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Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
Chapter 11—Raising Long-Term Financing
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Chapter 11—Raising Long-Term Financing

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  • 1. Chapter 11—Raising Long-Term Financing MULTIPLE CHOICE 1. Which law mandated the separation of investment and commercial banking? a. Gramm-Leach-Bliley Act b. McFadden Act c. Glass-Steagall Act d. none of the above ANS: C DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 2. A security offering that raises capital for firms is called a(n) a. primary security offering b. secondary security offering c. securitization d. all of the above ANS: A DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 3. A bond sold by foreign corporations to U.S. investors is called a(n) a. Eurobond b. foreign bond c. Yankee bond d. none of the above ANS: C DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 4. A bank that helps firms to acquire external capital is called a a. commercial bank b. savings bank c. investment bank d. credit union ANS: C DIF: E REF: Investment Banking and the Public Sale of Securities 5. Which of the following is not considered an advantage of going public? a. new capital for the company b. listed stock for use as compensation c. stock price emphasis d. personal wealth and liquidity ANS: C DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) 6. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, what is the per share pro- ceeds that Bavarian will receive? a. $11.59 b. $10.67 c. $13.41 d. $12.50
  • 2. ANS: A $12.50(1-.0725) = $11.59 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities 7. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.25 per share. If the offering price of the stock is set at $12.50 per share, what is the per- centage underwriting discount?? a. 8% b. 9% c. 10% d. 11% ANS: C $1.25/$12.50 = .10 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities 8. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share and the company is plan- ning on issuing 1 million shares, what are the total proceeds that Bavarian will receive? a. $12,500,000 b. $11,593,750 c. $10,750,000 d. $13,275,500 ANS: B 12.50(1-.0725)1,000,000 = 11,593,750 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities 9. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.25. If the offering price of the stock is set at $12.50 per share and the company is plan- ning on issuing 1 million shares, what are the total proceeds that Bavarian will receive? a. 12,500,000 b. 11,250,000 c. 13,750,000 d. 10,875,000 ANS: B (12.50-1.25)1,000,000 = 11,250,000 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities 10. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million? a. 6,000,000 b. 6,469,003 c. 5,567,400 d. 5,000,000 ANS: B 75,000,000/(12.50)(1-.0725) = 6,469,003
  • 3. DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities 11. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.30. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million? a. 6,000,000 b. 5,789,452 c. 5,000,000 d. 6,696,429 ANS: D 75,000,000/(12.50-1.30) = 6,696,429 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities 12. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.30. Legal and other expenses amount to $1,350,000. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million? a. 6,696,429 b. 6,816,964 c. 6,000,000 d. 5,769,345 ANS: B (75,000,000 + 1,350,000)/(12.50 - 1.30) = 6,816,964 DIF: M REF: 11.2 Investment Banking and the Public Sale of Securities 13. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. Legal and other expenses amount to $1,350,000. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million? a. 6,108,000 b. 6,585,445 c. 6,696,429 d. 7,124,359 ANS: B (75,000,000 + 1,350,000)/(12.50(1-.0725)) = 6,585,445 DIF: M REF: 11.2 Investment Banking and the Public Sale of Securities NARRBEGIN: Bavarian Brewhouse IPO Bavarian Brewhouse IPO Bavarian Brewhouse is planning an IPO. Under the terms of the IPO, Bavarian Brewhouse will issue 8 million shares at an offer price of $25 per share. The underwriter charges an 9% underwriting fee and direct costs are estimated to be $7 million. The stock is expected to trade at $30 at the end of the first trading day. NARREND 14. What is the total amount of funds raised by Bavarian Brew through the IPO? a. $175 million b. $182 million c. $200 million d. $150 million
