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Exam 15: Raising Capital

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Question 31

Multiple Choice

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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:

A) 3 months.
B) 6 months.
C) 180 days.
D) 2 years.
E) 5 years.

F) None of the above
G) A) and D)

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Question 32

Multiple Choice

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Advertisements in a financial newspaper announcing a public offering of securities,along with 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.

F) D) and E)
G) A) and C)

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Question 33

Multiple Choice

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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?

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?

The Woods Co.and the Mickelson Co.have both announced IPOs at $43 per share.One of these is undervalued by $20,and the over is overvalued by $14,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 Woods and 1,000 shares of Mickelson?

Steve is the founder of Jefferson & Westover.Recently,the firm decided to issue an IPO with Steve retaining 30 percent ownership of the firm.The IPO agreement contained both a Green Shoe provision and a 6-month lockup agreement.Steve's cost basis per share is $15.The offering price for the IPO was $16.On the first day of trading,the market price per share rose to $28.20 and closed for the day at $25.60.Now,six months after the IPO release,the stock is valued at $15.40 a share.Explain who benefited the most during the lockup period,an outside investor or Steve,and why.

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?

The Educated Horses Corporation needs to raise $20 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 $40 per share and the company's underwriters charge an 8 percent spread.The SEC filing fee and associated administrative expenses of the offering are $660,000.How many shares need to be sold?

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?

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

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?

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

Flagler,Inc.needs to raise $30 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.The offer price is $40 per share and the company's underwriters charge a 10 percent spread.How many shares need to be sold?

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations.Some recent financial information for the company is shown here: MHMM is considering an investment that has the same P/E ratio as the firm.The cost of the investment is $800,000,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 $115 per share? Assume the PE ratio remains constant.

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.

Which one of the following statements concerning dilution is correct?

Explain both a rights offering and the basic characteristics of a right.

Explain why there is a tendency for IPOs to be underpriced.

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

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