Deck 15: Raising Capital

Question 1

The Western Power Company, a regional electric utility, sells 500,000 shares of common stock to
investors at large. This is most likely to be a "best efforts" offering.

Answer 1

False

Question 2

The venture capitalist's exit strategy is an important factor when choosing a venture capitalist.

Answer 2

True

Question 3

Venture capital is relatively easy to acquire in today's market.

Answer 3

False

Question 4

Award: 2.00 points

Question 5

An initial public offering (IPO) occurs when a firm that is not currently publicly traded issues stock to
the public.

Question 6

Venture capitalists often are pension funds.

Question 7

Venture capitalists tend to avoid involvement in the actual running of a business.

Question 8

Venture capital is considered private debt.

Question 9

Venture capitalists often are insurance companies.

Question 10

Venture capitalists tend to be long-term investors.

Question 11

The financial strength of the venture capitalist is an important factor when choosing a venture
capitalist.

Question 12

Venture capital firms generally pool funds from various sources.

Question 13

Venture capitalists often are university endowment funds.

Question 14

Venture capitalists frequently assume active roles in the management of the financed firm.

Question 15

Venture capitalists are often given a 40% share in the firm's equity.

Question 16

The risk that new securities will be sold at a loss is transferred from the issuing firm to the
underwriter in best efforts underwriting.

Question 17

Venture capitalists often hold voting preferred stock.

Question 18

In regards to the cost of issuing securities, substantial economies of scale exist as related to
issuance size.

Question 19

"Best efforts" underwriting is the most common type of underwriting in Canada.

Question 20

Venture capitalists often assume 40 percent or more ownership in a firm as a condition of financing.

Question 21

Arguments that have been presented to support IPO underpricing include rewarding institutional
investors for sharing their opinion of a stock's market value.

Question 22

General cash offers is considered private debt.

Question 23

Indirect expenses is a cost of a secondary equity offering.

Question 24

A reason why many IPOs are underpriced is to reward large institutional investors.

Question 25

Green shoe option is a cost of a secondary equity offering.

Question 26

Arguments that have been presented to support IPO underpricing include counteracting the
"winner's curse".

Question 27

Arguments that have been presented to support IPO underpricing include diminishing the risk to
the underwriter who has agreed to a firm commitment underwriting.

Question 28

Underpricing is a cost of a secondary equity offering.

Question 29

All else equal, the greater the subscription price of shares in a rights offering, the smaller the
number of rights needed to buy one new share.

Question 30

A reason why many IPOs are underpriced is to help prevent lawsuits against underwriters.

Question 31

A reason why many IPOs are underpriced is to meet the Regulation A requirements of the OSC.

Question 32

In regards to the cost of issuing securities, underpricing for firm commitment offers is typically larger
than for best efforts.

Question 33

In regards to the cost of issuing securities, the costs of underpricing can exceed direct issuance
costs.

Question 34

A general cash offer is an offering of debt or equity securities to fewer than 40 investors.

Question 35

A reason why many IPOs are underpriced is to counteract the winner's curse.

Question 36

Large rights offerings are more common in industrialized nations other than Canada.

Question 37

Arguments that have been presented to support IPO underpricing include diminishing the odds that
investors will sue investment banks.

Question 38

Empirical evidence suggests that, on average, the shares in initial public offerings have not been
significantly underpriced.

Question 39

Term loans is considered private debt.

Question 40

Private placements is considered private debt.

Question 41

A shareholder currently owns 500 shares of ABC. Each share is currently priced at $15. The company has just released a rights offering at $12 plus 4 rights. What is the value of one right?

A) $0.25
B) $0.60
C) $.072
D) $1.50
E) $3.00

Question 42

The main difference between direct private long-term debt financing and public issues of debt is
that direct placements are limited to a total value of $10 million.

Question 43

According to the textbook, the market value of a firm's outstanding shares are most likely to fall
upon the announcement of a new equity offering.

Question 44

Assuming a price greater than zero, it is virtually impossible to overprice a rights offer.

Question 45

The main difference between direct private long-term debt financing and public issues of debt is
that registration costs are lower for direct placements.

Question 46

Spread is a cost of a secondary equity offering.

