Ch 15 MC

M&C Merchants is offering $2.5 million of new securities to the general public. Which SEC regulation governs this offering?

A. Regulation A.

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

B. Decrease.

Which one of the following statements concerning venture capitalists is correct?

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

With Dutch auction underwriting:

B. All successful bidders pay the same price per share.

If a firm commitment IPO is overpriced then the:

A. Investors in the IPO may consider suing the underwriters.

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.

B. Quiet

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:

B. Tombstones.

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

C. General cash offer.

Which one of the following statements concerning dilution is correct?

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

Which one of the following statements is correct?

E. A TV interview with a firm's CFO could cause a forced delay in the firm's IPO.

What is the definition of a syndicate?

E. A group of underwriters sharing the risk of selling a new issue of securities.

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?

A. $805,000

Existing shareholders:

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

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?

A.Best efforts

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:

D. 2 years.

The raising of small amounts of capital from a large number of people is known as:

D. Crowdfunding.

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?

E. Registration statement.

The JOBS Act allows a company during a 12-month period to issue new securities through crowdfunding up to a limit of:

E. $1,000,000.

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 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 money can you get for selling all of your rights?

E. $32,811.16

The total direct costs of underwriting an equity IPO:

E. Can be as low as 5.5 percent and as high as 25 percent of proceeds.

Mountain Homes wishes to expand its facilities. The company currently has 7 million shares outstanding and no debt. The stock sells for $55 per share, but the book value per share is $43. The firm's net income is currently $9.1 million. The new facility will cost $30 million, and it will increase net income by $309,000. Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio. What will be the EPS after the new equity issue?

A. $1.25

JL Enterprises has 75,000 shares of stock outstanding with a book value of $900,000 and a market value of $1,320,000. The firm is considering a project that requires the purchase of $130,000 of fixed assets and has a net present value of $7,500. The project would be all-equity financed through the sale of shares.What will the new book value per share be after the project is implemented?

A. $12.50

Davis Bros. and The Storage Shed have both announced IPOs at $28 per share. One of these is undervalued by $12, and the other is overvalued by $5, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of both IPO offerings?

A. $6,000

Richard has an outstanding order with his stockbroker 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?

A. -$75

Jen owns 15,000 shares of Teen Clothing. Currently, there are 650,000 shares of stock outstanding. The company has just announced a rights offering whereby 150,000 shares are being offered for sale at a subscription price of $16 a share. The current stock price is $19 a share. Assume that Jen sells her rights and that all rights are exercised. What percentage of the firm will Jen own after the rights offering?

A. 1.88 percent

You currently own 12 percent of the 2.8 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $23 a share. One right will be issued for each share of outstanding stock. This offering will provided $4.6 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?

A. 11.2 percent

The Motor Plant wants to raise $28.6 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $25 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $29.50 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?

A. 2.27 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 $47.50. 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 $40 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?

A. 2.51 rights

Flagler, Inc. needs to raise $14.7 million to finance its expansion. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $26 per share and the company's underwriters charge a spread of 8.5 percent. How many shares need to be sold? (Round up the next whole share.)

A. 617,907 shares

Outdoor Living needs $14.6 million to finance updates and additions to its production equipment. The underwriters estimate that the firm could sell additional shares of stock at $23.50 a share with an underwriting spread of 7.75 percent. This would be a firm commitment underwriting. The estimated issue costs are $368,000. How many shares of stock will Outdoor Living need to sell to finance this project? (Round up to the next whole share.)

A. 690,446 shares

Mobile Units recently offered 30,000 new shares of stock for sale. The underwriters sold a total of 32,000 shares to the public at a price of $14.50 a share. The additional 2,000 shares were purchased in accordance with which one of the following?

A. Green shoe provision

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

A. Gross Spread

The High-End mutual fund recently loaned $9.2 million to Henderson Hardware for 10 years at 6.4 percent interest. This loan is best described as a:

A. Private placement.

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.

A. Standby

The stock of Cleaner Homes is currently selling for $16.90 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 $14 plus four rights. What is the value of one right?