  • 4. ANS: A net proceeds per share: 25(1-.09) = 22.75 net proceeds = 22.75(8,000,000) - 7,000,000 = 175,000,000 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Bavarian Brewhouse IPO 15. What is the initial return earned by investors on this Bavarian Brewhouse IPO? a. 20% b. 15% c. 17% d. 22% ANS: A (30-25)/25 = .20 DIF: E REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Bavarian Brewhouse IPO 16. What are the total underwriting fees for this Bavarian Brewhouse IPO? a. $18 million b. $7 million c. $25 million d. $10 million ANS: C (.09)25(8,000,000) + 7,000,000 = 25,000,000 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Bavarian Brewhouse IPO 17. Refer to Bavarian Brewhouse IPO. What are the total costs caused by underpricing? a. $8 million b. $40 million c. $32 million d. $25 million ANS: B $5(8,000,000) = 40,000,000 DIF: E REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Bavarian Brewhouse IPO 18. What are the total costs (underwriting and underpricing) of the Bavarian Brewhouse IPO? a. $25 million b. $40 million c. $65 million d. $80 million ANS: C 25,000,000 + 40,000,000 = 65,000,000 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Bavarian Brewhouse IPO
  • 5. 19. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise $10 million, what are the total dollar costs? a. $900,000 b. $989,011 c. $856,788 d. $1,000,000 ANS: B 10,000,000/(1-.09) - 10,000,000 = 989,011 DIF: H REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) 20. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise net $10 million, what is the total amount of money that needs to be raised? a. $10,800,000 b. $10,989,011 c. $12,456,875 d. $8,458,950 ANS: B 10,000,000/(1-.09) = 10,989,011 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NARRBEGIN: Smith Enterprises Smith Enterprises Smith Enterprises recently conducted an IPO. In this, Smith received $14 per share from the under- writer, the offering price per share was $16 and the stock price rose to $19 on the first day of trading. NARREND 21. Refer to Smith Enterprises. What is the underwriter’s discount? a. 14.3% b. 12.5% c. 16.3% d. 10.2% ANS: B 2/16 = ..125 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Smith Enterprises 22. Refer to Smith Enterprises. What is the first day return on an investment in the IPO? a. 21.42% b. 15.79% c. 18.75% d. 12.56% ANS: C 3/16 = .1875 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Smith Enterprises
  • 6. 23. Refer to Smith Enterprises. What is the total percentage costs of the IPO (underwriting and underpric- ing)? a. 35.7% b. 14.3% c. 18.8% d. 21.4% ANS: A (19-14)/14 = .357 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: Smith Enterprises NARRBEGIN: Smith Enterprises 2 Smith Enterprises 2 Smith Enterprises wants to conduct an IPO. The offering price of the stock is $15, the underwriter’s discount is 6% and legal and other expenses are estimated to be $1,500,000. NARREND 24. Refer to Smith Enterprises 2. What are the net proceeds per share? a. $15 b. $16 c. $14.10 d. $17.20 ANS: C 15(1-.06) = 14.10 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities NAR: Smith Enterprises 2 25. Refer to Smith Enterprises 2. If the company issues 1,000,000 shares, what are the net proceeds of the IPO? a. $13,500,000 b. $15,000,000 c. $12,600,000 d. $10,500,000 ANS: C 1,000,000(1-.06)(15) - 1,500,000 = 12,600,000 DIF: E REF: 11.2 Investment Banking and the Public Sale of Securities NAR: Smith Enterprises 2 26. The dominant source of financing for U.S. corporations is a. debt financing. b. new equity. c. internal cash flow. d. none of the above. ANS: C DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 27. An institution that raises capital by issuing liabilities against itself is a a. financial intermediary. b. financial broker.
