7) National Trucking, Inc., will issue 20-year, semiannual bonds with a 6.0% coupon rate and a
$1,000 par value. Bonds of similar risk and maturity are currently selling to yield 5.20% in the
market place. What is the market price of one of the firm’s new bonds? Use a financial calculator
to determine your answer.
A) $1,000.00
B) $1,124.72
C) $1,116.24
D) $1,098.74
8) Good Buy Inc. plans to sell 30,000 bonds each with a face value of $1,000. If all of the bonds
eventually sell for $1,050 each and the firm’s investment banker receives a commission of 1.50%
for every bond sold, what are the net proceeds to the firm from the sale of the bond issue?
A) $31,500,000
B) $31,275,000
C) $31,180,000
D) $31,027,500
9) Bonneville Power Company will issue 20-year, semiannual bonds with an 4.0% coupon rate
and a $1,000 par value. Bonds of similar risk and maturity are currently selling to yield 4.10% in
the market place. What is the market price of one of the firm’s new bonds? Use a financial
calculator to determine your answer.
A) $1,000.00
B) $986.44
C) $901.04
D) $894.12
10) Neighborhood Drugstore plans to sell 10,000 bonds each with a face value of $1,000. If all of
the bonds eventually sell for $990 each and the firm’s investment banker receives a commission
of 2.50% for every bond sold, what are the net proceeds to the firm from the sale of the bond
issue?
A) $9,652,500
B) $9,900,000
C) $10,000,000
D) $10,150,000
11) The public auction of bonds in the United States is regulated by the Federal Reserve System.
12) For a bond auction, a company selects a commercial banker to help design and market the
bond.
13) The prospectus is the formal contract for the bond.
14) An investment bank is an agent that works with the firm to meet all the listing requirements
of the bond issue, the design of the bond terms, the marketing of the bond, and the auction of the
bond.
15) Wilderness Adventure Vacation Company will issue 20-year, semiannual bonds with a 9.0%
coupon rate and a $1,000 par value. Bonds of similar risk and maturity are currently selling to
yield 10.0% in the marketplace. What is the market price of one of the firm’s new bonds? If the
investment banking firm working with the firm receives a best-efforts commission of 2.0% per
bond sold, how much money will it make if the issue sells only 80% of the 5,000 bonds offered?
Use a financial calculator to determine your answer.
23
Copyright © 2019 Pearson Education, Inc.
15.5 Borrowing for a Stable and Mature Business: Selling Stock
1) The process for selling stock for the very first time is known as ________.
A) an initial public offering
B) a primary market
C) first refusal rights
D) a rookie offering
2) For your firm’s initial public offering of stock, your investment banker has guaranteed a
specific amount of funds your firm will receive. This is an example of what type of investment
banker compensation?
A) Due diligence
B) Firm commitment
C) IPO
D) Best efforts
3) By making a/an ________, the investment banker agrees to buy an entire issue of new
securities from a firm and then attempt to sell the securities to the public.
A) firm commitment
B) best effort
C) IPO
D) due diligence
4) Houston Investments (HI), a Texas-based investment banking firm, has proposed two types of
payment plans for the IPO being considered by Anderson Exploration. The first is a firm
commitment of $20,000,000. The second is a best efforts arrangement in which Houston
Investments will receive $3.00 for every share sold up to a maximum of $1,200,000 for the
400,000 shares being offered. How much money will HI earn under the firm commitment
method if it is able to sell only 85% of the offering at a price of $60.00 per share?
A) $400,000
B) $800,000
C) $1,200,000
D) $1,600,000
5) Houston Investments (HI), an investment banking firm, has proposed two types of payment
plans for the IPO being considered by Anderson Exploration. The first is a firm commitment of
$20,000,000. The second is a best efforts arrangement in which HI will receive $3.00 for every
share sold up to a maximum of $1,200,000 for the 400,000 shares being offered. How much
money will HI earn under the best efforts method if it is able to sell only 85% of the offering at a
price of $60.00 per share?
A) $800,000
B) $1,080,000
C) $1,020,000
D) $960,000
6) Great Plains Investment Inc. (GPI), an investment banking firm, has proposed two types of
payment plans for the IPO being considered by Ashford Community Hospital. The first is a firm
commitment of $7,000,000. The second is a best efforts arrangement in which GPI will receive
$2.00 for every share sold up to a maximum of $1,000,000 for the 500,000 shares being offered.