B. $.58

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?

B. $1

Mountain Products has decided to raise $8.4 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding and it will take 4 rights to purchase one new share. The offering consists of a total of 210,000 new shares. The current market price of the stock is $45.60. What is the value of one right?

B. $1.12

Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids received are as follows: 100 shares at $14 a share, 300 shares at $12, 400 shares at $11, 700 shares at $10, and 900 shares at $9 a share.How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.

B. $12,000

Precise Machining is considering a rights offer. The company has determined that the ex-rights price would be $46. The current price is $53 per share, and there are 7 million shares outstanding. The rights offer would raise a total of $70 million. What is the subscription price?

B. $27.06

The Timken Company has announced a rights offer to raise $18 million for a new journal. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently sells for $49 per share and there are 1.52 million shares outstanding. The subscription price is set at $45 per share. What is the ex-rights price per share?

B. $48.17

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?

B. -$350

Mountain Teas wants to raise $8.9 million to open a new production center. The company estimates the issue costs for legal and accounting fees will be $510,000. The underwriters have set the stock price at $26 a share and the underwriting spread at 8.35 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need? (Round up to the next whole share.)

B. 394,897 shares

Kurt currently owns 4.6 percent of Northeastern Transportation. The company has a total of 465,000 shares outstanding with a current market price of $26.20 a share. At present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?

B. 4.37 percent

Which one of the following statements is correct concerning the issuance of long-term debt?

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

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?

B. 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?

B. Percentage ownership dilution.

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?

B. Shelf registration.

Over-the-Road Trucking is considering investing in a new project that will cost $6.8 million and increase net income by 9.2 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.34 million shares of stock outstanding with a market price of $39 per share. The current earnings per share are $2.34. What will the earnings per share be if the project is implemented?

C. $2.26

The Boat Works has decided to take the company public by offering a total of 150,000 shares of common stock to the public. The firm has hired an underwriter who arranges a firm commitment underwriting and suggests an initial selling price of $22 a share with a spread of 8 percent. As it turns out, the underwriters only sell 122,400 shares. How much cash will the firm receive from its first public offering?

C. $3,036,000

LC Delivery has decided to sell 1,500 shares of stock through a Dutch auction. The bids received are as follows:300 shares at $36 a share, 500 shares at $35, 1,000 shares at $34, 1,200 shares at $33, and 1,800 shares at $32 a share. How much will LC Delivery receive in total from selling the 1,500 shares? Ignore all transaction and flotation costs.

C. $51,000

You own 12 percent, or 15,000 shares, of Printers Ink stock that has a total market value of $678,300. By what percentage will the total value of your investment in this firm change if the company sells an additional 12,500 shares of stock at $43.50 a share and you do not buy any?

C. -.35 percent

A.K. Stevenson wants to raise $10.2 million through a rights offering. The subscription price is set at $16 a share. Currently, the company has 1.7 million shares outstanding with a current market price of $25 a share. Each shareholder will receive one right for each share of stock they currently own. How many rights will be needed to purchase one new share of stock in this offering?

C. 2.67 rights

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? (Round up to the next whole share)

C. 397,543 shares

BK & Co. offered 15,000 shares in a rights offer. T.L. Moore & Co. was the underwriter that by prior agreement purchased the 1,315 unsold shares. For its participation in this rights offer, T.L. Moore & Co. is most likely entitled to:

C. A standby fee.

Underwriters generally:

C. Accept the risk of selling the new securities in exchange for the gross spread.

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:

C. Dilution

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?

C. Gain board approval.

Which one of the following is a key goal of the aftermarket period?

C. Supporting the market price for a new securities issue.

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):

C. Underwriter.

Two IPOs will commence trading next week. Scott places an order to buy 500 shares of IPO A. Steve places an order to purchase 500 shares of IPO A and 500 shares of IPO B. Both IPOs are priced at $18 a share. Scott is allocated 200 shares of IPO A. Steve is allocated 200 shares of IPO A and 500 shares of IPO B. At the end of the first day of trading, IPO A is selling for $26.10 a share and IPO B is selling for $14.75 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?