  • 7. c. financial agent. d. none of the above. ANS: A DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 28. The 1933 law that prohibited commercial banks from underwriting corporate security issues, as well as a host of other things is a. the Glass-Steagall Act. b. the McFadden Act. c. the Gramm-Leach-Bliley Act. d. none of the above ANS: A DIF: M REF: 11.1 The Basic Choices in Long-Term Financing 29. When a financial intermediary repackages loans and other traditional bank-based credit products into securities that can be sold to public investors we call that a. privatization. b. securitization. c. asset substitution. d. none of the above ANS: B DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 30. In the U.S., firms that need to raise capital externally, prefer to issue a. common stock. b. preferred stock. c. debt. d. hybrid securities. ANS: C DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 31. A bond sold in the U.S. by a German based company is an example of a(n) a. Eurobond. b. Yankee bond. c. Samurai bond. d. none of the above ANS: B DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 32. An investment banking firm that generally occupies the lead or co-lead manager’s position in large se- curity offerings is referred to as a. a bulge bracket firm. b. a green shoe firm. c. a Wall Street firm. d. none of the above. ANS: A DIF: M REF: 11.2 Investment Banking and the Public Issuance of Securities 33. Lead Investment Banking Corp. is the lead underwriter for the equity issuance of NewCorp. Lead is responsible for 80% of the issue at a discount of $1.70 per share. If Lead is responsible for selling 1,300,000 shares then what is the total compensation to the underwriting syndicate? a. $1,768,000 b. $2,210,000 c. $2,762,500 d. none of the above
  • 8. ANS: C 1,300,000 / .8 = 1,625,000 × 1.7 = 2,762,500 DIF: M REF: 11.2 Investment Banking and the Public Issuance of Securities 34. In general, what is the determining factor in the underwriting spread charged by investment banks? a. the size of the issue b. the risk inherent in the security to be issued c. the name recognition of the underwriter d. none of the above ANS: B DIF: M REF: 11.2 Investment Banking and the Public Issuance of Securities 35. The most important law governing the sale of new securities is a. the Glass-Steagall Act. b. the Securities Act of 1933. c. the Securities and Exchange Commission Act of 1934. d. none of the above. ANS: B DIF: M REF: 11.2 Investment Banking and the Public Issuance of Securities 36. Which of the following should not be considered a benefit to a firm that is issuing an IPO? a. access to additional capital b. provide an alternative to cash for future acquisistions c. have another source, other than cash for executive compensation d. limits the founder’s ownership dilution ANS: D DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) 37. Which of the following factors might be most important for an entrepreneur that is considering an IPO in an industry where a firm’s strategy is its most important asset. a. the use of stock as a compensation vehicle b. the investment banking fee c. the disclosure requirments of publicly traded firms d. all of the above are most import to such a firm ANS: C strategy can be interpreted as private information ===> disclosure is the most onerous choice. DIF: H REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) 38. If Company X intends to distribute shares of its wholly owned subsidiary to its current shareholders in an effort to make the subsidiary a publicly traded company, then Company X is contemplating a(n) a. equity carve-out b. spin-off c. LBO d. none of the above ANS: B DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)
