M5 -2

Nelson Paints recently went public by offering 50,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $17.50 a share & the gross spread was $2.30. After completing their sales efforts, the underwriters determined that they sold a total of 47,500 shares. How much cash did the company receive from its IPO? a. $722,000 b. $717,000 c. $735,000 d. $705,000 e. $748,000

a. $722,000 total cash received = 47,500($17.50 - 2.30) = $722,000

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting? a. Dutch auction b. Best efforts c. Public rights d. Private placement e. Market commitment

a. Dutch auction

Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 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

a. Green Shoe provision

Kurt currently owns 4.2 percent of NT Co. The company has a total of 685,000 shares outstanding w/a current market price of $19.20 a share. At present, the firm is offering an additional 15,000 shares at a price of $18 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed? a. 4.06 percent b. 4.11 percent c. 4.19 percent d. 4.14 percent e. 4.26 percent

b. 4.11 percent Number of shares owned = .042(685,000) =28,770 New ownership position = 28,770/(685,000 + 15,000) = .0411 or 4.11 percent

Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation? a. overallotment b. percentage ownership dilution c. Green Shoe allocation d. Red herring allotment e. Abnormal event

b. Percentage ownership dilution

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. a. auction b. quiet c. lockup d. Green Shoe e. red

b. quiet

The Boat Works 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 a 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? a. $2,227,280 b. $3,074,420 c. $2,971,080 d. $2,692,820 e. $2,477,380

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

You own 8,000 shares, or 5 percent, of Printers Ink stock. Your shares are valued at $279,280. By what percentage will the total value of your investment change if the company sells an additional 7,500 shares of stock at $33.50 a share & you do not buy any? a. -.13 percent b. -.21 percent c. -.18 percent d. -.03 percent e. -.26 percent

c. -.18 percent current number of shares outstanding = 8,000/.05 = 160,000 Price per share = $279,280/8,000 = $34.91 New market value per share = [160,000($34.91) + 7,500($33.50)]/(160,000 + 7,500) = $34.85 Percent change = ($34.85 - 34.91)/$34.91 = -.0018 or -.18%

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

c. General cash offer

Which one of the following is a key goal of the aftermarket period? a. Collecting the largest number of Dutch auction bids as possible b. Determining the fair offer price c. Supporting the market price for a new securities issue d. establishing a broad-based underwriting syndicate e. Distributing red herrings to as many potential investors as possible

c. Supporting the market price for a new securities issue

Underwriters generally: a. pay a spread to the issuing firm b. provide only best efforts underwriting in the U.S. c. accept the risk of selling the new securities in exchange for the gross spread d. market & distribute an entire issue of new securities w/in their own firm e. pass the risk of unsold shares back to the issuing firm via a firm commitment agreement

c. accept the risk of selling the new securities in exchange for the gross spread

The Huff Co. has just gone public. Under a firm commitment agreement, Huff received $17.64 for each of the 3.2 million shares sold. The initial offering price was $22.50 per share, and the stock rose to $24.15 per share in the first day of trading. Huff paid $984,900 in direct legal and other costs and incurred $340,000 in indirect costs. What was the flotation cost as a percentage of the net amount raised? a. 38.56 percent b. 40.32 percent c. 41.68 percent d. 40.20 percent e. 39.09 percent

d. 40.20 percent Net amount raised = 3,200,000($17.64) = $984,900 - 340,000 = $55,123,100 Total direct costs = $984,900 + ($22.50 - 17.64)(3,200,000) = $16,536,900 Total indirect costs = $340,000 + ($24.15 - 22.50)(3,200,000) = $5,620,000 total costs = $16,536,900 + $5,620,000 = $22,156,900 Flotation Cost Percentage = $22,156,900/55,123,100 = .4020 or 40.20%

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

e. red herring

With Dutch auction underwriting: A. each winning bidder pays the minimum price offered by any bidder B. all successful bidders pay the same price per share C. all bidders receive at least a portion of the quantity for which they bid. D. the selling firm receives the maximum possible price for each security sold. E. the bidder for the largest quantity receives the first allocation of securities.

