Fundamentals of Corporate Finance 3e Test Bank
52.
Stump, Inc. a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17
per share, and the offering price to the public is $22 per share. The firm’s legal fees, SEC
registration fees, and other administrative costs are $350,000. The firm’s stock price increases
15 percent on the first day. What is the underpricing on this issue?
A)
$9,900,000
B)
$24,900,000
C)
$15,000,000
D)
None of the above
Ans:
A
Total underpricing = ($3.30 per share × 3,000,000 shares of stock) = $9,900,000
53.
Stump, Inc. a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17
per share, and the offering price to the public is $22 per share. The firm’s legal fees, SEC
registration fees, and other administrative costs are $350,000. The firm’s stock price increases
15 percent on the first day. What is the firm’s total cost of issuing the securities?
A)
$24.9 million
B)
$15.35 million
C)
$25.25 million
D)
None of the above
Fundamentals of Corporate Finance 3e Test Bank
54.
Pau, Inc. issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the
public is $19.30 per share. The firm’s legal fees, SEC registration fees, and other administrative
costs are $270,000. The firm’s stock price increases 18 percent on the first day. What is the
underpricing cost of issuing the securities to the firm? (Round your intermediate calculations to
two decimal places.)
A)
$13.60 million
B)
$20.60 million
C)
$6.94 million
D)
$7.57 million
Ans:
C
55.
Pau, Inc. issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the
public is $19.30 per share. The firm’s legal fees, SEC registration fees, and other administrative
costs are $270,000. The firm’s stock price increases 18 percent on the first day. What is the
underwriting cost?
A)
$13.6 million
B)
$20.6 million
C)
$6.94 million
D)
None of the above
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
56.
Pau, Inc. issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the
public is $19.30 per share. The firm’s legal fees, SEC registration fees, and other administrative
costs are $270,000. The firm’s stock price increases 18 percent on the first day. What is the total
cost of issuing the securities to the firm?
A)
$13,606,000
B)
$20,818,000
C)
$20,610,000
D)
None of the above
Ans:
B
57.
When Geo Corp. went public in September 2008, the offer price was $19.00 per share and the
closing price at the end of the first day was $24.70. The firm issued 4 million shares. What was
the loss to the company due to underpricing?
A)
$13.6 million
B)
$20.83 million
C)
$20.6 million
D)
$22.8 million
Ans:
D
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
58.
Bethesda Biosys issues an IPO on a best-effort basis. The company’s investment bank demands
a spread of 18 percent of the selling price. The average selling price remains at $25 per share.
Four million shares are issued. What are the net proceeds for the issuer?
A)
$82 million
B)
$92 million
C)
$100 million
D)
None of the above
Ans:
A
AICPA: Industry/Sector Perspective
59.
Fortune Hotels issues an IPO on a best-effort basis. The company’s investment bank demands a
spread of 20 percent of the selling price. Five million shares are issued. The average selling
price remains at $31. What are the net proceeds per share for the issuer?
A)
$27.50
B)
$22
C)
$31
D)
$24.8
Ans:
D
Number of shares issued = 5 million
Underwriting spread = 20% × $31 = $6.2
Proceeds to issuer = ($31 – $6.2) = $24.8 per share
Fundamentals of Corporate Finance 3e Test Bank
60.
Fortune Hotels issues an IPO on a best-effort basis. The company’s investment bank demands a
spread of 20 percent of the selling price. Five million shares are issued. The average selling
price remains at $31. How much did the investment bank receive?
A)
$22.0 million
B)
$27.5 million
C)
$31.0 million
D)
None of the above
Ans:
C
61.
Dienz Pharma plans to issue an IPO on a best-effort basis. The company’s investment bank
demands a spread of 16 percent of the selling price. The selling price is $32 per share. Three
million shares are issued. What are the proceeds for the issuer?
A)
$96.00 million
B)
$78.75 million
C)
$80.64 million
D)
None of the above
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
62.
The most likely reason that underpricing of new issues occurs more frequently than overpricing
is the:
A)
Underwriters’ desire to reduce the risk of a firm commitment.