  • 9. 39. If you are anticipating purchasing shares of companies that will be offering shares to the public for the first time, your most profitable strategy for purchasing those shares will be a. to buy them in the primary market. b. to buy them in the secondary market. c. buy options on the shares before the IPO date. d. none of the above. ANS: A Note: buying options on pre-IPO shares is not possible DIF: H REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) 40. If you were to purchase the shares of a firm one month after its IPO as well as the shares of a compara- ble sized (matched) firm on the same day and then hold both shares for five years, you would expect a. that the return of the IPO firm’s stock to be greater than that of the matched firm. b. that the return of the matched firm’s stock to be greater than that of the IPO firm. c. that the return of the two stocks to be equal. d. that since the two firms are likely to be uncorrelated the relation cannot be predicted. ANS: B DIF: H REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) 41. If you are an investor that owns shares in a firm that you believe is about to issue additional equity, then you would expect the price of your shares to a. increase. b. be unaffected. c. decrease. d. all three of the above could happen with equal probability. ANS: C DIF: M REF: 11.4 Seasoned Equity Offerings in the United States 42. If a firm is going to issue additional equity by offering existing shareholders the right, or the ability to sell to someone else that right, to purchase the offering then that is called a a. general cash offering. b. rights offering. c. seasonal rights offering. d. none of the above. ANS: B DIF: M REF: 11.4 Seasoned Equity Offerings in the United States 43. Which of the following would most likely get a firm in trouble if it sold private placement securities to this investor? a. pension fund b. venture capitalist c. retiree d. none of the above ANS: C DIF: M REF: 11.4 Seasoned Equity Offerings in the United States 44. Which of the following is a valid concern for an investor who is considering purchasing a bond which has been issued under Rule 144A? a. Rule 144A issues are less liquid than public issues
  • 10. b. Rule 144A issues are traded in the secondary market too actively to accurately value them c. Rule 144A issues can never be repurchased by the issuing firm d. none of the above ANS: A Securities issued under Rule 144A are private issues which are less liquid than public issues. DIF: M REF: 11.4 Seasoned Equity Offerings in the United States 45. One reason that a U.S. based firm might want to issue its equity in international markets is a. that the firm will be able to raise markedly more capital, through a much higher security price, in the international markets. b. that an international issue may help a company integrate itself into a international local business scene. c. that U.S. Securities Law states that international ownership has no voting rights. d. none of the above. ANS: B DIF: M REF: 11.5 International Common Stock Offerings 46. A non-U.S. based company would like to issue a form of its common equity in the U.S. A current method for doing so would be a. to contract for a U.S. investment back to issue a sponsored ADR. b. to let a U.S. investment bank issue an unsponsored ADR. c. to sell put options on its own stock to U.S. investors. d. none of the above. ANS: A DIF: H REF: 11.5 International Common Stock Offerings 47. American Depository Receipts provide U.S. Investors with a. the ability to purchase foreign securities in the foreign companies domestic currency. b. the ability to purchase foreign securities in U.S. dollars. c. the ability to purchase U.S. securities in foreign currency denominations. d. none of the above. ANS: B DIF: M REF: 11.5 International Common Stock Offerings 48. An example of a share privatization issue would be a. the public issue of securities representing ownership in the telephone system which is cur- rently owned by the government of a foreign country. b. the public issue of securities representing ownership in a firm that is currently privately owned by a foreign citizen. c. the private issue of securities representing ownership in a firm that is currently privately owned by a foreign citizen. d. none of the above. ANS: A DIF: H REF: 11.5 International Common Stock Offerings 49. Most of the short-term capital gains of share privatization IPOs are captured by a. investors and citizens who vote in the country of the firm that is being privatized. b. the investor base that is determined to pay the maximum price for the IPO. c. the international monetary fund that helped inject much of the initial capital for the initial start up. d. none of the above. ANS: A DIF: M REF: 11.5 International Common Stock Offerings
