Question 1

When an investment banker agrees to buy new securities from an issuing company at a given price, this is called:

Accepted Answer

An underwriting agreement is when an investment banker (underwriter) agrees to buy new securities from an issuing company at a given price and then resells them to the public or institutional investors. This process helps ensure that the issuing company receives the capital it needs, as the underwriter assumes the risk of selling the securities at the agreed price.

Question 2

To value a stock initially going public, which of the following processes would not be an effective pricing tool?

Accepted Answer

The IPO approach is not a specific valuation method; it refers to the process of taking a company public, not a pricing tool.

Question 3

The preemptive right applies to:

Accepted Answer

The preemptive right allows existing shareholders to purchase additional shares in a new issue of common stock before the company offers them to the public, maintaining their proportional ownership in the corporation.

Question 4

A firm has a rights offering with a record date of Thursday, April 24, and and expiration date of Friday, May 31. You buy the stock on Friday April 25. You will be able to exercise the rights:

Accepted Answer

Since you purchased the stock on Friday, April 25, which is after the record date of Thursday, April 24, you will not own the rights associated with the rights offering. Rights are typically assigned to shareholders of record as of a specific date, and in this case, you would not be considered a shareholder of record on the record date.

Question 5

One of the most important features of a preemptive right is it:

Accepted Answer

Preemptive rights protect existing shareholders from dilution of their ownership stake when new shares are issued, by allowing them to purchase additional shares before the new shares are offered to the public.

Question 6

A right is no longer valuable after:

Accepted Answer

A right is no longer valuable after its expiration date because it cannot be exercised or sold beyond this point.

Question 7

Given the following information, calculate the approximate value of a right: Market price per share of the common stock, selling rights-on, is $50; subscription price is $36; 7 rights are required to buy a new share.

Accepted Answer

The value of a right is calculated as (Market price - Subscription price) / Number of rights required.= ($50 - $36) / 7= $14 / 7= $2

Question 8

A stock is traded rights on; the market price per share of the common stock is $100; the subscription price is $80; and the number of rights needed to buy a new share is 19. Calculate the approximate value of a right.

Accepted Answer

The value of a right is calculated as (Market price - Subscription price) / Number of rights needed to buy a new share. In this case, the value of a right is ($100 - $80) / 19 = $1.05.

Question 9

A stock is trading ex rights; the market price per share of the common stock is $80; the subscription price is $62; and the number of rights is 5. Calculate the approximate value of a right.

Accepted Answer

The value of a right is calculated as (Market price - Subscription price) / Number of rights = ($80 - $62) / 5 = $3.60.

Question 10

Warrants have value until:

Accepted Answer

Warrants have value until the expiration date, which is the last day on which they can be exercised.

Question 11

The exercise value of a warrant is:

Accepted Answer

The exercise value of a warrant is the amount saved by purchasing the common stock by exercising the warrant rather than buying the common stock in the open market. This value is determined by the difference between the market price of the stock and the exercise price of the warrant.

Question 12

The exercise value of a warrant is zero if:

Accepted Answer

The answer of The exercise value of a warrant is...

Question 13

The exercise price of a warrant is $45 per share; current market price of the common stock is $55; number of shares that can be purchased by exercising the warrant is 5. Calculate the exercise value of the warrant.

Accepted Answer

The exercise value of a warrant is calculated by subtracting the exercise price from the current market price of the stock, then multiplying by the number of shares that can be purchased. Here, ($55 - $45) * 5 = $10 * 5 = $50.

Question 14

The warrant's time value is equal to:

Accepted Answer

The time value of a warrant is the difference between its market price and its intrinsic value (exercise value). This is because the time value represents the premium paid over the intrinsic value, reflecting the warrant's potential for future gain due to time left until expiration.

Question 15

The market value of a warrant:

Accepted Answer

The market value of a warrant, similar to options, increases with greater expected volatility of the stock price. This is because higher volatility increases the potential for the stock price to exceed the exercise price of the warrant, making it more valuable.

Question 16

A stock is trading ex-rights; the market price per share of common stock is $75; the number of rights needed to buy one new share is 3, and the value of a right is 5. Calculate the subscription price.

Accepted Answer

The answer of A stock is trading ex-rights; the market...

Question 17

If a nine-member board of directors is being elected, how many board members can stockholders elect under the majority voting rule if there are 200,000 shares outstanding?

Accepted Answer

Under the majority voting rule, stockholders can elect all members of the board if they hold more than 50% of the shares. Since there is no division of shares mentioned that would limit the election to a portion of the board, stockholders can elect all 9 members.

Question 18

Which of the following is true?

Accepted Answer

Majority interest refers to the ownership of more than 50% of a company's voting shares, which typically grants the power to control the company's operations and decisions. Controlling interest, while often achieved through majority ownership, can also occur with less than 50% ownership if the remaining shares are widely dispersed or if there are agreements in place that grant control to the shareholder(s) with less than a majority stake.

Question 19

When an investment banker agrees to sell as many shares as possible but does not purchase the shares from the company, this is called:

Accepted Answer

This arrangement is known as a best efforts agreement, where the investment banker agrees to sell as many shares as possible on behalf of the company but does not commit to purchasing any unsold shares, thus not guaranteeing the total amount raised from the offering.

Question 20

The current market price of a rights-on stock is $90.00. The subscription price is $81.00. The number of rights required to purchase one new share is 8. What is the approximate market price is one right?

Accepted Answer

The value of a right is calculated as (Market Price - Subscription Price) / (Number of Rights + 1). So, ($90 - $81) / (8 + 1) = $1.00.

Quiz 5: Long-Term Financing Decisions