Question 47

The value of a right granted by a rights offering depends upon the price-earnings ratio of the stock.

Question 48

One of the drawbacks of a rights offering is that the price of the stock falls, harming existing
stockholders.

Question 49

The market value of DC Wholesalers common stock is $17 a share. The company has decided to raise funds through a rights offering. Shareholders will receive one right for each share of stock
They own. The new shares are priced at $15 plus four rights. What is the value of one right?

A) $.37
B) $.40
C) $.44
D) $.50
E) $.53

Question 50

According to the textbook, direct flotation costs and the offering size (as measured by gross
proceeds) are positively related.

Question 51

Empirical evidence suggests that the market price of a firm's existing shares is most likely to decline
upon the announcement of a new equity issue. An equity issue is a signal that the firm may have
too little liquidity has been advanced as a possible explanation for this phenomenon.

Question 52

Empirical evidence suggests that the market price of a firm's existing shares is most likely to decline
upon the announcement of a new equity issue. Management will issue equity only when it believes
that existing shares are undervalued has been advanced as a possible explanation for this
phenomenon.

Question 53

The value of a right granted by a rights offering depends upon the number of rights required to
purchase one new share.

Question 54

The value of a right granted by a rights offering depends upon the market price of the security.

Question 55

The main difference between direct private long-term debt financing and public issues of debt is
that it is easier to renegotiate a term loan or private placement in the event of a default.

Question 56

Historically, general cash offers have had average flotation costs higher than pure rights offerings.

Question 57

Empirical evidence suggests that the market price of a firm's existing shares is most likely to decline
upon the announcement of a new equity issue. Issuing new equity requires the firm to incur
substantial issue costs has been advanced as a possible explanation for this phenomenon.

Question 58

In regards to the cost of issuing securities, the total costs involved with seasoned issues are
typically higher than for IPOs.

Question 59

The value of a right granted by a rights offering depends upon the subscription price.

Question 60

The main difference between direct private long-term debt financing and public issues of debt is
that direct placements are less likely to have restrictive covenants.

Question 61

The Green Hornet wants to raise $25 million in a rights offering. The stock price is $48 a share, the subscription price is $40 a share, and there are 4 million shares outstanding. What is the value of
One right?

A) $0.97
B) $1.03
C) $1.08
D) $1.11
E) $1.33

Question 62

You decide to take your company public by offering a total of 50,000 shares of common stock to the public in an initial public offering (IPO). You hire an underwriter who arranges a full commitment
Underwriting and suggests an initial selling price of $28 a share with an 8 percent spread. As it
Turns out, the underwriters only sell 48,500 shares. How much cash will you receive from your IPO?

A) $1,249,360
B) $1,288,000
C) $1,299,360
D) $1,308,600
E) $1,400,000

Question 63

The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets. The net present value of the project is $20,000. 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) $9.97
B) $10.88
C) $11.34
D) $13.15
E) $15.70

Question 64

Allied Corporation offers 40,000 shares of common stock to the public in an initial public offering (IPO). The underwriters agree to provide their services in a best efforts underwriting. The offering
Price is set at $28. The gross spread is $3. After completing their sales efforts the underwriters
Determine that they were able to sell a total of 36,750 shares. How much cash did Allied
Corporation receive from their IPO?

A) $880,000
B) $918,750
C) $1,029,000
D) $1,120,000
E) $1,139,250

Question 65

An Edmonton firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What will the firm be
Worth after the offering?

A) $96.0 million
B) $98.4 million
C) $105.0 million
D) $112.0 million
E) $115.8 million

Question 66

You decide to raise $2 million in additional funding via a rights offering. Every shareholder will receive one right for every share of stock they own. The offering consists of a total of 250,000 new
Shares. The current market price of your stock is $10. Currently, there are 1 million shares
Outstanding. What is the value of one right?

A) $.25
B) $.40
C) $.75
D) $1.20
E) $1.50

Question 67

Wagner Trucking is considering investing in a new project that will cost $6 million and increase net income by 5 percent. This project will be completely funded by issuing new equity shares.
Currently, the firm has 2 million shares of stock outstanding with a market price of $30 per share.
The current earnings per share are $1.60. What will the earnings per share be if the project is
Implemented?

