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Chapter 15 - Investment Banking: Public and Private Placement
75. Which of the following activities is not a service provided by investment bankers?
76. Raybac is about to go public. Its present stockholders own 500,000 shares. The new public
issue will represent 700,000 shares. The shares will be priced at $25 to the public with a 5%
spread. The out-of pocket costs will be $450,000. What are the net proceeds to the firm?
Chapter 15 - Investment Banking: Public and Private Placement
77. In a public distribution, the dealer group will generally pay a
78. When a firm sells a new issue through an investment banker the costs incurred
79. Generally, the total cost to issue securities (as a percent of total proceeds)
Chapter 15 - Investment Banking: Public and Private Placement
80. Dilution of earnings occurs because
81. Market stabilization
82. Underpricing occurs
Chapter 15 - Investment Banking: Public and Private Placement
83. Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at
$22 to the public. Maxwell will receive $19 per share. The firm has 1 million shares
outstanding and earnings of $6 million. What is the amount of dilution in earnings per share?
84. Firm X needs to net $12,800,000 from the sale of common stock. Its investment banker
has informed the firm that the retail price will be $22 per share, and that the firm will receive
$18.50 per share. Out-of-pocket costs are $250,000. How many shares must be sold?
Chapter 15 - Investment Banking: Public and Private Placement
85. Newdex has net income of $3,000,000 and 1,000,000 shares outstanding. It needs to raise
$5,000,000 in funds for a new asset. Its investment banker plans to sell an issue of common
stock to the public for $40, less a spread of 10%. How much must Newdex's after-tax income
increase to prevent dilution of EPS?
86. The market stabilization function usually
Chapter 15 - Investment Banking: Public and Private Placement
87. In countries where stocks are publicly traded, IPOs are underpriced
88. Shelf registration
89. Under SEC Rule 415, shelf registration
Chapter 15 - Investment Banking: Public and Private Placement
90. Which of the following is not true about rule 415?
91. Shelf Registration has been most frequently used with
92. Which of the following is considered an advantage (for the corporation) of going public?
Chapter 15 - Investment Banking: Public and Private Placement
93. All of the following are advantages of going public except
94. All of the following are disadvantages of going public except
95. Publicly-traded companies generally have
Chapter 15 - Investment Banking: Public and Private Placement
96. Which of the following statements about Hambrecht's Open IPO→ auctions is false?
97. Which of the following is not an advantage of private placement?
98. Which of the following are advantages of being privately placed?
Chapter 15 - Investment Banking: Public and Private Placement
99. Private placement of corporate bonds
100. Which of the following are advantages to private bond placement over public offerings?
101. Which of the following is a characteristic of leveraged buyouts?
Chapter 15 - Investment Banking: Public and Private Placement
102. ______________ occurs when a company is broken up into smaller divisions and sold
for a profit.
103. A company's value based on the assumption that its divisions would be sold individually
is called its ___________ value.
104. Which of the following is not a recent trend in investment banking?
Chapter 15 - Investment Banking: Public and Private Placement
105. Which of the following statements about secondary offerings is false?
106. Dilution is
107. In order to avoid long-term dilution, a corporation should determine whether the
necessary additional earnings from the issue are realistic relative to their historic:
Chapter 15 - Investment Banking: Public and Private Placement
108. Market stabilization has the following characteristics except:
Chapter 15 - Investment Banking: Public and Private Placement
110. Match the following with the items below:
An investment banker who is responsible for the
pricing, prospectus and legal work involved in the sale of a
2. dilution of
Is the difference between the price a selling corporation
received for its securities and the price paid when the issue
3. investment
4. private
Financial organization that specializes in selling
primary offerings of securities. In recent years, their duties
6. public
Maintains the price of a stock artificially for the purpose
Results in a decline in earnings per share until earnings
8. market
The sale of securities to a mixed group of investors by
9. underwriting
The sale of securities directly to a financial institution
10. managing
The repurchase of all publicly-owned shares of common
Chapter 15 - Investment Banking: Public and Private Placement
111. Match the following with the items below:
1. leveraged
The act of taking on any risk that might be associated
Taking on the responsibility of distributing a security
A group of investment bankers formed to share the risk
The act of setting the price of a new security slightly
A secondary market where securities are traded after its
Permits large companies to file one comprehensive
statement with the Securities and Exchange Commission
(SEC) outlining their financial plans for the next two
Occurs when either management or another investment
group borrows the needed cash to repurchase all traded
9. shelf
When divisions and products are sold and assets
Investment bankers that take a company public, but
instead of selling companies owned by individuals, the
investment bankers sell companies previously owned by
Chapter 15 - Investment Banking: Public and Private Placement
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112. Dixon Corporation is considering a public offering of common stock. The firm will offer
one million shares of common stock for sale. The estimated selling price is $45 per share with
Dixon Corp. receiving $40.50 per share after the offering. Registration fees are estimated at
$275,000.
a) What is the spread in dollars? In percent?
b) What are the total expenses of the issue?
c) If Dixon Corp. needs to generate $28 million, how many shares will have to be sold?
Chapter 15 - Investment Banking: Public and Private Placement
Chapter 15 - Investment Banking: Public and Private Placement
15-38
113. The Houston Corp. needs to raise money for an addition to its plant. It will issue 250,000
shares of new common stock. The new shares will be priced at $50 per share with a 9%
spread on the offer price. Registration costs will be $150,000. Presently Houston Corp has
earnings of $3 million and 700,000 shares outstanding.
a) Compute the potential dilution from this new stock issue.
b) Compute the net proceeds to Houston Corp.
c) What rate of return must be earned on the net proceeds so that no dilution of earnings per
share occurs?
Chapter 15 - Investment Banking: Public and Private Placement
Chapter 15 - Investment Banking: Public and Private Placement
114. Flyrite Company currently has net income of $9 million and 3 million common shares
outstanding which sell for $33/share. Flyrite has decided to issue new stock to raise
$4,000,000 to expand its operations. Flyrite's investment banker will sell the stock for $29
with a spread of 7%. There will be a $60,000 registration cost.
a) Calculate current EPS and P/E ratio.
b) How many shares will have to be sold to net $4 million?
c) Calculate new EPS and stock price immediately after the sale if the P/E ratio remains
constant.
