Finance 301 Ch. 15 Final Questions

Types of Long term Debt

1. Bonds-public issue of long term debt 2. Private issues: A. term loans B. Private placements These are easier to renegotiate than public issues and they are lower in costs than public issues

Venture capital(VC)

Financing for new, often high-risk ventures

Underpricing

For initial public offerings, losses arise from selling the stock below the true value

Green shoe option

Gives the underwriters the right to buy additional shares at the offer price to cover over allotments

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 a. Gross spread b. Under price amount c. Filing fee d. New issue premium d. Offer price

Gross spread

Private placements

Similar to term loans but with longer maturity

Indirect expenses

These costs are not reported on the prospectus and include the costs of management time spent working on the new issue

Jones and Co is funded by group of individuals investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products. What is the type of funding called?

c. Venture capital

Other direct expenses

direct costs, incurred by the issuer, that are not part of the compensation to underwriters

Market value

firm accepts negative NPV projects

Dilution

loss in existing shareholders' value in terms of ownership, market value, book value, or EPS

Book Value and EPS

occurs when market-to-book value is less than one

Green Shoe provision

1. Allows the syndicate to purchase an additional 15% of the issue from the issuer 2. Allow the issue to be oversubscribed 3. Provides some protection for the underwriters as they perform their price stabilization function

The costs of selling stock to the public:

1. Gross spread 2. Other direct expenses 3. Indirect expenses 4. Abnormal returns 5. Underpricing 6. Green Shoe option

Rights offerings

1. Issue of common stock offered to existing shareholders 2. Allows current shareholders to avoid the dilution that can occur with a new stock issue 3. "rights" are given to the shareholders" Specify numbers of shares that can be purchased Specify purchase price Specify time frame

Selling securities to the public

1. Management must obtain permission form the Board of directors 2. Firm must file a registration statement with the SEC 3. The SEC examines the registration during a 20-day waiting period A preliminary prospectus, called red herring, is distributed during the waiting period If there are problems, the company is allowed to amend the registration and the waiting period starts over 4. Securities may not be sold during the waiting period 5. The price is determined on the effective date of the registration

IPO underpricing

1. May be difficult to price an IPO because there isn't a current market price available 2. Private companies tend to have more asymmetric information than companies that are already publicly traded 3. Underwriters want to ensure that, on average, their clients earn a good return on IPOs 4. Underpricing causes the issuer to "leave money on the table"

Shelf registration

1. Permits a corporation to register a large* issue with the SEC and sell it in small portions over a two year period 2. Reduces the flotation costs of registration 3. Allow the company more flexibility to raise money quickly *REQUIREMENTS* 1. Company must be rated investment grade 2. Cannot have defaulted on debt within last three years 3. Market value of stock must be greater than 150 million 4. No violations of the securities Act of 1934 in the last three years

Lockup Agreement

1. Restrictions on insiders that prevents then from selling their shares of an IPO for a specified time period 2. The lockup period is commonly 180 days 3. The stock price tends to drop when the lock up period expires due to market anticipation of additional shares hitting the street

Stock prices tend to decline when new equity is issued because..............

1. Signaling and managerial information 2. Signaling and debt usage 3. Issue costs The drop in price can be significant and much of the drop may be attributable to negative signals, it is important for management to understand the signals, that are being sent and try to reduce the effect when possible

The value of a right depends on:

1. The number of rights required to purchase one new share 2. The market price of the security 3. The subscription price.

The Value of a right

1. The right specified in a rights offering is generally less than the current market place 2. The share price will adjust based on the number of shares issued 3. The value of the right is the difference between the old share price and the "new" share price

Dutch Action Underwriting

1. Underwriting accepts a series of bids that include number of shares and price per share 2. The price that everyone pays is the highest price that will result in all shares being sold 3.There is an incentive to bid high to make sure you get in on the auction but knowing that you will probably pay a lower price than you bid (The US treasury has used Dutch actions for years)

Choosing a venture capitalist:

1. financial strength is important 2.Choose a VC that has a management style that is compatible with your own 3. Obtain and check references 4. What contacts does the VC have? 5. What is the exit strategy

Services provided by underwriters include:

1.Formulated method used to issue securities 2. Price the securities 3. Sell the securities 4. Price stabilization by lead underwriters

Initial public offering

A company's first equity issue made available to the public. Also called an unseasoned new issue or an IPO

Green Shoe Provision

A contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price. Also called the over allotment price

Syndicate

A group of underwriters formed to share the risk and to help sell an issue

What is the definition of a syndicate a. A venture capitalist b. A group of attorneys providing services for an IPO c. Block of investors who control a firm d. A bank that loans funds to finance the startup of a new firm e. A group of underwriters sharing the risk of selling a new issue of securities

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

Prospectus

A legal document describing details of the issuing corporation and the proposed offering to potential investors

Season Equity offering (SEO)

A new equity issue of securities by a company that has perviously issued securities to the public

Red Herring

A preliminary prospectus distributed to prospective investors in a new issue of securities

Oversubscription privilege

A privilege that allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price

Rights offer

A public issue of securities in which securities are first offered to existing shareholders ----Also called a rights offering

Registration statement:

A statement filed with the SEC that discloses all material information concerning the corporation making a public offering

the difference between the underwriters cost and buying shares in a firm commitment and the offering price of those securities to the public called the:

A. Gross spread

Regulation A

An SEC regulation that exempts public issues of less than $5 million for most registration requirements

Tombstone

An advertisement announcing a public offering

Standby fee

An amount paid to an underwriter participating in a standby underwriting agreement

General cash offer

An issue of securities offered for sale to the general pubic on a cash basis

With Dutch Auction underwriting:

B. All successful bidders pay the same price

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

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

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

The securities and exchange commission:

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

Gross Spread

Compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price

What is a prospectus?