  • 11. 50. One characteristic of share privatizations is a. that they are generally much larger than the IPOs of their private-sector counterparts. b. that they are generally much smaller than the IPOs of their private-sector counterparts. c. that the decision to privatize is made solely on economic grounds. d. none of the above. ANS: A Note: C is incorrect because much of the economic benefit flows to voters rather than investors that might maximize the price of the IPO. DIF: M REF: 11.5 International Common Stock Offerings 51. Assume that you purchase shares of a company that recently executed an IPO at the post-offering mar- ket price of $32 per share, and you hold the shares for one year. You then sell your shares for $36 per share. The company does not pay dividends, and you are not subject to capital gains taxation. What net return did you earn on your share investment? a. 11.11% b. 12.00% c. 12.50% d. 13.00% ANS: C =($36-$32)/$32 = .1250 DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 52. Assume that you purchase shares of a company that recently executed an IPO at the post-offering mar- ket price of $50 per share, and you hold the shares for one year. You then sell your shares for $52.50 per share. The company does not pay dividends, and you are not subject to capital gains taxation. What net return did you earn on your share investment? a. 2.50% b. 4.81% c. 5.00% d. 7.50% ANS: C =($52.50-$50)/$50 = .0500 DIF: E REF: 11.1 The Basic Choices in Long-Term Financing NARRBEGIN: Sea Grove Beach Corp. Sea Grove Beach Corporation Sea Grove Beach Corporation is executing an initial public offering with the following characteristics. The company will sell 12 million shares at an offer price of $20 per share, the underwriter will charge a 7 percent underwriting fee, and the shares are expected to sell for $27.50 per share by the end of the first day’s trading. Assuming this IPO is executed as expected. NARREND 53. Refer to Sea Grove Beach Corporation. What is the initial return earned by investors allocated shares in the IPO? a. 20.27% b. 27.27% c. 30.50% d. 37.50%
  • 12. ANS: D =($27.50-$20)/$20 = .375 DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Sea Grove Beach Corp. 54. How much will Sea Grove Beach Corporation receive from the offering? a. $6.30 million b. $223.20 million c. $240.50 million d. $306.90 million ANS: B = 12*$20*.93 = $223.20 DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Sea Grove Beach Corp. 55. What is the total cost (underwriting fee and underpricing) of this issue to Sea Grove Beach Corpora- tion? a. $6.30 million b. $16.80 million c. $106.80 million d. $125.00 million ANS: C = 12*$27.50 - 12*$20*.93 = $106.80 DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Sea Grove Beach Corp. 56. Montigo Magic Petroleum Corporation is interested in selling common stock to raise capital for a new oil well. The firm has contacted First Bank of Manhattan, a large underwriting firm, which believes that the stock can be sold for $40 per share. The underwriter also believes, after careful research, that its administrative costs will be 2.75 percent of the sale price and its selling costs will be 2.40 percent of the sale price. If the underwriter requires a profit equal to 1.25 percent of the sale price, how much will the spread have to be in dollars to cover the underwriter’s costs and profit? a. $0.64 b. $1.80 c. $2.16 d. $2.56 ANS: D = 2.75% + 2.40% + 1.25% = 6.40% = $40*6.40% = $2.56 DIF: E REF: 11.2 Investment Banking and the Issuance of Public Securities NARRBEGIN: Sea Grove Beach Co. Sea Grove Beach Company Sea Grove Beach Company needs to raise $30 million of new equity capital. Its common stock is cur- rently selling for $44 per share. The investment bankers require an underwriting spread of 7 percent of the offering price, and the company’s legal, accounting, and printing expenses associated with the sea- soned offering are estimated to be $500,000. NARREND