B)
Demand for a new issue is typically too high.
C)
Underwriters earn low rates of return.
D)
Issuing firms demand that equity be underpriced.
63.
A firm is making an initial public offering. The investment bankers agree to a firm underwriting
commitment of 500,000 shares priced to the public at $50 a share. The underwriter’s spread is
12%. In addition, the underwriter charges $600,000 in legal fees. On the first day of trading, the
firm’s stock closed at $61. What were the total costs of the issue?
A)
$3,000,000
B)
$3,600,000
C)
$8,500,000
D)
$9,100,000
Ans:
D
= $9,100,000
Fundamentals of Corporate Finance 3e Test Bank
64.
Which of the following statements is NOT true?
A)
In a competitive sale, the firm specifies the type and amount of securities it wants to sell.
B)
In a negotiated sale, the issuer selects the underwriter at the beginning of the origination
process.
C)
In a general cash offer, management must decide whether to sell the securities on a
competitive or a negotiated basis.
D)
For equity securities, competitive sales generally provide the lowest-cost method of sale.
Ans:
D
AICPA: Industry/Sector Perspective
65.
Which of the following statements is NOT true of shelf registration?
A)
Shelf registration gives firms less flexibility in bringing securities to market.
B)
During a two-year window, the firm can take the securities “off the shelf” and sell them
as needed.
C)
Shelf registration allows firms to periodically sell small amounts of securities.
D)
A shelf registration statement can cover multiple securities, and there is no penalty if
authorized securities are not issued.
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
66.
Benefits from shelf registration include all EXCEPT
A)
greater flexibility in bringing securities to market.
B)
shelf registration allows firms to periodically sell small amounts of securities and raise
capital as needed.
C)
a shelf registration statement can cover multiple securities, but there is a penalty if
authorized securities are not issued.
D)
costs associated with selling the securities are reduced because only a single registration
statement is required.
Ans:
C
AICPA: Industry/Sector Perspective
67.
Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $30 million
to finance it. The company plans to raise the money through a general cash offering priced at
$23.50 a share. Star’s underwriters charge a 6 percent spread. How many shares does the
company have to sell to achieve its goal? (Round your final answer to the nearest unit of share.)
A)
1,358,081 shares
B)
1,276,596 shares
C)
1,200,000 shares
D)
None of the above
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
68.
Why is the total cost of bringing a general cash offer to the market lower than issuing an IPO?
A)
General cash offer does not include a large underpricing
B)
Underwriting spreads are smaller in case of general cash offer
C)
There is less risk involved with a general cash offer than an IPO
D)
All of the above
Ans:
D
69.
Which of the following statements is NOT true?
A)
For many smaller firms and firms of lower credit standing that have limited access, or no
access, to the public markets, the cheapest source of external funding is often the private
markets.
B)
Bootstrapping and venture capital financing are not part of the private market.
C)
The biggest drawback of private placements involves restrictions on the resale of the
securities.
D)
Many private companies that are owned by entrepreneurs, families, or family
foundations and are sizable companies of high credit quality prefer to sell their securities
in the private markets.
Ans:
B
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
70.
Which of the following statements is NOT true?
A)
Private placement occurs when a firm sells unregistered securities directly to investors
such as insurance companies, commercial banks, or wealthy individuals.
B)
In private placements, there are no restrictions on the resale of the securities.
C)
About half of all corporate debt is sold through the private placement market.
D)
Investment banks and money center banks often assist firms with private placements.
71.
Advantages of private placements include
A)
lower cost of funds.
B)
more willingness among private lenders to negotiate changes to a bond contract.
C)
the speed of private placement deals and flexibility in issue size.
D)
All of the above
Ans:
D
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Industry/Sector Perspective
72.
Which of the following statements is NOT true?
A)
Private equity firms pool money from wealthy investors, pension funds, insurance
companies, and other sources to make investments.
B)
Private equity firms invest in more mature companies.
C)
Agency problems tend to be more in firms owned by private equity investors than in
public firms.
D)
Private equity investors focus on firms that have stable cash flows because they use a lot
of debt to finance their acquisitions.
