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Exam 15: Raising Capital

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Question 41

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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?

A) syndicate
B) introduction
C) second-stage
D) mezzanine-level
E) seed money

F) A) and B)
G) A) and C)

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Question 42

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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) A) and D)
G) B) and E)

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Question 43

Multiple Choice

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The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period.

The Warm Shoe Co.has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering.It has correctly determined that as a result of the rights offering,the share price will fall from $100 to $90 ($100 is the rights-on-price; $90 is the ex-rights price,also known as the when-issued price) .The company is seeking $18 million in additional funds with a per-share subscription price of $50.How many shares of stock are outstanding,before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.)

Which one of the following statements is correct?

Precise Machining is considering a rights offer.The company has determined that the ex-rights price would be $46.The current price is $53 per share,and there are 7 million shares outstanding.The rights offer would raise a total of $70 million.What is the subscription price?

You are a broker and 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 $25 a share and will begin trading on the same day.The client is allocated 500 shares of IPO A and 100 shares of IPO B.At the end of the first day of trading,IPO A was selling for $23.50 a share and IPO B was selling for $29 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?

Franklin Minerals recently had a rights offering of 1,000 shares at an offer price of $10 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 the unsubscribed shares.Which one of the following will allow her to do so?

Flagler,Inc.needs to raise $30 million to finance its expansion into new markets.The company will sell new shares of equity via a general cash offering to raise the needed funds.The offer price is $40 per share and the company's underwriters charge a 10 percent spread.How many shares need to be sold?

Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction.The bids received are as follows: $\begin{array} { c c c } \text { Bidder } & \text { Quantity } & \text { Price } \\ \text { A } & 400 & \$ 24 \\\text { B } & 300 & \$ 23 \\\text { C } & 1,000 & \$ 21 \\\text { D } & 1,500 & \$ 20 \\\text { E } & 2,900 & \$ 19\end{array}$ How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs.

Which of the following should be considered when selecting a venture capitalist? I.level of involvement II.past experiences III.termination of funding IV.financial strength

What is the definition of a syndicate?

What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?

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?

The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations.Some recent financial information for the company is shown here: $\begin{array} { l r } \text { Number of shares outstanding } & 24,000 \\\text { Book value } & \$ 320,000 \\\text { Market value } & \$ 457,600 \\\text { Net income } & \$ 18,000\end{array}$ MHMM is considering an investment that has the same P/E ratio as the firm.The cost of the investment is $800,000,and it will be financed with a new equity issue.What would the ROE on the investment have to be if we wanted the price after the offering to be $115 per share? Assume the PE ratio remains constant.

With firm commitment underwriting,the issuing firm:

Roy owns 200 shares of R.T.F.,Inc.He has opted not to participate in the current rights offering by this firm.As a result,Roy will most likely be subject to:

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? $\begin{array} { l r } \text { Number of shares outstanding } & 60,000 \\\text { Book value } & \$ 720,000 \\\text { Market value } & \$ 936,000 \\\text { Net income } & \$ 108,000\end{array}$

Miller Fruit wants to expand its citrus grove operations.The firm estimates that it needs $8.6 million to buy land and establish its operations.Currently,the firm has 540,000 shares of stock outstanding at a market price per share of $34.80.If the firm decides to raise the needed capital through a rights offering,one right will be issued for each share of stock.The subscription price will be set at $33 a share.How many rights will a shareholder need to purchase one new share of stock in this offering?

Explain why there is a tendency for IPOs to be underpriced.