  • 13. 57. Refer to Sea Grove Beach Company. How many new shares must the company sell to net $30 million? a. 745,357 b. 745,857 c. 746,127 d. 746,327 ANS: A = $30,000,000 = X * .93 * $44 - $500,000 X = 745,357 DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Sea Grove Beach Co. 58. What is the net price per share that Sea Grove Beach Company will receive from this offering? a. $40.24 b. $40.92 c. $42.24 d. $43.93 ANS: B = .07*$44 = $3.08 Net = $44 - $3.08 =$40.92 DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Sea Grove Beach Co. NARRBEGIN: Panama City Panama City Beach Company Panama City Beach Company needs to raise $60 million of new equity capital. Its common stock is currently selling for $70 per share. The investment bankers require an underwriting spread of 5 percent of the offering price, and the company’s legal, accounting, and printing expenses associated with the seasoned offering are estimated to be $200,000. NARREND 59. What is the net price per share that Panama City Beach Company will receive from this offering? a. $66.00 b. $66.20 c. $66.50 d. $67.00 ANS: C = .05*$70 = $3.50 Net = $70 - $3.50 =$66.50 DIF: H REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Panama City 60. Refer to Panama City Beach Company. How many shares must be sold to net $60 million? a. 905,263 b. 902,256 c. 885,715 d. 857,143 ANS: A
  • 14. = .05*$70 = $3.50 Net = $70 - $3.50 =$66.50 $62,000,000/$66.50 = 905,263 DIF: H REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Panama City NARRBEGIN: Brooks Corporation Brooks Corporation Brooks Corporation has just received $40 million in net proceeds from a seasoned offering. The offer- ing was underwritten by ABC Investments, an investment bank that focuses on small company offer- ings. For the offering, 8 million shares of stock were issued and the underwriting expenses for ABC Investments were $800,000. NARREND 61. Refer to Brooks Corporation. For ABC Investments to make a profit on this offering, what is the mini- mum price they must sell the stock for on the secondary market? a. $5.00 b. $5.04 c. $5.10 d. $5.15 ANS: C Break even = 8*X - $40 - $0.8 = $0 X = $5.10 DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Brooks Corporation 62. Refer to Brooks Corporation. ABC Investments is able to sell the stock on the secondary market at $6.00. What is the profit for ABC Investments for underwriting this seasoned offering? a. $7.2 million b. $7.6 million c. $8.0 million d. $8.8 million ANS: A Profit = 8*$6 - $40 - $0.8 = $0 Profit = $7.2 DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities NAR: Brooks Corporation NARRBEGIN: "Flip" shares 1 "Flip" shares 1 Three companies went public last month with initial public offerings (IPO). The offer price and first day closing price are shown below for the three firms. An investor was able to purchase 100 shares of each company at the offer price and then “flip” the shares at the end of the day for the full return. Stock Offer Price Closing Price A $10 $12.50 B $80 $96.00 C $40 $55
  • 15. NARREND 63. Refer to "Flip" shares 1. What was the total dollar value of this investment at the end of the first day? (Ignore any tax implications for this question) a. $13,000 b. $14,650 c. $15,850 d. $16,350 ANS: D A: 100*$12.50 = $1250 B: 100*$96.00= $9600 C: 100*$55 = $5500 TOTAL: $16,350 DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: "Flip" shares 1 64. Refer to "Flip" shares 1. What was the return on this investment at the end of the first day? (Ignore any tax implications for this question) a. 23.1% b. 25.8% c. 27.5% d. 29.1% ANS: B avg. return = (1/13)*(25%)+(8/13)*(20%)+(4/13)*(37.5%) = 25.8% DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: "Flip" shares 1 NARRBEGIN: "Flip" shares 2 "Flip" shares 2 Three companies went public last month with initial public offerings (IPO). An investor was able to purchase shares of each company at the offer price and then “flip” the shares at the end of the day for the full return. The shares of each company sold for a $20 offer price. The number of shares pur- chased and the first day return are shown below. Shares First Day Stock Bought Return A 50 20% B 75 12% C 75 5% NARREND 65. Refer to "Flip" shares 2. What was the return on this investment at the end of the first day? (Ignore any tax implications for this question) a. 11.38% b. 11.61% c. 11.88% d. 12.33% ANS: A
