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Exam 15: Financial Leverage and Capital Structure Policy

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Question 31

Multiple Choice

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What is a prospectus?

A) a letter issued by the SEC authorizing a new issue of securities
B) a report stating that the SEC recommends a new security to investors
C) a letter issued by the SEC that outlines the changes required for a registration statement to be approved
D) a document that describes the details of a proposed security offering along with relevant information about the issuer
E) an advertisement in a financial newspaper that describes a security offering

F) C) and E)
G) C) and D)

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Question 32

Multiple Choice

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Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets.The net present value of the project is $22,500.Equity shares will be issued as the sole means of financing the project.What will the new book value per share be after the project is implemented given the following current information on the firm?

A) $13.25
B) $13.70
C) $14.23
D) $14.94
E) $15.60

F) D) and E)
G) A) and C)

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Question 33

Multiple Choice

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Tony currently owns 12,000 shares of GL Tools.He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public.What is this type of an offer called?

Which one of the following is a preliminary prospectus?

Shares of PLS United have been selling with rights attached.Tomorrow, the stock will sell independent of these rights.Which one of the following terms applies to tomorrow in relation to this stock?

Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities.How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $31 a share?

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:

Which one of the following statements concerning venture capital financing is correct?

An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:

Which one of the following statements concerning dilution is correct?

Wear Ever is expanding and needs $12.6 million to help fund this growth.The firm estimates it can sell new shares of stock for $35 a share.It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue.The underwriters have agreed to a 7 percent spread.How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs?

Which one of the following statements concerning venture capitalists is correct?

The Timken Company has announced a rights offer to raise $25 million for a new journal, the Journal of Financial Excess.This journal will review potential articles after the author pays a nonrefundable reviewing fee of $2,500 per page.The stock currently sells for $48 per share, and there are 2.6 million shares outstanding.The subscription price is set at $43 per share.What is the ex-rights price per share?

Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding.After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000.Which one of the following terms best describes this situation?

Existing shareholders:

Aaron's Sailboats has decided to take the company public by offering a total of 120,000 shares of common stock to the public.The firm has hired an underwriter who arranges a full commitment underwriting and suggests an initial selling price of $25 a share with a 7 percent spread.As it turns out, the underwriters only sell 97,400 shares.How much cash will Aaron's Sailboats receive from its first public offering?

Suzie is a chemist who has been experimenting with fragrances in her home laboratory and feels that she now has three viable perfumes that could be successfully marketed.She knows a venture capitalist who has offered to finance her business to the point where she would be ready to begin the manufacturing and marketing stage.Which type of financing is Suzie being offered?

Which one of the following is probably the most successful means of finding venture capital?

Explain both a rights offering and the basic characteristics of a right.

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public.The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares.Which one of the following terms best describes this underwriting?