Chapter 11—Raising Long-Term Financing
MULTIPLE CHOICE
1. Which law mandated the separation of investment and commercial banking?
a.
Gramm-Leach-Bliley Act
b.
McFadden Act
c.
Glass-Steagall Act
d.
none of the above
2. A security offering that raises capital for firms is called a(n)
a.
primary security offering
b.
secondary security offering
c.
securitization
d.
all of the above
3. A bond sold by foreign corporations to U.S. investors is called a(n)
a.
Eurobond
b.
foreign bond
c.
Yankee bond
d.
none of the above
4. A bank that helps firms to acquire external capital is called a
a.
commercial bank
b.
savings bank
c.
investment bank
d.
credit union
5. Which of the following is not considered an advantage of going public?
a.
new capital for the company
b.
listed stock for use as compensation
c.
stock price emphasis
d.
personal wealth and liquidity
6. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is 7.25%. If the offering price of the stock is set at $12.50 per share, what is the per share
proceeds that Bavarian will receive?
a.
$11.59
b.
$10.67
c.
$13.41
d.
$12.50
7. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is $1.25 per share. If the offering price of the stock is set at $12.50 per share, what is the
percentage underwriting discount?
a.
8%
b.
9%
c.
10%
d.
11%
8. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is 7.25%. If the offering price of the stock is set at $12.50 per share and the company is
planning on issuing 1 million shares, what are the total proceeds that Bavarian will receive?
a.
$12,500,000
b.
$11,593,750
c.
$10,750,000
d.
$13,275,500
9. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is $1.25. If the offering price of the stock is set at $12.50 per share and the company is
planning on issuing 1 million shares, what are the total proceeds that Bavarian will receive?
a.
12,500,000
b.
11,250,000
c.
13,750,000
d.
10,875,000
10. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is 7.25%. If the offering price of the stock is set at $12.50 per share, how many shares does
the company have to issue to raise $75 million?
a.
6,000,000
b.
6,469,003
c.
5,567,400
d.
5,000,000
11. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is $1.30. If the offering price of the stock is set at $12.50 per share, how many shares does the
company have to issue to raise $75 million?
a.
6,000,000
b.
5,789,452
c.
5,000,000
d.
6,696,429
12. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is $1.30. Legal and other expenses amount to $1,350,000. If the offering price of the stock is
set at $12.50 per share, how many shares does the company have to issue to raise $75 million?
a.
6,696,429
b.
6,816,964
c.
6,000,000
d.
5,769,345
13. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting
discount is 7.25%. Legal and other expenses amount to $1,350,000. If the offering price of the stock is
set at $12.50 per share, how many shares does the company have to issue to raise $75 million?
a.
6,108,000
b.
6,585,445
c.
6,696,429
d.
7,124,359
NARRBEGIN: Bavarian Brewhouse IPO
Bavarian Brewhouse IPO
Bavarian Brewhouse is planning an IPO. Under the terms of the IPO, Bavarian Brewhouse will issue 8
million shares at an offer price of $25 per share. The underwriter charges an 9% underwriting fee and
direct costs are estimated to be $7 million. The stock is expected to trade at $30 at the end of the first
trading day.
NARREND
14. What is the total amount of funds raised by Bavarian Brew through the IPO?
a.
$175 million
b.
$182 million
c.
$200 million
d.
$150 million
15. What is the initial return earned by investors on this Bavarian Brewhouse IPO?
a.
20%
b.
15%
c.
17%
d.
22%
16. What are the total underwriting fees for this Bavarian Brewhouse IPO?
a.
$18 million
b.
$7 million
c.
$25 million
d.
$10 million
17. Refer to Bavarian Brewhouse IPO. What are the total costs caused by underpricing?
a.
$8 million
b.
$40 million
c.
$32 million
d.
$25 million
18. What are the total costs (underwriting and underpricing) of the Bavarian Brewhouse IPO?
a.
$25 million
b.
$40 million
c.
$65 million
d.
$80 million
19. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise
$10 million, what are the total dollar costs?
a.
$900,000
b.
$989,011
c.
$856,788
d.
$1,000,000
20. A company faces costs of 9% of the amount of cash raised for an IPO. If the company needs to raise
net $10 million, what is the total amount of money that needs to be raised?
a.
$10,800,000
b.
$10,989,011
c.
$12,456,875
d.
$8,458,950
NARRBEGIN: Smith Enterprises
Smith Enterprises
Smith Enterprises recently conducted an IPO. In this, Smith received $14 per share from the
underwriter, the offering price per share was $16 and the stock price rose to $19 on the first day of
trading.
NARREND
21. Refer to Smith Enterprises. What is the underwriter’s discount?
a.
14.3%
b.
12.5%
c.
16.3%
d.
10.2%
22. Refer to Smith Enterprises. What is the first day return on an investment in the IPO?
a.
21.42%
b.
15.79%
c.
18.75%
d.