D. $1,625

Winston's has 18,000 shares outstanding with a book value of $348,000 and a market value of $501,660 and has net income of $21,000. The firm is considering a project with a net present value of $4,500 that would require the purchase of $175,000 of fixed assets.The project would be financed through the sale of equity shares. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented?

D. $28.06

Eastern Electric is offering 2,500 shares of stock in a Dutch auction. The bids include: 600 shares at $27 a share, 1,500 shares at $26, 3,000 shares at $25, and 2,500 shares at $24 a share.How much cash will Eastern Electric receive from selling these shares? Ignore all transaction and flotation costs.

D. $62,500

The Warm Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $100 to $90 ($100 is the rights-on-price; $90 is the ex-rights price). The company is seeking $18 million in additional funds with a per-share subscription price of $50. How many shares of stock are outstanding, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.)

D. 1,440,000

High Mountain Mining wants to expand its current operations and requires $2.7 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 $20 a share. The current market price of the firm's stock is $22.70 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans? (Round up to the next whole share.)

D. 135,000shares

MHM Corporation wants to diversify its operations. The firm's stock price is $72 a share with 25,000 shares outstanding. The firm has total assets of $10.2 million, total liabilities of $3.6 million, and a net income of $825,000. MHM is considering an investment that has the same PE ratio as the firm. The cost of the investment is $820,000, and it will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the price after the offering to be $72 per share?

D. 45.83 percent

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. What was the flotation cost as a percentage of funds raised?

D. 48.03 percent

What is a prospectus?

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

Individual investors might avoid requesting 100 shares in an upcoming IPO because they:

D. Are more apt to receive shares if the IPO is under allocated.

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

D. Holder-of-record date.

The value of a right depends upon the number of rights required for each new share as well as the:

D. Market and subscription prices.

Which one of the following is probably the most successful means of finding venture capital?

D. Personal contacts

The Securities and Exchange Commission:

D. Reviews registration statements to ensure they comply with current laws and regulations.

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the firm is issuing additional shares and 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?

D. Rights offer.

What is a seasoned equity offering?

D. Sale of newly issued equity shares by a firm that is currently publicly owned.

All new interstate security issues are regulated by the:

D. Securities Act of 1933.

Which one of the following statements is correct concerning the direct costs of issuing securities?

D. There tends to be substantial economies of scale when issuing any type of security.

Which one of the following statements concerning venture capital financing is correct?

D. Venture capitalists often require at least a 40 percent equity position as a condition of financing.

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? (Round up to the next whole share.)

E. 458,065 shares

New Education needs to raise $16 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. Suppose the offer price is $36 per share and the company's underwriters charge a spread of 8.4 percent. The SEC filing fee and associated administrative expenses of the offering are $489,000. How many shares need to be sold?

E. 500,030

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?

E. Ex-rights date.

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?

E. Firm commitment.

JLK is a partnership that was formed two years ago for the purpose of creating new fad items and distributing them directly to consumers. 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?

E. Initial public offering.

With firm commitment underwriting, the issuing firm:

E. Knows upfront the amount of money it will receive from the stock offering.

All of the following are supporting arguments in favor of IPO underpricing except which one?

E. Provides better returns to issuing firms.

Which one of the following is a preliminary prospectus?

E. Red herring.

Lamar has been experimenting in his garage and now has a product he feels could be successfully marketed. A venture capitalist has offered to finance the development of this product until it reaches the manufacturing and marketing stage. Which type of financing is being offered?

E. Seed money.

To purchase a share in a rights offering, an existing shareholder generally just needs to:

E. Submit the required number of rights along with the subscription price.

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

E. Term loans.

When selecting a venture capitalist, which one of the following characteristics is probably the least important?

E. Underwriting experience.

Business Aid is funded by a group of wealthy investors for the sole purpose of providing funding for individuals and small firms that are trying to convert their new ideas into viable products. What is this type of funding called?

c. Venture capital.