  • 16. =50/200*20%+75/200*12%+75/200*5%= 11.38% DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: "Flip" shares 2 66. Refer to "Flip" shares 2. What was the dollar value of the IPO investment after the first day? (Ignore any tax implications for this question) a. $4,493 b. $4,477 c. $4,455 d. $4,400 ANS: C =50/200*20%+75/200*12%+75/200*5%= 11.38% =$20*(50+75+75)*(1.1138) = $4,455 DIF: H REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs) NAR: "Flip" shares 2 NARRBEGIN: ABC Logistics ABC Logistics The managers of ABC Logistics (ABC) have decided to expand the company’s operations into a few new markets. To fund this opportunity, ABC has decided to launch a seasoned equity offering to raise new equity capital. ABC currently has 12 million shares outstanding, and yesterday’s closing market price was $40.00 per ABC share. The company plans to sell 3 million newly issued shares in its sea- soned offering. The investment banking firm of Armstrong Incorporated has agreed to underwrite the new stock issue for a 4 percent discount from the offering price, which ABC and Armstrong have agreed should be $0.50 per share lower than ABC’s closing price the day before the offering is sold. NARREND 67. If ABC’s stock price closes at $39.00 the day before the offering, what will be the net proceeds for ABC from this offering? a. $109.55 million b. $110.88 million c. $112.32 million d. $117.00 million ANS: B = 3*.96*38.50 =$110.88 million DIF: M REF: 11.4 Seasoned Equity Offerings in the United States NAR: ABC Logistics 68. If ABC’s stock price closes at $39.00 the day before the offering, calculate the return earned by ABC’s existing stockholders on their shares from the time before the seasoned offering was announced through the time it was actually sold for $38.50 per share. a. -3.75% b. -2.00% c. 1.25% d. 3.75% ANS: A = ($38.50-$40)/$40 = -0.0375 DIF: M REF: 11.4 Seasoned Equity Offerings in the United States
  • 17. NAR: ABC Logistics 69. If ABC’s stock price closes at $39.00 the day before the offering, calculate the total cost of the sea- soned equity offering to ABC’s existing stockholders as a percentage of the offering proceeds. a. 16.23% b. 18.51% c. 20.10% d. 20.40% ANS: D Proceeds from offer = 3*.96*$38.50=$110.88 market value of firm’s shares after offering = 15*38.50 =$577.50 Wealth loss for existing holders = 12 * $1.50 = $18 Underwriting fee = .04*3*$38.50 = $4.62 Wealth loss + underwriting fee = $22.62 Cost of issue = $22.62/$110.88 = 20.40% DIF: H REF: 11.4 Seasoned Equity Offerings in the United States NAR: ABC Logistics 70. If ABC’s stock price closes at $46.75 the day before the offering, calculate the total cost of the sea- soned equity offering to ABC’s existing stockholders as a percentage of the offering proceeds. a. 32.72% b. 31.65% c. 30.17% d. 29.89% ANS: A Proceeds from offer = 5*.95*$46=$218.50 market value of firm’s shares after offering = 20*46 =$920 Wealth loss for existing holders = 15 * $4 = $60 Underwriting fee = .05*5*$46 = $11.50 Wealth loss + underwriting fee = $71.50 Cost of issue = $71.50/$218.50 = 32.72% DIF: H REF: 11.4 Seasoned Equity Offerings in the United States NAR: ABC Logistics 71. What is an institution that raises funds by issuing liabilities against itself? a. Financial intermediary b. Mutual fund company c. Investment bank d. Initial public offering ANS: A DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 72. What is the term for the repackaging of loans and other traditional bank-based credit products into se- curities that can be sold to public investors? a. Privatization b. Asset Bundling c. Securitization d. Primary offering
  • 18. ANS: C DIF: E REF: 11.1 The Basic Choices in Long-Term Financing 73. Which statement is FALSE regarding the issuance of securities by investment banks? a. The profits for an investment bank are determined by the size of the underwriting spread. b. The prospectus is the legal document that describes the terms of the IPO. c. Banks charge higher spreads for seasoned equity offerings than unseasoned equity offer- ings. d. Banks charge higher spreads on equity issues than debt issues. ANS: C DIF: M REF: 11.2 Investment Banking and the Issuance of Public Securities 74. What is the most important federal law regarding the issue of new securities? a. Securities Act of 1923 b. Securities Act of 1933 c. Securities Act of 1943 d. Securities Act of 1953 ANS: B DIF: E REF: 11.2 Investment Banking and the Issuance of Public Securities 75. Which of the following is NOT a benefit of going public for a private firm? a. New capital for the company. b. Publicly traded stock for acquisitions c. Personal wealth and liquidity d. Low managerial cost in issuing the IPO. ANS: D DIF: M REF: 11.3 The U.S. Market for Initial Public Offerings (IPOs)

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