12.56%
23. Refer to Smith Enterprises. What is the total percentage costs of the IPO (underwriting and
underpricing)?
a.
35.7%
b.
14.3%
c.
18.8%
d.
21.4%
NARRBEGIN: Smith Enterprises 2
Smith Enterprises 2
Smith Enterprises wants to conduct an IPO. The offering price of the stock is $15, the underwriter’s
discount is 6% and legal and other expenses are estimated to be $1,500,000.
NARREND
24. Refer to Smith Enterprises 2. What are the net proceeds per share?
a.
$15
b.
$16
c.
$14.10
d.
$17.20
25. Refer to Smith Enterprises 2. If the company issues 1,000,000 shares, what are the net proceeds of the
IPO?
a.
$13,500,000
b.
$15,000,000
c.
$12,600,000
d.
$10,500,000
26. The dominant source of financing for U.S. corporations is
a.
debt financing.
b.
new equity.
c.
internal cash flow.
d.
none of the above.
27. An institution that raises capital by issuing liabilities against itself is a
a.
financial intermediary.
b.
financial broker.
c.
financial agent.
d.
none of the above.
28. The 1933 law that prohibited commercial banks from underwriting corporate security issues, as well as
a host of other things is
a.
the Glass-Steagall Act.
b.
the McFadden Act.
c.
the Gramm-Leach-Bliley Act.
d.
none of the above
29. When a financial intermediary repackages loans and other traditional bank-based credit products into
securities that can be sold to public investors we call that
a.
privatization.
b.
securitization.
c.
asset substitution.
d.
none of the above
30. In the U.S., firms that need to raise capital externally, prefer to issue
a.
common stock.
b.
preferred stock.
c.
debt.
d.
hybrid securities.
31. A bond sold in the U.S. by a German based company is an example of a(n)
a.
Eurobond.
b.
Yankee bond.
c.
Samurai bond.
d.
none of the above
32. An investment banking firm that generally occupies the lead or co-lead manager’s position in large
security offerings is referred to as
a.
a bulge bracket firm.
b.
a green shoe firm.
c.
a Wall Street firm.
d.
none of the above.
33. Lead Investment Banking Corp. is the lead underwriter for the equity issuance of NewCorp. Lead is
responsible for 80% of the issue at a discount of $1.70 per share. If Lead is responsible for selling
1,300,000 shares then what is the total compensation to the underwriting syndicate?
a.
$1,768,000
b.
$2,210,000
c.
$2,762,500
d.
none of the above
34. In general, what is the determining factor in the underwriting spread charged by investment banks?
a.
the size of the issue
b.
the risk inherent in the security to be issued
c.
the name recognition of the underwriter
d.
none of the above
35. The most important law governing the sale of new securities is
a.
the Glass-Steagall Act.
b.
the Securities Act of 1933.
c.
the Securities and Exchange Commission Act of 1934.
d.
none of the above.
36. Which of the following should not be considered a benefit to a firm that is issuing an IPO?
a.
access to additional capital
b.
provide an alternative to cash for future acquisitions
c.
have another source, other than cash for executive compensation
d.
limits the founder’s ownership dilution
37. Which of the following factors might be most important for an entrepreneur that is considering an IPO
in an industry where a firm’s strategy is its most important asset.
a.
the use of stock as a compensation vehicle
b.
the investment banking fee
c.
the disclosure requirements of publicly traded firms
d.
all of the above are most import to such a firm
38. If Company X intends to distribute shares of its wholly owned subsidiary to its current shareholders in
an effort to make the subsidiary a publicly traded company, then Company X is contemplating a(n)
a.
equity carve-out
b.
spin-off
c.
LBO
d.
none of the above
39. If you are anticipating purchasing shares of companies that will be offering shares to the public for the
first time, your most profitable strategy for purchasing those shares will be
a.
to buy them in the primary market.
b.
to buy them in the secondary market.
c.
buy options on the shares before the IPO date.
d.
none of the above.
40. If you were to purchase the shares of a firm one month after its IPO as well as the shares of a
comparable sized (matched) firm on the same day and then hold both shares for five years, you would
expect
a.
that the return of the IPO firm’s stock to be greater than that of the matched firm.
b.
that the return of the matched firm’s stock to be greater than that of the IPO firm.
c.
that the return of the two stocks to be equal.
d.
that since the two firms are likely to be uncorrelated the relation cannot be predicted.
41. If you are an investor that owns shares in a firm that you believe is about to issue additional equity,
then you would expect the price of your shares to
a.
increase.
b.
be unaffected.
c.
decrease.
d.
all three of the above could happen with equal probability.
42. If a firm is going to issue additional equity by offering existing shareholders the right, or the ability to
sell to someone else that right, to purchase the offering then that is called a
a.
general cash offering.
b.
rights offering.
c.
seasonal rights offering.
d.
none of the above.