A) $1.39
B) $1.45
C) $1.53
D) $1.60
E) $1.68

Question 68

A Windsor firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What is the ex-rights price?

A) $100.00
B) $113.33
C) $115.50
D) $116.67
E) $120.00

Question 69

Assume that Classique decides to set the subscription price at $4 rather than $2. Now what will the value of a right be? (Assume all other information remains the same.)

A) $0.25
B) $0.40
C) $0.80
D) $1.20
E) $2.50

Question 70

TOYSrYOU needs to raise $5 million in a rights offering. If the subscription price is $10 per share, the stock price is $12.50 per share, and there are 4 million shares outstanding, what will the stock
Sell for ex-rights?

A) $7.50
B) $11.46
C) $12.22
D) $12.36
E) $12.50

Question 71

You decide to raise $8 million in additional funding via a rights offering. One right is being granted for every share of stock currently outstanding. The offering consists of a total of 400,000 new
Shares. Currently, there are 2.5 million shares outstanding at a market price of $31 per share. What
Is the value of one right?

A) $.71
B) $1.15
C) $1.24
D) $1.37
E) $1.52

Question 72

Frank Enterprises is sponsoring a rights offering wherein every shareholder will receive one right for every share of stock they own. The new shares in this offering are priced at $25 plus 5 rights.
The current market price of Frank Enterprises stock is $31 a share. What is the value of one right?

A) $0.25
B) $.60
C) $1.00
D) $1.20
E) $1.50

Question 73

TOYSrYOU needs to raise $5 million in a rights offering. If the subscription price is $10 per share, the stock price is $12.50 per share, and there are 4 million shares outstanding, what is the value of
A right?

A) $0.14
B) $0.28
C) $1.04
D) $2.50
E) $5.00

Question 74

A Calgary firm is considering a new project which requires the purchase of $370,000 of new equipment. The net present value of the project is $67,000. The price-earnings ratio of the project
Equals that of the existing firm. What will the new market value per share be after the project is
Implemented given the following current information on the firm?

A) $11.70
B) $12.19
C) $12.49
D) $13.01
E) $13.13

Question 75

The Jenkins Co. is considering a project which requires the purchase of $315,000 of fixed assets. The net present value of the project is $20,000. Equity shares will be issued as the sole means of
financing the project. The price-earnings ratio of the project equals that of the existing firm. What
Will the new market value per share be after the project is implemented given the following current
Information on the firm?

A) $10.00
B) $10.37
C) $12.07
D) $14.68
E) $15.04

Question 76

Summit Health Care is sponsoring a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $42 plus 8 rights.
The current market price of Summit stock is $48 a share. What is the value of one right?

A) $.50
B) $.58
C) $.63
D) $.67
E) $.75

Question 77

Wexford Industries offers 60,000 shares of common stock to the public in an initial public offering (IPO). The underwriters agree to pay $35 a share and to provide their services in a best efforts
Underwriting. The offer price is set at $39. After completing their sales efforts the underwriters
Determine that they were able to sell a total of 48,250 shares. How much cash did Wexford
Industries receive from their IPO?

A) $1,688,750
B) $1,703,250
C) $1,881,750
D) $2,100,000
E) $2,340,000

Question 78

Glasses, Etc. is offering 100,000 shares of common stock to the public in an initial public offering (IPO). The underwriters agree to pay $18 a share and to provide their services in a best efforts
Underwriting. The offer price is set at $19.50. The underwriters sell a total of 91,700 shares to the
General public. How much cash did Glasses, Etc. receive from its IPO?

A) $1,650,600
B) $1,720,500
C) $1,788,150
D) $1,800,000
E) $1,950,000

Question 79

The Purple Nickel is seeking to raise $8 million through a rights offering. Two rights will be required to purchase each new share of stock. Currently, there are 1.6 million shares outstanding at a market
Price of $12 per share. What is the ex-rights price?

A) $11.00
B) $11.33
C) $11.50
D) $11.58
E) $11.77

Question 80

The stock of Byron Enterprises is currently selling for $48 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for every
Share of stock they own. The new shares being offered are priced at $42 plus five rights. What is
The value of one right?

A) $0.20
B) $0.50
C) $1.00
D) $5.00
E) $6.00