How much money will GPI earn under the best efforts method if it is able to sell only 75% of the
offering at a price of $20.00 per share?
A) $1,600,000
B) $1,000,000
C) $900,000
D) $750,000
7) The process to register an equity security with the SEC, provide a prospectus for the sale, and
advertise for the sale takes, on average, ________.
A) 15-20 days
B) 30-60 days
C) 61-120 days
D) 121-180 days
8) A preliminary prospectus is called a/an ________.
A) indenture
B) tombstone
C) red herring
D) letter of comment
9) What is the street name for the advertisement issued during the period of time when a firm is
waiting for approval from the SEC to issue new securities? This advertisement typically contains
the name of the issuing firm and the list of investment bankers involved in underwriting and
marketing the new issue.
A) Indenture
B) Tombstone
C) Red herring
D) Letter of comment
10) A ________ allows an investment banker to purchase up to 15% of additional shares in an
equity offering beyond what is offered to the public.
A) green-shoe provision
B) lock-up agreement
C) letter of commitment
D) red herring
11) A ________ requires that the original owners of the firm maintain ownership of their stock
for at least 180 days following an IPO.
A) green-shoe provision
B) lock-up agreement
C) letter of commitment
D) red herring
12) New York Investments (NYI), an investment banking firm, has proposed two types of
payment plans for the IPO being considered by Albany Exploration. The first is a firm
commitment of $36,000,000. The second is a best efforts arrangement in which NYI will receive
$2.00 for every share sold up to a maximum of $2,400,000 for the 1,200,000 shares being
offered. How much money will NYI earn under the firm commitment method if it is able to sell
only 90% of the offering at a price of $35.00 per share?
A) $800,000
B) $1,800,000
C) $2,200,000
D) $2,750,000
13) New York Investments (NYI), an investment banking firm, has proposed two types of
payment plans for the IPO being considered by Albany Exploration. The first is a firm
commitment of $36,000,000. The second is a best efforts arrangement in which NYI will receive
$2.00 for every share sold up to a maximum of $2,400,000 for the 1,200,000 shares being
offered. How much money will NYI earn under the best efforts method if it is able to sell only
90% of the offering at a price of $35.00 per share?
A) $2,160,000
B) $1,800,000
C) $1,200,000
D) $1,000,000
14) The firm commitment method of compensation for investment bankers is always more risky
financially for issuing firms than the best efforts method.
15) During the so-called cooling-off period while an issuing company is waiting for SEC
approval of its IPO, advertising and promotion of the stock usually begins.
16) Regulation A is an exemption from filing with the SEC for an IPO issue of less than $5
million; instead, it requires only a brief offering statement.
17) If the auction of an IPO is oversubscribed, shares of the IPO are allocated pro-rata to all
bidders.
18) In a best efforts arrangement, the investment bank pledges to use its best efforts to sell all the
authorized shares and takes a cut on each individual share that it sells, but provides no guarantee
as to how many shares it will sell.
19) If there is missing information in the prospectus, the investment banker issues a letter of
comment to the company and the public.
20) Investment bankers are commonly compensated for their services through a best efforts or a
firm commitment method. Explain how the two compensation methods work.
21) Extreme Adventures Inc. needs to raise capital and has hired Solomon Sisters to be its
investment banker (IB). Solomon recommends a sale of common stock and estimate the firm
could raise a gross amount of $7,500,000 if they could sell 300,000 shares of stock at $25 per
share. Solomon has offered two compensation methods for its work on the sale of these
securities. The first is a best efforts arrangement where Extreme will pay Solomon $1.00 for
every share issued. The second is a firm-commitment of $7,000,000. If Solomon is able to sell
the entire issue at the recommended price, how much money will it make under each
arrangement? What is the break-even point in sales percent between firm commitment and best
efforts for Extreme Adventures?
1) Commercial paper and banker’s acceptances are two forms of corporate financing typically
undertaken by ________.
A) start-up firms
B) mature firms
C) sole proprietorships
D) all of the above
2) Commercial paper has a maturity of ________.
A) less than 270 days
B) nine to eighteen months
C) greater than one year
D) three to five years
3) Commercial paper has a minimum denomination of ________.
A) $10,000
B) $50,000
C) $100,000
D) $500,000
4) Pacific Motors Inc. plans to issue $3,000,000 of commercial paper with a 6-month maturity at
99% of par value. What is the 6-month interest rate?
