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47) Arguments offered as explanations, with or without market evidence, as to why most U.S.
equity issues are sold without rights include all the following except:
A) underwriters buy at an agreed upon price and bear some risk of selling the issue.
B) cash proceeds are available sooner in underwriting and the issue is available to a wider
market.
C) underwriters certify that the offering price is consistent with the true value of the issue.
D) the underwritten offer price is generally set 48 hours prior to the offering while the rights
price must be set much further in advance.
E) underwriters tend to increase the stock price through their sales efforts.
48) Dilution commonly refers to the:
A) increase in stock value due to wider ownership of stock.
B) loss in existing shareholder's value.
C) loss in new shareholder's equity.
D) splitting of a single share of stock into multiple shares.
E) issuance of debt to repurchase shares.
49) The type(s) of dilution that are most relevant to a firm's shareholders when the firm's shares
are issued with rights is(are) the dilution of:
A) percentage ownership.
B) stock price per share.
C) both book value per share and earnings per share.
D) both percentage ownership and book value per share.
E) both stock price per share and earnings per share.
50) If existing shareholders are offered rights to a new issue of securities, those shareholders:
A) will receive additional shares at no additional cost to themselves.
B) will need to pay the current market price per share on the day they tend their rights.
C) must participate in the offering if they wish to maintain their current ownership position.
D) will pay the book price per share for each share obtained through the rights process.
E) should expect to receive the book value per share for each right they have been granted.
51) If a rights offer is used as the means of funding a positive net present value project, then
shareholders should expect the price of their shares to:
A) remain constant as the value of the project will be offset by the issuance of the new shares.
B) decrease due to the additional shares being offered.
C) change but the direction of that change cannot be predicted.
D) change in direct relation to the change in the book value per share.
E) increase due to the increased value of the issuing firm.
52) Assume a firm issued rights to fund a new project. If this project immediately increases the
market value per share, then:
A) no dilution of ownership position can occur.
B) the book value per share had to remain constant.
C) the EPS will also immediately increase.
D) the shareholders will be worse off than before, whether or not they participate in the offering.
E) the firm has acted in the best interest of its pre-rights shareholders.
53) Corporations primarily use the shelf registration method of security sales because:
A) preregistered securities can be quickly brought to market.
B) SEC registration is avoided.
C) their stock is rated as junk.
D) they are issuing securities to the general public for the first time.
E) they are doing a private offering.
54) All the following are major requirements needed to qualify for shelf registration except:
A) having a current rating of investment grade.
B) having outstanding stock with a market value in excess of $150 million.
C) not defaulting on debt in the past three years.
D) having no violations of the Securities Act of 1933 in the past three years.
E) having no violations of the Securities Exchange Act of 1934 in the past three years.
55) One argument against the use of shelf-registration is:
A) that it is limited to only technology and manufacturing firms which provides those industries
with a market advantage.
B) that it provides an unfair advantage to debt issues.
C) that it unfairly increases the market price of the registered security.
D) the ability to use the dribble method in conjunction with the shelf-registration.
E) the age of the information disclosure.
56) Which one of these statements related to debt financing is correct?
A) Debt issues of any type, unlike equity issues, do not require SEC registration.
B) Commercial banks specialize more in private placements than in term loans.
C) Private placements generally have longer maturities than term loans.
D) The majority of debt issues are public issues.
E) Public debt issues generally have more restrictive covenants than private issues.
57) Assume there are three upcoming IPOs (A, B, and C) that are priced at $20 a share. You
place an order with your broker to purchase 500 shares of each of the three offerings. Further
assume that A is oversubscribed and your allocation is only 100 shares. You receive a full
allocation on both B and C. Offer A is undervalued by $13, B is overvalued by $8, and C is
overvalued by $1. What will be your combined total profit or loss on these three investments?
A) −$3,200
B) −$1,125
C) $2,000
D) $1,125
E) $3,200
58) Rita placed an order for 300 shares of each of four separate IPOs (Orders A, B, C, and D)
with an offer price of $16 each. She received 100 shares of Order B, 200 shares of Order D, and
300 shares of the other orders. At the end of the first day, Order A was overpriced by $2 a share,
Order B was underpriced by $4 a share, Order C was correctly priced, and Order D was
overpriced by $1 a share. What was combined total profit or loss for the first day on these four
orders?
A) −$400
B) $400
C) $100
D) −$100
E) −$300
59) The Market Place recently offered 5,000 shares of stock for sale via a Dutch auction. The
firm received bids as follows: 500 shares at $22.50; 2,500 shares at $22.20; 3,300 shares at $22;
and 5,500 shares at $21. Ignoring all costs, how much will the firm receive from this auction?
