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10) Big Box retailing has a market capitalization of $500 million and 20 million shares
outstanding. In order to inance its growth, the management of Big Box plans to raise
further capital through a rights issue. All shareholders will be issued ten rights to purchase
a new share at a price of $1.00. What will the price of a share be after the SEO, if all
shareholders exercise their rights?
A) $23.82
B) $24.81
C) $23.00
D) $22.82
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
11) Chambers Industries has a market capitalization of $800 million and 250 million shares
outstanding. The management of this irm plans to raise further capital through a rights
issue. Which of the following rights schemes will raise the most money, if all shareholders
exercise their rights?
A) two rights to purchase one share at $1.60 per share
B) three rights to purchase two shares at $1.80 per share
C) four rights to purchase three shares at $2.00 per share
D) ive rights to purchase two shares at $1.50 per share
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
40
12) Which of the following is an advantage of a cash ofer over a rights ofer?
A) The underwriter can credibly attest to the issue's quality.
B) The overall costs are lower.
C) There is no loss imposed on the current holders of stock.
D) There are lower underwriting fees.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13) Convex Incorporated sells 10 million shares of stock in an SEO—8 million being
primary shares issued by the company and 2 million being secondary shares sold by
investors in the company. At the time of the sale, Convex's stock was selling at $7.50 per
share. If the underwriter charges 4% of the gross proceeds as a fee, how much money was
raised in the sale?
A) $46.08 million
B) $57.60 million
C) $60.48 million
D) $92.16 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) Braynerd Chemicals sells 40 million shares of stock in an SEO—25 million being
primary shares issued by the company and 15 million being secondary shares sold by
investors in the company. At the time of the sale, Braynerd's stock was selling at $21.00 per
share. If the underwriter charges 5% of the gross proceeds as a fee, how much money was
raised in the sale?
A) $374.06 million
B) $423.94 million
C) $498.75 million
D) $573.56 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
41
15) Parafoil Avionics sells 50 million shares of stock in an SEO—20 million being primary
shares issued by the company and 30 million being secondary shares sold by investors in
the company. At the time of the sale, Parafoil's stock was selling at $13.00 per share. If the
underwriter charges 7% of the gross proceeds as a fee, how much money was raised in the
sale?
A) $242 million
B) $254 million
C) $290 million
D) $314 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16) Parafoil Avionics sells 50 million shares of stock in an SEO—30 million being primary
shares issued by the company and 20 million being secondary shares sold by investors in
the company. At the time of the sale, Parafoil's stock was selling at $11.50 per share. If the
underwriter charges 7% of the gross proceeds as a fee, how much money did existing
investors in the company raise in the sale?
A) $213.90 million
B) $224.60 million
C) $855.60 million
D) $866.30 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
17) Convex Incorporated sells 10 million shares of stock in an SEO—8 million being
primary shares issued by the company and 2 million being secondary shares sold by
investors in the company. At the time of the sale, Convex's stock was selling at $8.00. If the
underwriter charges 4% of the gross proceeds as a fee, how much money was raised in the
sale?
A) $61.44 million
B) $64.51 million
C) $98.30 million
D) $104.45 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
18) Highlander Homes stock trades at $34 per share and there are 50 million shares
outstanding. The management would like to raise $200 million in an SEO. If the
underwriter charges 6% of gross proceeds, how many shares must it sell?
A) 5.32 million
42
B) 5.63 million
C) 5.94 million
D) 6.26 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
19) Highlander Homes stock trades at $31 per share and there are 50 million shares
outstanding. The management would like to raise $300 million in an SEO, and current
investors would like to sell $100 million of their own stock. If the underwriter charges 6%
of gross proceeds, how many shares must it sell in the total (primary and secondary)
ofering?
A) 13.04 million
B) 10.30 million
C) 13.73 million
D) 10.98 million
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
43
20) Neutrino Industries stock trades at $49 per share and there are 120 million shares
outstanding. The management would like to raise $400 million in an SEO. If the
underwriter charges 6% of gross proceeds, how many shares must it sell?