A) 1.00%
B) 1.01%
C) 2.02%
D) 2.08%
5) Overstock Inc. plans to issue $10,000,000 of commercial paper with a 6-month maturity at
98% of par value. What is the 6-month interest rate?
A) 1.50%
B) 2.04%
C) 3.09%
D) 4.18%
6) Underworld Inc. plans to issue $10,000,000 of commercial paper with a 6-month maturity at
98% of par value. What is the EAR?
A) 4.12%
B) 4.08%
C) 4.00%
D) 2.04%
7) Autoplex Inc. plans to issue $5,000,000 of commercial paper with a 6-month maturity at 99%
of par value. What is the discounted selling price of the firm’s commercial paper?
A) $4,950,000
B) $3,260,000
C) $2,940,000
D) $2,666,667
8) Western Appliance Inc. has planned a 3-month issue of commercial paper with a face value of
$15,000,000. The paper is set to sell at 98.% of face value. What is the EAR?
A) 8.42%
B) 6.23%
C) 5.04%
D) 4.22%
9) Western Appliance Inc. has planned a 3-month issue of commercial paper with a face value of
$15,000,000. The paper is set to sell at 98% of face value. What is the discounted selling price of
the firm’s commercial paper?
A) $13,300,000
B) $14,000,000
C) $14,700,000
D) $15,400,000
10) Western Appliance Inc. has planned a 3-month issue of commercial paper with a face value
of $15,000,000. The paper is set to sell at 98% of face value. What is the 3-month interest rate?
A) 6.04%
B) 8.16%
C) 2.17%
D) 2.04%
11) FPL Inc. has planned a 3-month issue of commercial paper with a face value of $15,000,000.
The paper is set to sell at 99.5% of face value. What is the EAR?
A) 2.025%
B) 2.250%
C) 2.500%
D) 2.512%
12) FPL Inc. has planned a 3-month issue of commercial paper with a face value of $15,000,000.
The paper is set to sell at 99.5% of face value. What is the discounted selling price of the firm’s
commercial paper?
A) $14,925,000
B) $14,995,000
C) $15,000,000
D) $15,300,000
13) FPL Inc. has planned a 3-month issue of commercial paper with a face value of $15,000,000.
The paper is set to sell at 99.5% of face value. What is the 3-month interest rate?
A) 0.5000%
B) 0.5025%
C) 0.5035%
D) 0.5050%
14) Commercial paper sells at a discount and repays the face value with interest within 270 days.
15) Commercial paper sells in minimum denominations of $1,000,000.
16) Commercial paper is a short-term security issued by corporations for commercial purposes.
17) Commercial paper is often issued by large high-quality corporations because the market
interest rate they pay on this borrowed money is lower than what they would pay at a
commercial bank.
18) Banker’s acceptances are frequently used to facilitate trade between firms in the United
States and other countries.
19) A typical banker’s acceptance would involve two firms and their commercial banks.
20) What is commercial paper? What is its maximum maturity? Why? Does it sell at a discount
at face value plus interest? Extract Electrical Motors has issued $3,000,000 of commercial paper
with a 30-day maturity date. If the paper sells at 99% of par value, what are the net proceeds to
the firm? What is the EAR for this issue of commercial paper?
1) The two chapters for commercial businesses to handle financial difficulties under the
Bankruptcy Reform Act of 1978 are ________.
A) chapters 7 and 11
B) chapters 7 and 13
C) chapters 9 and 11
D) chapters 11 and 13
2) ________ bankruptcy calls for a company to cease business, sell remaining assets, and
distribute the proceeds as governed by a bankruptcy court.
A) Reorganization
B) Chapter 11
C) Chapter 7
D) None of the above
3) ________ bankruptcy allows a company to attempt reorganization under court supervision
without claimants taking action.
A) Chapter 7
B) Chapter 11
C) Liquidation
D) None of the above
4) Under a court-supervised corporate reorganization plan, the business may be run by
________.
A) a court-appointed trustee
B) current managers
C) A or B
D) None of the above
5) Chapter 7 bankruptcy is a liquidation of assets, and chapter 11 bankruptcy is a reorganization
of assets.
6) Often, in bankruptcy, the current managers continue to run the business while it operates
under the reorganization plan, but the court may also appoint a trustee to oversee the operations
and protect the rights of the claimants during this period of time.
7) Explain the difference between chapter 7 and chapter 11 bankruptcy. Which group of
claimants generally stands last in a chapter 7 filing?