A) $110,000
B) $105,000
C) $138,600
D) $112,500
E) $247,800
60) Alex bid $24 a share for 500 shares in a Dutch auction for ABC shares of stock. The other
bids were $25 for 200 shares, $23 for 600 shares, $26 for 100 shares, and $22 for 500 shares.
ABC was seeking the sale of 1,000 shares. What price did Alex have to pay for each share he
obtained?
A) $26
B) $25
C) $24
D) $23
E) $22
61) Nelson's Metallurgy needs $1.36 million to fund an expansion project. The firm has decided
to raise the funds through a negotiated offering. The terms of the offer include an offer price of
$22.50 a share and an underwriting spread of 8.1 percent. How many shares must the firm sell in
order to raise the funds it needs?
A) 65,772
B) 81,414
C) 65,340
D) 81,200
E) 55,915
62) A firm has negotiated a seasoned equity offer that will provide the firm with $1.68 million in
net proceeds. The underwriting spread is 7.35 percent and the firm needs to sell 50,000 shares.
What is the offer price?
A) $36.07
B) $37.25
C) $36.27
D) $34.50
E) $33.60
63) Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds
via a seasoned stock offering. Assume the firm will incur $140,000 in indirect costs and pay 8.63
percent of the gross proceeds in direct costs. How much does the firm need to raise in total to
cover all the issue costs as well as fund the new project?
A) $2,068,513
B) $2,037,825
C) $2,055,289
D) $1,914,650
E) $1,984,294
64) The Wordsmith Corporation has 40,000 shares outstanding with a market price of $25 each.
The firm expects to raise $200,000 via a rights offering at a subscription price of $20. How many
rights must be submitted to acquire one new share?
A) .20
B) .25
C) 5.00
D) 1.25
E) 4.00
65) Assume it requires 3 rights to obtain a new share in a rights offering. If the stock's price prior
to the ex-rights date is $25 and the ex-rights price is $22.75, what is the value of each right?
A) $.67
B) $.75
C) $.56
D) $1.25
E) $2.25
66) You currently own 200 shares of a stock valued at $21 a share. A rights offer has just been
announced that grants the option of obtaining one new share for two rights plus $17. Each
current share is entitled to one right. What is the value of each right?
A) $1.33
B) $1.25
C) $.33
D) $.67
E) $1.67
67) Regional Power wants to raise $2.4 million in new equity via a rights offering with a
subscription price of $12. There are currently 2.6 million shares outstanding, each with one right.
How many rights are needed to purchase one new share?
A) 12
B) 18
C) 20
D) 13
E) 6
68) Western Markets has 150,000 shares outstanding with a market price per share of $15. Each
share is entitled to one right. If the firm sets a rights offer as 5 rights plus $10 for each new share,
what will be the ex-rights price per share?
A) $12.23
B) $14.17
C) $15.83
D) $13.77
E) $14.49
69) Schraeder Corporation has 20,000 shares outstanding at $30 each. The firm expects to raise
$200,000 via a rights offering at a subscription price of $25. How many rights are required for
each new share?
A) 1.25
B) 1.50
C) 2.00
D) 2.50
E) 2.25
70) Assume a stock has an ex-rights price of $32. The rights offer has a requirement of 3 rights
per new share and a subscription price of $30. What is the rights-on stock price?
A) $28.06
B) $32.67
C) $42.00
D) $40.94
E) $38.33
71) A rights offer was set at four rights plus $25 for each new share. What is the rights-on price
if the ex-rights price is $30?
A) $35.00
B) $25.00
C) $30.00
D) $31.25
E) $32.50
72) A stock has a rights-on price of $20, an ex-rights price of $18.25, and the number of rights
needed to buy one new share is 5. Assuming everything else is held constant, what is the
subscription price?
A) $9.50
B) $11.25
C) $16.67
D) $14.50
E) $21.90
73) Lasko's has 250,000 shares of stock outstanding, $400,000 in perpetual annual earnings, and
a discount rate of 16 percent. The firm is considering a new project that has initial costs of
$350,000 and annual perpetual cash flows of $60,000. How many new shares must be issued to
fund the new project? Ignore taxes.
A) 34,653
B) 33,928
C) 35,000
D) 36,028
E) 34,209
74) Discuss the stages of venture capital financing, defining each in detail.
75) What are venture capitalists and what is their role in raising capital for firms?
76) The Direct Interactive Publishing Company is planning to raise $200 million dollars in new
capital. There are currently 50 million shares outstanding with an estimated market price of $60
each. The corporate officers are debating whether to use a rights offering (with or without a
standby underwriting) or have the issue fully underwritten. The company is currently listed on a
regional exchange and plans to list on a national exchange after the new issue. List and explain
three advantages/disadvantages of each issue method.
77) Discuss what a Dutch auction is and how it works.
78) Identify six components that comprise the total costs associated with issuing securities.
79) Identify and explain the key differences between public issues of debt and direct private
long-term debt financing.