43. Which of the following would most likely get a firm in trouble if it sold private placement securities to
this investor?
a.
pension fund
b.
venture capitalist
c.
retiree
d.
none of the above
44. Which of the following is a valid concern for an investor who is considering purchasing a bond which
has been issued under Rule 144A?
a.
Rule 144A issues are less liquid than public issues
b.
Rule 144A issues are traded in the secondary market too actively to accurately value them
c.
Rule 144A issues can never be repurchased by the issuing firm
d.
none of the above
45. One reason that a U.S. based firm might want to issue its equity in international markets is
a.
that the firm will be able to raise markedly more capital, through a much higher security
price, in the international markets.
b.
that an international issue may help a company integrate itself into a international local
business scene.
c.
that U.S. Securities Law states that international ownership has no voting rights.
d.
none of the above.
46. A non-U.S. based company would like to issue a form of its common equity in the U.S. A current
method for doing so would be
a.
to contract for a U.S. investment back to issue a sponsored ADR.
b.
to let a U.S. investment bank issue an unsponsored ADR.
c.
to sell put options on its own stock to U.S. investors.
d.
none of the above.
47. American Depository Receipts provide U.S. investors with
a.
the ability to purchase foreign securities in the foreign company’s domestic currency.
b.
the ability to purchase foreign securities in U.S. dollars.
c.
the ability to purchase U.S. securities in foreign currency denominations.
d.
none of the above.
48. An example of a share privatization issue would be
a.
the public issue of securities representing ownership in the telephone system which is
currently owned by the government of a foreign country.
b.
the public issue of securities representing ownership in a firm that is currently privately
owned by a foreign citizen.
c.
the private issue of securities representing ownership in a firm that is currently privately
owned by a foreign citizen.
d.
none of the above.
49. Most of the short-term capital gains of share privatization IPOs are captured by
a.
investors and citizens who vote in the country of the firm that is being privatized.
b.
the investor base that is determined to pay the maximum price for the IPO.
c.
the international monetary fund that helped inject much of the initial capital for the initial
start up.
d.
none of the above.
50. One characteristic of share privatizations is
a.
that they are generally much larger than the IPOs of their private-sector counterparts.
b.
that they are generally much smaller than the IPOs of their private-sector counterparts.
c.
that the decision to privatize is made solely on economic grounds.
d.
none of the above.
51. Assume that you purchase shares of a company that recently executed an IPO at the post-offering
market price of $32 per share, and you hold the shares for one year. You then sell your shares for $36
per share. The company does not pay dividends, and you are not subject to capital gains taxation. What
net return did you earn on your share investment?
a.
11.11%
b.
12.00%
c.
12.50%
d.
13.00%
52. Assume that you purchase shares of a company that recently executed an IPO at the post-offering
market price of $50 per share, and you hold the shares for one year. You then sell your shares for
$52.50 per share. The company does not pay dividends, and you are not subject to capital gains
taxation. What net return did you earn on your share investment?
a.
2.50%
b.
4.81%
c.
5.00%
d.
7.50%
NARRBEGIN: Sea Grove Beach Corp.
Sea Grove Beach Corporation
Sea Grove Beach Corporation is executing an initial public offering with the following characteristics.
The company will sell 12 million shares at an offer price of $20 per share, the underwriter will charge
a 7 percent underwriting fee, and the shares are expected to sell for $27.50 per share by the end of the
first day’s trading. Assuming this IPO is executed as expected.
NARREND
53. Refer to Sea Grove Beach Corporation. What is the initial return earned by investors allocated shares
in the IPO?
a.
20.27%
b.
27.27%
c.
30.50%
d.
37.50%
54. How much will Sea Grove Beach Corporation receive from the offering?
a.
$6.30 million
b.
$223.20 million
c.
$240.50 million
d.
$306.90 million
55. What is the total cost (underwriting fee and underpricing) of this issue to Sea Grove Beach
Corporation?
a.
$6.30 million
b.
$16.80 million
c.
$106.80 million
d.
$125.00 million
56. Montigo Magic Petroleum Corporation is interested in selling common stock to raise capital for a new
oil well. The firm has contacted First Bank of Manhattan, a large underwriting firm, which believes
that the stock can be sold for $40 per share. The underwriter also believes, after careful research, that
its administrative costs will be 2.75 percent of the sale price and its selling costs will be 2.40 percent of
the sale price. If the underwriter requires a profit equal to 1.25 percent of the sale price, how much will
the spread have to be in dollars to cover the underwriter’s costs and profit?
a.
$0.64
b.
$1.80
c.
$2.16
d.
$2.56
NARRBEGIN: Sea Grove Beach Co.
Sea Grove Beach Company
Sea Grove Beach Company needs to raise $30 million of new equity capital. Its common stock is
currently selling for $44 per share. The investment bankers require an underwriting spread of 7 percent
of the offering price, and the company’s legal, accounting, and printing expenses associated with the
seasoned offering are estimated to be $500,000.
NARREND
57. Refer to Sea Grove Beach Company. How many new shares must the company sell to net $30 million?