A) 7.38 million
B) 7.82 million
C) 8.25 million
D) 8.68 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
21) Criswell Mining stock trades at $19 per share, and there are 200 million shares
outstanding. The management would like to raise $100 million in an SEO. If the
underwriter charges 5% of gross proceeds, how many shares must it sell?
A) 5.26 million
B) 5.54 million
C) 8.86 million
D) 9.97 million
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
44
22) Highlander Homes stock trades at $35 per share and there are 50 million shares
outstanding. The management would like to raise $300 million in an SEO. If the
underwriter charges 5% of gross proceeds, and all the shares are primary shares sold to
new investors, what percentage of the company will be owned by the new investors?
A) 12.99%
B) 13.76%
C) 14.52%
D) 15.29%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
23) Highlander Homes stock trades at $30 per share and there are 50 million shares
outstanding. The management would like to issue a total of 10 million (primary and
secondary) shares in an SEO. If the underwriter charges 5% of gross proceeds, 25% of the
shares are primary shares sold to new investors, and 75% of the shares are secondary
shares sold to new investors, what percentage of the company will be owned by the new
investors?
A) 13.33%
B) 18.10%
C) 14.29%
D) 19.05%
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
45
24) Which of the following statements is FALSE?
A) More often than not, irms return to the equity markets and ofer new shares for sale, a
type of ofering called a seasoned equity ofering (SEO).
B) Usually, proitable growth opportunities occur throughout the life of a irm, and in some
cases it is not feasible to inance these opportunities out of retained earnings.
C) When a irm issues stock using an SEO, it follows many of the same steps as for an IPO.
The main diference is that a market price for the stock already exists, so the price-setting
process is not necessary.
D) A irm's need for outside capital usually ends at the IPO.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
25) Which of the following statements is FALSE?
A) Primary shares are new shares issued by the company.
B) Today, investors become informed about the impending sale of stock by the news media,
via a road show, or through the book-building process, so tombstones are purely
ceremonial.
C) In a cash ofer, a irm ofers the new shares to existing shareholders.
D) Historically, intermediaries would advertise the sale of stock (both IPOs and SEOs) by
taking out advertisements in newspapers called tombstones.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
26) Which of the following statements is FALSE?
A) In a rights ofer, a irm ofers the new shares only to existing shareholders.
B) Secondary shares are shares sold by existing shareholders, including the company's
founder.
C) If a irm's management is concerned that its equity may be underpriced in the market,
by using a rights ofering the irm can continue to issue equity without imposing a loss on
its current shareholders.
D) In the United States, most ofers are rights ofers.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
46
27) Which of the following statements is FALSE?
A) SEO rights ofers have lower costs than cash ofers.
B) The decision to raise inancing externally usually implies that a irm plans to pursue an
investment opportunity.
C) Although not as costly as IPOs, seasoned oferings are still expensive.
D) Researchers have found that, on average, the market greets the news of an SEO with a
price increase.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
28) Which of the following statements is FALSE?
A) The one advantage of a cash ofer is that the underwriter takes on a larger role and,
therefore, can credibly certify the issue's quality.
B) SEO underwriting fees average about 5% of the proceeds of the issue and, as with IPOs,
the variation across issues of diferent sizes is relatively small.
C) As with IPOs, evidence suggests that companies overperform following a seasoned
ofering.
D) Often the value destroyed by the price decline can be a signiicant fraction of the new
money raised with a SEO.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
47
29) Luther Industries currently has 100 million shares of stock outstanding at a price of
$25 per share. The company would like to raise money and has announced a rights issue.
Every existing shareholder will be sent one right per share of stock that he or she owns.
The company plans to require twenty rights to purchase one share at a price of $30 per
share. The amount of money that Luther will raise through its rights ofering is closest to
________.
A) $750 million
B) $187.5 million
C) $150 million
D) $600 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
30) How many types of seasoned equity oferings are there?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
48
