42) BK & Co. offered 15,000 shares in a rights offer. T.L. Moore & Co. was the underwriter that
by prior agreement purchased the 639 unsold shares. For its participation in this rights offer, T.L.
Moore & Co. is most likely entitled to:
A) the gross margin.
B) the optional spread.
C) a standby fee.
D) the subscription price.
E) an oversubscription fee.
43) Franklin Minerals recently had a rights offering of 12,000 shares at an offer price of $17 a
share. Isabelle is a shareholder who exercised her rights option by buying all of the rights to
which she was entitled based on the number of shares she owns. Currently, there are six
shareholders who have opted not to participate in the rights offering. Isabelle would like to
purchase these unsubscribed shares. Which one of the following will allow her to do so?
A) Standby provision
B) Oversubscription privilege
C) Open offer privilege
D) New issues provision
E) Overallotment provision
44) Existing shareholders:
A) may or may not have a pre-emptive right to newly issued shares.
B) must purchase new shares whenever rights are issued.
C) are prohibited from selling their rights.
D) are generally well advised to let the rights they receive expire.
E) can maintain their proportional ownership positions without exercising their rights.
45) To purchase a share in a rights offering, an existing shareholder generally just needs to:
A) pay the subscription amount in cash.
B) submit the required form along with the required number of rights.
C) pay the difference between the market price of the stock and the subscription price.
D) submit the required number of rights along with a payment for the underwriting fee.
E) submit the required number of rights along with the subscription price.
46) The value of a right depends upon the number of rights required for each new share as well
as the:
A) subscription price and book value per share.
B) market and book values per share.
C) market price, book value, and subscription price.
D) market and subscription prices.
E) difference between the market and book values per share.
47) Before a seasoned stock offering, you owned 500 shares of a firm that had 20,000 shares
outstanding. After the seasoned offering, you still owned 500 shares but the number of shares
outstanding rose to 25,000. Which one of the following terms best describes this situation?
A) Overallotment
B) Percentage ownership dilution
C) Green Shoe allocation
D) Red herring allotment
E) Abnormal event
48) Which one of the following statements concerning dilution is correct?
A) Dilution of percentage ownership occurs whenever an investor fully participates in a rights
offer.
B) Market value dilution increases as the net present value of a project increases.
C) Market value dilution occurs when the net present value of a project is negative.
D) Neither book value dilution nor market value dilution has any direct bearing on individual
shareholders.
E) Book value dilution is the cause of market value dilution.
49) Roy owns 200 shares of RTF Inc. He has opted not to participate in the current rights
offering by this company. As a result, Roy will most likely be subject to:
A) an oversubscription cost.
B) underpricing.
C) dilution.
D) the Green Shoe provision.
E) a locked-in period.
50) Direct business loans typically ranging from one to five years are called:
A) private placements.
B) debt SEOs.
C) notes payable.
D) debt IPOs.
E) term loans.
51) The High-End mutual fund recently loaned $13.6 million to Henderson Hardware for 15
years at 6.8 percent interest. This loan is best described as a:
A) private placement.
B) debt SEO.
C) note payable.
D) debt IPO.
E) term loan.
52) Which one of the following statements is correct concerning the issuance of long-term debt?
A) A direct private long-term loan has to be registered with the SEC.
B) Direct placement debt tends to have more restrictive covenants than publicly issued debt.
C) Distribution costs are lower for public debt than for private debt.
D) It is easier to renegotiate public debt than private debt.
E) Wealthy individuals tend to dominate the private debt market.
53) Shelf registration allows a firm to register multiple issues at one time with the SEC and then
sell those registered shares anytime during the subsequent:
A) 3 months.
B) 6 months.
C) 180 days.
D) 2 years.
E) 5 years.
55) The Boat Works decided to go public by offering a total of 135,000 shares of common stock
to the public. The company hired an underwriter who arranged a firm commitment underwriting
and an initial selling price of $24 a share with a spread of 8.3 percent. As it turned out, the
underwriters only sold 122,400 shares to the public. What is the amount paid to the issuer?
A) $2,227,280
B) $3,074,420
C) $2,971,080
D) $2,692,820
E) $2,477,380
56) Nelson Paints recently went public by offering 50,000 shares of common stock to the public.
The underwriters provided their services in a best efforts underwriting. The offering price was
set at $17.50 a share and the gross spread was $2.30. After completing their sales efforts, the
underwriters determined that they sold a total of 47,500 shares. How much cash did the company
receive from its IPO?
A) $722,000
B) $717,000
C) $735,000
D) $705,000
E) $748,000
57) LC Delivery has decided to sell 1,800 shares of stock through a Dutch auction. The bids
received are as follows: 600 shares at $37 a share, 800 shares at $36, 900 shares at $35, 200
shares at $34, and 100 shares at $32 a share. How much will the company receive in total from
selling the 1,800 shares? Ignore all transaction and flotation costs.
A) $63,100
B) $52,500
C) $63,000
D) $58,800
E) $52,100
58) Bakers’ Town Bread is selling 1,500 shares of stock through a Dutch auction. The bids
received are as follows: 200 shares at $17 a share, 400 shares at $15, 700 shares at $14, 400
shares at $13, and 200 shares at $11 a share. How much cash will the company receive from
selling these shares of stock? Ignore all transaction and flotation costs.