Ans:
C
Level of Difficulty: Medium
73.
Private equity firms improve the performance of firms in which they invest by:
A)
making sure that the firms have the best possible management teams.
B)
closely monitoring each firm’s performance and providing advice and counsel to the
firm’s management team.
C)
facilitating mergers and acquisitions that help improve the competitive positions of the
companies in which they invest.
D)
All of the above
Fundamentals of Corporate Finance 3e Test Bank
74.
Which of the following statements is NOT true of PIPE transactions?
A)
PIPE transactions are registered with the SEC.
B)
PIPE transaction gives issuers faster access to capital.
C)
In a PIPE transaction, investors purchase securities (equity or debt) directly from a
publicly traded company in a private placement.
D)
The securities are virtually always sold to the investors at a discount to the price at which
they would sell in the public markets.
Ans:
A
AICPA: Industry/Sector Perspective
75.
Which of the following statements is true of PIPE transactions?
A)
Under federal securities law, they can be resold to investors in the public markets
immediately even if they are not registered.
B)
As part of the PIPE contract, the company often agrees to register the restricted securities
with the SEC, usually within 90 days of the PIPE closing.
C)
As part of the PIPE contract, the company often agrees to register the restricted securities
with the SEC after 90 days of the PIPE closing.
D)
PIPE transactions involving a healthy firm can also be executed without the use of an
investment bank but result in a cost increase of 7 to 8 percent of the proceeds.
Ans:
B
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
76.
Jasper, Inc. is looking for a five-year term loan of $3 million. Its bank is willing to make the
loan. The firm will have to pay a premium of 1.5 percent for default risk and another 0.75
percent for maturity risk. The current prime rate is 7.5 percent. What is the loan rate on this
bank loan?
A)
9%
B)
8.25%
C)
9.75%
D)
None of the above
Ans:
C
Prime rate = PR = 7.5%
77.
Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has
excellent credit and can borrow at the prime rate, whereas Firm B’s credit standing is prime rate
plus 2 percent. The current prime rate is 5.75 percent, the 30-year Treasury bond yield is 4.35
percent, the three-month Treasury bill yield is 3.54 percent, and the 10-year Treasury note yield
is 4.24 percent. What are the appropriate loan rates for both the firms?
A)
6.45% for Firm A, 7.75% for Firm B
B)
6.45% for Firm A, 8.45% for Firm B
C)
5.75% for Firm A, 8.45% for Firm B
D)
None of the above
Ans:
B
Borrowing rate for Firm A = kA = Prime rate + MAT = 5.75% + 0.70% = 6.45%
Fundamentals of Corporate Finance 3e Test Bank
78.
Marigold Corp. wants to borrow money from Howard Bank for a period of five years. The
firm’s credit standing calls for a premium of 1.5 percent over the prime rate. The current prime
rate is 6.5 percent, the 30-year Treasury bond yield is 5.375 percent, the three-month Treasury
bill yield is 3.525 percent, and the 5-year Treasury note yield is 4.25 percent. What is the
appropriate loan rate for this customer?
A)
8.725%
B)
7.225%
C)
6.500%
D)
None of the above
Fundamentals of Corporate Finance 3e Test Bank
79.
Castle Co. needs to borrow $10 million for process improvement upgrades. Management
decides to sell 20-year bonds. They determine that the 3-month Treasury bill rate is 2.75
percent, the firm’s credit rating is A, and the yield on 20-year Treasury bonds is 1.80 percent
higher than that for 3-month Treasury bills. Bonds with an A rating are selling for 50 basis
points above the 20-year Treasury bond rate. What is the borrowing cost for this transaction?
A)
B)
C)
D)
Ans:
Fundamentals of Corporate Finance 3e Test Bank
80.
Why do traditional sources of funding not work for new or emerging businesses?
Fundamentals of Corporate Finance 3e Test Bank
81.
What are the advantages and disadvantages of going public?
Fundamentals of Corporate Finance 3e Test Bank
82.
What are PIPE transactions and how do they help firms raise capital?