Chapter 15 Quiz FINA 718

Multiple Choice Venture capital is relatively easy to obtain. Venture capitalists desire shares of common stock but avoid preferred stock. Venture capitalists should have key contacts and financial strength. Venture capitalists rarely assume active roles in the management of the financed firm. Venture capital is relatively inexpensive in today's competitive markets.

Venture capitalists should have key contacts and financial strength.

Draiman Guitars is offering 135,000 shares of stock in an IPO by a general cash offer. The offer price is $44 per share and the underwriter's spread is 8 percent. The administrative costs are $375,000. What are the net proceeds to the company? Multiple Choice $5,565,000 $4,714,800 $5,464,800 $5,089,800 $5,940,000

Explanation Net proceeds = (# shares)(Price per share)(1-spread)-costs Net proceeds = [135,000 × $44 × (1 − .08)] − $375,000 Net proceeds = $5,089,800

Direct business loans typically ranging from one to five years are called: Multiple Choice debt IPOs. debt SEOs. notes payable. term loans. private placements.

term loans.

It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital. Multiple Choice 40 30 15 20 10

40

Davis Bros. and The Storage Shed have both announced IPOs at $32 per share. One of these is undervalued by $9, and the other is overvalued by $4, 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? Multiple Choice $4,500 $5,000 $5,500 $6,000 $4,000

Explanation Expected profit = 500($9) + 1,000(−$4) Expected profit = $500 Profit if 1,000 shares of each = 1,000($9) + 1,000(−$4) Profit if 1,000 shares of each = $5,000 Difference = $5,000 − 500 Difference = $4,500

Trieu Group decided to go public by offering a total of 135,000 shares of common stock to the public. The company hired an underwriter who arranged a firm commitment underwriting and an initial selling price of $24 per share with a spread of 8.3 percent. As it turned out, the underwriters only sold 122,400 shares to the public. What is the amount paid to the issuer? Multiple Choice $2,971,080 $2,692,820 $2,477,380 $3,074,420 $2,227,280

Explanation Total cash received = 135,000($24)(1 − .083) Total cash received = $2,971,080

Hager Lifts has decided to sell 1,800 shares of stock through a Dutch auction. The bids received are as follows: 600 shares at $37 per share, 800 shares at $36 per share, 900 shares at $35 per share, 200 shares at $34 per share, and 100 shares at $32 per share. How much will the company receive in total from selling the 1,800 shares? Ignore all transaction and flotation costs. Multiple Choice $58,800 $63,100 $52,500 $52,100 $63,000

Explanation 600+800+900 = 2,300 Price of stock at 900 = $35.00 All 1,800 shares will be offered at $35.00 in "Dutch auction" Total cash received = 1,800($35.00) Total cash received = $63,000

Jenny Corporation needs to raise $55.5 million to fund a new project. The company will sell shares at a price of $29.50 in a general cash offer and the company's underwriters will charge a spread of 6 percent. The direct flotation costs associated with the issue are $1,050,000. How many shares need to be sold? Multiple Choice 1,960,332 shares 1,828,110 shares 1,881,356 shares 1,774,864 shares 2,039,308 shares

Explanation Required proceeds = (Project Funds needed+Costs)/(1-spread) ($1,050,000 + 55,500,000)/(1 − .06) = $60,159,574 Number of shares offered = Required proceeds/Price per share= $60,159,574/$29.50 Number of shares offered = 2,039,308 shares

Richard placed an order for 1,000 shares in each of three IPOs at $28 per share. He was allocated 1,000 shares of IPO A, 200 shares of IPO B, and 600 shares of IPO C. On the first day of trading, IPO A opened at $28 per share and ended the day at $24.25 per share. IPO B opened at $30 per share and finished the day at $37 per share. IPO C opened at $28 per share and ended the day at $27.65 per share. What is the total profit or loss on these three IPO purchases as of the end of the first day of trading? Multiple Choice −$1,850 −$1,950 $2,240 $2,175 −$2,160

Explanation Total profit = [1,000($24.25 − 28.00)] + [200 ($37.00 − 28.00)] + [600 ($27.65 − 28.00)] Total profit = (−$2,160)

Mackenzie is the CEO of Donihoo Corporation, a privately held corporation. If she wants to take Donihoo public, what must be her first step? Multiple Choice Select an underwriter Prepare a registration statement Gain board approval Obtain SEC approval Distribute a prospectus

Gain board approval

Which one of the following statements is correct concerning the direct costs of issuing securities? Multiple Choice There tends to be substantial economies of scale when issuing any type of security. The gross spread as a percentage of proceeds is the same for similar-sized IPOs and SEOs. The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of issuing straight debt. A seasoned offering is always more expensive on a percentage basis than an IPO. Domestic bonds are generally more expensive to issue than equity IPOs.

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

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: Multiple Choice offer price. new issue premium. filing fee. gross spread. under price amount.

gross spread.