A) $22,000
B) $22,500
C) $23,000
D) $24,500
E) $20,200
59) Eastern Electric is offering 2,100 shares of stock in a Dutch auction. The bids include: 1,400
shares at $32 a share, 1,500 shares at $31, 1,400 shares at $30, and 900 shares at $29 a share.
How much cash will Eastern Electric receive from selling these shares? Ignore all transaction
and flotation costs.
A) $62,100
B) $64,200
C) $60,000
D) $63,000
E) $63,300
60) You have been instructed to place an order for a client to purchase 500 shares of every IPO
that comes to market. The next two IPOs are each priced at $26 a share and will begin trading on
the same day. The client is allocated 500 shares of IPO A and 240 shares of IPO B. At the end of
the first day of trading, IPO A was selling for $23.90 a share and IPO B was selling for $29.40 a
share. What is the client’s total profit or loss on these two IPOs as of the end of the first day of
trading?
A) − $286
B) − $234
C) − $148
D) $275
E) $329
61) Richard placed an order for 1,000 shares in each of three IPOs at $28 a share. He was
allocated 1,000 shares of IPO A, 200 shares of IPO B, and 600 shares of IPO C. On the first day
of trading, IPO A opened at $28 a share and ended the day at $24.25 a share. IPO B opened at
$30 a share and finished the day at $37 a share. IPO C opened at $28 a share and ended the day
at $27.65 a share. What is the total profit or loss on these three IPO purchases as of the end of the
first day of trading?
A) − $2,160
B) − $1,850
C) − $1,950
D) $2,240
E) $2,175
62) Two IPOs will commence trading next week. Scott places an order to buy 600 shares of IPO
A. Steve places an order to purchase 600 shares of IPO A and 600 shares of IPO B. Both IPOs
are priced at $21 a share. Scott is allocated 300 shares of IPO A. Steve is allocated 300 shares of
IPO A and 600 shares of IPO B. At the end of the first day of trading, IPO A is selling for $23.30
a share and IPO B is selling for $17.75 a share. How much additional profit did Steve have at the
end of the first day of trading as compared to Scott?
A) $1,950
B) $1,260
C) $1,870
D) −$1,950
E) −$1,260
63) Davis Bros. and The Storage Shed have both announced IPOs at $32 per share. One of these
is undervalued by $9, and the other is overvalued by $4, but you have no way of knowing which
is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be
rationed, and only half your order will be filled. What is the amount of the difference between
your expected profit and the amount of profit you could earn if you could get 1,000 shares of
both IPO offerings?
A) $4,500
B) $5,000
C) $4,000
D) $5,500
E) $6,000
64) Wear Ever is expanding and needs $6.8 million to help fund this growth. The company
estimates it can sell new shares of stock for $43 a share. It also estimates it will cost an additional
$352,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a
spread of 7.5 percent. How many shares of stock must be sold for the company to fund its
expansion?
A) 170,376
B) 185,127
C) 179,811
D) 154,209
E) 61,806
65) Mountain Teas wants to raise $13.6 million to open a new production facility. The company
estimates the issue costs for legal and accounting fees will be $386,000. The underwriters have
set the stock price at $27.50 a share and the underwriting spread at 8.15 percent. How many
shares of stock must be sold to meet this cash need?
A) 528,414
B) 553,709
C) 569,315
D) 492,144
E) 501,909
66) Outdoor Goods needs $3.8 million to modernize its production equipment. The underwriters
set the stock price at $29.50 a share with an underwriting spread of 7.35 percent. This would be a
firm commitment underwriting. The estimated issue costs are $272,000. How many shares of
stock must be sold to finance this project?
A) 148,984
B) 188,917
C) 152,311
D) 186,299
E) 162,400
67) Flagler Inc. needs to raise $11.6 million, including all accounting and legal fees, to finance
its expansion so has decided to sell new shares of equity via a general cash offering. The offer
price is $22.50 per share and the underwriting spread is 7.85 percent. How many shares need to
be sold?
A) 559,474
B) 604,011
C) 566,667
D) 571,008
E) 538,409
68) New Education needs to raise $8.79 million to finance its expansion and has decided to sell
new shares of equity via a general cash offering. The offer price is $31.40 per share, the
underwriting spread is 7.32 percent, and the associated administrative expenses and fees are
$517,600. How many shares need to be sold?
A) 348,907
B) 361,222
C) 311,111
D) 329,937
E) 319,832
69) The Huff Co. has just gone public. Under a firm commitment agreement, the company
received $17.64 for each of the 3.2 million shares sold. The initial offering price was $22.50 per
share, and the stock rose to $24.15 per share in the first day of trading. The company paid
$984,900 in direct legal and other costs and incurred $340,000 in indirect costs. What was the
flotation cost as a percentage of the net amount raised?
A) 38.56 percent
B) 40.32 percent
C) 41.68 percent
D) 40.20 percent
E) 39.09 percent
70) Mountain Mining requires $3.3 million to expand its current operations and has decided to
raise these funds through a rights offering at a subscription price of $18 a share. The current
market price of the company’s stock is $24.70 a share. How many shares of stock must be sold to
fund the expansion plans?
A) 140,015
B) 133,603
C) 148,909
D) 183,333
E) 195,607
71) Northwest Rail wants to raise $27.8 million through a rights offering to upgrade its rail lines.
How many shares of stock need to be sold if the current market price is $30.34 a share and the
subscription price is $26.50 a share?
A) 916,282
B) 937,856
C) 985,065
D) 1,058,604
E) 1,049,057