000/$127,350,000 = 48.03 percent

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 percent spread. Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering. How much can you get for selling all of your rights?

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 = $4.56 (7,200) = $32,811.16

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 outstanding with a market price of $42 per share. The current earnings per share are $1.82. What will the earnings per share be if the project is implemented?

New earnings per share = ($1.82 × 1.25m × 1.065)/[1.25m + ($13m/$42)] = $1.55

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 of $12.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering?

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 firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?

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

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 provided $9 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally?

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

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

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 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

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 is allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share. What is the difference in the total profits or losses that Scott and Steve have as of the end of the first day of trading?

Scott's profit = 100 × ($22.70 - $20) = $270 Steve's profit = [100 × ($22.70 - $20)] + [300 × ($18.60 - $20)] = -$150 Difference = $270 - (-$150) = $420

All new interstate security issues are regulated by the:

Securities Act of 1933.

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 where she would be ready to begin the manufacturing and marketing stage. Which type of financing is Suzie being offered?

Seed Money

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

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, and 100 shares of IPO C. On the first day of trading IPO A opened at $31.50 a share and ended the day at $28.25 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $38.75 a share. What is Richard's total profit or loss on these three IPOs as of the end of the first day of trading?

Total profit = [1,000 × ($28.25 - $30)] + [400 × ($32 - $30)] + [100 × ($38.75 - $30)] = -$75

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 of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.50 a share and IPO B was selling for $29 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading?

Total profit = [500 × ($23.50 - $25)] + [100 × ($29 - $25)] = -$350

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 spread at 9 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need?

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

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 underwriters have agreed to a 7 percent spread. How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs?

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

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 with a 7.5 percent underwriting spread. This would be a firm commitment underwriting. The estimated issue costs are $125,000. How many shares of stock will Outdoor Living need to sell to finance this project?

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

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 active roles in the management of the financed firm. D. Venture capitalists often require at least a forty percent equity position as a condition of financing. E. Venture capital is relatively inexpensive in today's competitive markets.

Venture capitalists often require at least a forty percent equity position as a condition of financing.

What is a prospectus?

a document that describes the details of a proposed security offering along with relevant information about the issuer