B. all successful bidders pay the same price per share

Executive Tours has decided to go public and has hired an investment firm to handle this offering. The investment firm is serving as a(n): A. aftermarket specialist. B. venture capitalist. C. underwriter. D. seasoned writer. E. primary investor.

C. underwriter.

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

a. -$2,160 Total profit = [1,000($24.25 - 28)] + [200($37 - 28)] + [600($27.65 - 28)] -$2,160

Existing shareholders: a. may or may not have a preemptive right to newly issued shares. b. must purchase new shares whenever rights are issued. c. are prohibited from selling their rights. d. are generally well advised to let the rights they receive expire. e. can maintain their proportional ownership positions without exercising their rights.

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

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year & the remaining 80,000 shares next year. What type of registration was this? a. standby registration b. shelf registration c. Regulation A registration d. Regulation Q registration e. Private placement registration

b. shelf registration

Advertisements in a financial newspaper announcing a public offering of securities, along w/a list of the investment banks handling the offering, are called: a. red herrings b. tombstones c. Green Shoes d. registration statements e. cash offers

b. tombstones

Wear Ever is expanding and needs $6.8 million to help fund this growth. The firm estimates it can sell new shares of stock for $43 a share. It also estimates it will cost an additional $352,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a spread of 7.5 percent. How many shares of stock must be sold for the company to funds its expansion? a. 170,376 b. 185,127 c. 179,811 d. 154,209 e. 61,806

c. 179,811 Total value of issue = ($6,800,000 + 352,000)/(1 - .075) =$7,731,891.89 Shares to be sold = $7,731,891.89/$43 = 179,811

Two IPOs will commence trading next week. Scott places an order to buy 600 shares of IPO A. Steve places an order to purchase 600 shares of IPO A and 600 shares of IPO B. Both IPOs are priced at $21 a share. Scott is allocated 300 shares of IPO A. Steve is allocated 300 shares of IPO A and 600 shares of IPO B. At the end of the first day of trading, IPO A is selling for $23.30 a share and IPO B is selling for $17.75 a share. How much additional profit did Steve have at the end of the first day of trading as compared to Scott? a. $1,950 b. $1,260 c. $1,870 d. -$1,950 e. -$1,260

d. -$1,950 Difference = 600($17.75 - 21) = -$1,950

Shelf Registration allows a firm to register multiple issues at one time w/the SEC & then sell those registered shares anytime during the subsequent: a. 3 months b. 6 months c. 180 days d. 2 years e. 5 years

d. 2 years

What is the 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 w/relevant information about the issuer e. An advertisement in a financial newspaper that describes a security offering

d. A document that describes the details of a proposed security offering along w/relevant information about the issuer

Which one of these describes an exception to the registration filing requirement of the SEC? a. Loans that mature in one year or less b. Issues that have an approved prospectus c. Loans of $10 million or less d. Issues of less than $5 million e. Issues that have received an approved letter of comment

d. Issues of less than $5 million

The Securities & Exchange Commission: a. verifies the accuracy of the information contained in the prospectus b. publishes red herrings on prospective new security offerings c. examines the prospectus during the Green Shoe period d. reviews registration statements to ensure they comply with current laws & regulations e. determines the final offer price once they have approved the registration statement

d. reviews registration statements to ensure they comply with current laws & regulations

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company 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 offer called? a. best efforts offer b. firm commitment offer c. general cash offer d. rights offer e. priority offer

d. rights offer

Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this? a. best efforts b. shelf c. oversubscribed d. private placement e. firm commitment

e. firm commitment

A syndicate can best be defined as a: a. venture capitalist b. group of attorneys providing services for an IPO c. block of investors who control a firm d. bank that loans funds to finance the start-up of a new company e. group of underwriters sharing the risk of selling a new issue of securities

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

All of the following are supporting arguments in favor of IPO underpricing except which one? a. Helps prevent the "winner's curse" b. rewards institutional investors who share their market value opinions c. reduces potential lawsuits against underwriters d. diminishes underwriting risk e. provides better returns to issuing firms

e. provides better returns to issuing firms