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

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

D. personal contacts

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tend to a. Increase b. Decrease c. Remain constant d. Respond but the direction of the response is not predictable as shown by past studies e. Decrease momentarily and then immediately increase substantially within an hour following the announcement

Decrease

Terms loans

Direct business loans form commercial banks, insurance companies etc. Maturities 1-5 years Repayable during life of the loan

Term loans

Direct business loans of typically one to five years

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

E. Term loans

What is an issue of securities that is offered for sale to the general public on direct cash basis called? a. Best efforts underwriting b. Firm commitment underwriting c. General cash offer d. Rights offer e. Herring offer

General cash offer

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 A. II and III only B. II and IV only C. I and II only D. I, II, and III only E. I, II, III, and IV

I, II, and III only

Abnormal Returns

In a seasoned issue of stock, the price of the existing stock drops on average by 3% on the announcement of the issue.

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 into the general public. What is this type of an equity offering called? a. Venture capital b. Shelf offering c. Private placement d. Seasoned equity offering e. Initial public offering

Initial public offering

Underwriters

Investment firms that act as intermediaries between a company selling securities and the investing public

The Securities and Exchange Commission a. Verifies the accuracy of the information contained in the prospectus b. Verifies the accuracy of the information contained in the red herring c. Examines the registration statement during the Green Shoe period d. Is concerned only that an issue complies with all rules and regulations e. Determines the final offer price once they have approved the registration statement

Is concerned only that an issue complies with all rules and regulations

If an IPO is underpriced then the a. Investors in the IPO are generally unhappy with the underwriters b. Issue is less likely to sell out c. Stock price will generally decline on the first day of trading d. Issuing firm is guaranteed to be successful in the long term e. Issuing firm receives less money than it probably should have

Issue is less likely to sell out

Private Placement

Loans (usually long-term)provided directly by a limited number of investors

Which one of the following is probably the most successful means of finding venture capital? a. Internet searches b. Dutch actions c. Newspaper advertisements d. Personal contacts e. Personal letters to venture capital firms

Personal contacts

Which one of the following is a preliminary prospectus? a. Tombstone b. Green shoe c. Registration statement d. Rights offer e. Redherring

Redherring

Shelf registration

Registration permitted by SEC Rule 415, which allows a company to register all issues it expects to sell within two years at one time with subsequent sales at any time within those 2 years

What is the form called that is filed with the SEC and discloses the material information on the securities issuer when that issuer offers new securities to the general public? a. Prospectus b. Red herring c. Indenture d. Public disclosure statement e. Registration statement

Registration statement

Miller and Chase is offering $4 million of new securities to the general public. Which SEC regulation governs this offering? a. Regulation A b. Regulation C c. Regulation G d. Regulation Q e. Regulation R

Regulation A

Percentage ownership

Shares sold to the general public without a rights offering

Rights offering example

Suppose a company wants to raise 10 million dollars the subscription price is $20 the current stock price is $25 The firm currently has 5,000,000 shares outstanding 1. How many shares must be issued? Shares issued=10,000,000/20 = 500,000 2. How many rights will it take to purchase one share? Rights needed=5,000,000/500,000=10 3. What is the value of one right? Total investment=10*25+20=270 Price per share=270/11=24.55 Value of a right=25-24.55=0.45

Direct business loans typically ranging from one to five years are called: a. Private placements b. Debt SEOs c. Notes payable d. Debt IPOs e. Term loans

Term loans

Ex-rights date

The beginning of the period when stock is sold without a recently declared right, normally two trading days before the holder-of-record date/date of record

Holder-of-record date

The date on which existing shareholders on company records are designed as the recipients of stock rights. Also, the date of record

Lockup agreement

The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock

Dutch action underwriting

The type of underwriting in which the offer price is set based on COMPETITIVE BIDDING BASED ON INVESTORS. Also known as uniform price auction

Standby underwriting

The type of underwriting in which the underwriter agrees to purchase the unsubscribed portion of the issue

Firm commitment underwriting

The type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares

Best Efforts underwriting

The type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

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(an)

Underwriter

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? a. Green shoe funding b. Tombstone underwriting c. Venture capital d. Red herring funding e. Life cycle capital

Venture capital

What is a prospectus? a. A letter issued by the SEC authorizing a new issue of securities b. A report stating that the SEC recommends a new security to investors c. A letter issued by the SEC that outlines the changes required for a registration statement to be approved d. A document that describes the details of a proposed security offering along with relevant information about the issuer

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

Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing and distributing healthy soups in a dried from. 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 equity called

a. Initial public offering

Gross Spread

the gross spread consists of direct fees paid by the issuer to the underwriting syndicate--the difference between the price the issuer receives and the offer price