92) Which of the following is an advantage of a cash offer over a rights offer?
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.
93) Convex Incorporated sells 10 million shares of stock in an SEO 6 million being primary shares issued by the
company and 4 million being secondary shares sold by investors in the company. At the time of the sale,
Convex’s stock was selling at $8.00 per share. If the underwriter charges 6% of the gross proceeds as a fee,
how much money was raised in the sale?
A) $36.25 million
B) $45.12 million
C) $48.00 million
D) $75.20 million
94) Braynerd Chemicals sells 40 million shares of stock in an SEO 35 million being primary shares issued by the
company and 5 million being secondary shares sold by investors in the company. At the time of the sale,
Braynerd’s stock was selling at $22.50 per share. If the underwriter charges 6% of the gross proceeds as a
fee, how much money was raised in the sale?
A) $553.00 million
B) $620.85 million
C) $740.25 million
D) $846.00 million
95) Parafoil Avionics sells 50 million shares of stock in an SEO 40 million being primary shares issued by the
company and 10 million being secondary shares sold by investors in the company. At the time of the sale,
Parafoil’s stock was selling at $12.50 per share. If the underwriter charges 5% of the gross proceeds as a fee,
how much money was raised in the sale?
A) $475 million
B) $500 million
C) $594 million
D) $625 million
96) Parafoil Avionics sells 50 million shares of stock in an SEO 40 million being primary shares issued by the
company and 10 million being secondary shares sold by investors in the company. At the time of the sale,
Parafoil’s stock was selling at $12.50 per share. If the underwriter charges 5% of the gross proceeds as a fee,
how much money did existing investors in the company net from the sale?
A) $118.75 million
B) $125 million
C) $475 million
D) $500 million
97) Convex Incorporated sells 10 million shares of stock in an SEO 6 million being primary shares issued by the
company and 4 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 6% of the gross proceeds as a fee, how much
money was raised in the sale?
A) $45.12 million
B) $48.00 million
C) $75.20 million
D) $80.00 million
98) Highlander Homes stock trades at $32 per share and there are 50 million shares outstanding. The
management would like to raise $200 million in an SEO. If the underwriter charges 5% of gross proceeds,
how many shares must it sell?
A) 5.875 million
B) 6.05 million
C) 6.25 million
D) 6.58 million
99) Highlander Homes stock trades at $32 per share and there are 50 million shares outstanding. The
management would like to raise $200 million in an SEO, and current investors would like to sell $50 million
of their own stock. If the underwriter charges 5% of gross proceeds, how many shares must it sell in the total
(primary and secondary) offering?
A) 7.81 million
B) 6.05 million
C) 8.22 million
D) 6.58 million
100) Neutrino Industries stock trades at $48 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) 8.33 million
B) 8.40 million
C) 8.68 million
D) 8.87 million
101) Criswell Mining stock trades at $18 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) 5.56 million
B) 5.85 million
C) 8.93 million
D) 11.11 million
102) Highlander Homes stock trades at $32 per share and there are 50 million shares outstanding. The
management would like to raise $200 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) 10.51%
B) 10.79%
C) 11.11%
D) 11.63%
103) Highlander Homes stock trades at $32 per share and there are 50 million shares outstanding. The
management would like to issue a total of 8 million (primary and secondary) shares in an SEO. If the
underwriter charges 5% of gross proceeds, 75% of the shares are primary shares sold to new investors, and
25% of the shares are secondary shares sold to new investors, what percentage of the company will be owned
by the new investors?
A) 10.34%
B) 13.79%
C) 10.71%
D) 14.29%
104) Which of the following statements is FALSE?
A) More often than not, firms return to the equity markets and offer new shares for sale, a type of offering
called a seasoned equity offering (SEO).
B) Usually, profitable growth opportunities occur throughout the life of the firm, and in some cases it is
not feasible to finance these opportunities out of retained earnings.
C) When a firm issues stock using an SEO, it follows many of the same steps as for an IPO. The main
difference is that a market price for the stock already exists, so the price–setting process is not necessary.
D) A firm’s need for outside capital usually ends at the IPO.
105) 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 offer, the firm offers 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.
106) Which of the following statements is FALSE?
A) In a rights offer, the firm offers the new shares only to existing shareholders.
B) Secondary shares are shares sold by existing shareholders, including the company’s founder.
C) If a firm’s management is concerned that its equity may be underpriced in the market, by using a rights
offering the firm can continue to issue equity without imposing a loss on its current shareholders.
D) In the United States, most offers are rights offers.
107) Which of the following statements is FALSE?
A) SEO rights offers have lower costs than cash offers.
B) The decision to raise financing externally usually implies that a firm plans to pursue an investment
opportunity.
C) Although not as costly as IPOs, seasoned offerings are still expensive.
D) Researchers have found that, on average, the market greets the news of an SEO with a price increase.
108) Which of the following statements is FALSE?
A) The one advantage of a cash offer 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 different sizes is relatively small.
C) As with IPOs, evidence suggests that companies overperform following a seasoned offering.
D) Often the value destroyed by the price decline can be a significant fraction of the new money raised
with a SEO.
109) 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 $20 per share. The amount of money that Luther will raise through its rights offering is
closest to?
A) $500 million
B) $125 million
C) $100 million
D) $400 million
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
110) How many types of seasoned equity offerings are there?
