Question 1

The current market price of an ex-rights stock is $89.00. 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 answer of The current market price of an ex-rights...

Question 2

Voting rights or dividend payment differences are indicative of:

Accepted Answer

Voting rights or dividend payment differences are indicative of different classes of stock. Companies may issue various classes of stock to allocate different rights and privileges, such as voting power or dividend payments, to different groups of shareholders.

Question 3

Which of the following is false?

Accepted Answer

Public corporations are required to have a board of directors to oversee the management and make key strategic decisions. However, private corporations also often have boards of directors, especially if they are of a certain size or complexity. The statement that private corporations do not have a board of directors is false, as the presence of a board is not exclusive to public corporations.

Question 4

Advantages of equity financing include:

Accepted Answer

The answer of Advantages of equity financing include:
...

Question 5

The holder of a call option:

Accepted Answer

The holder of a call option has the right, but not the obligation, to buy shares at a predetermined price on or before the option's expiry date.

Question 6

The holder of a put option:

Accepted Answer

The holder of a put option has the right, but not the obligation, to sell a specified amount of an underlying security at a predetermined price within a specified time frame. This is typically done with the expectation that the stock price will decline, allowing the holder to sell at a higher price than the market offers.

Question 7

Describe the difference between a preemptive right and a warrant.

Accepted Answer

The answer of Describe the difference between a preemptive right...

Question 8

Given the following information, calculate the exercise value of the warrant:
Exercise price is $55 per share
Market price per share of the common stock is $45
Number of shares of common stock that can be bought per warrant by exercising it is 5

Accepted Answer

The answer of Given the following information, calculate the exercise...

Question 9

Company XYZ has 30 million shares of common stock outstanding. It wishes to issue another 1,500,000 shares. The current market price per share is $25 and the rights offering subscription price is $20 per share.
a. How many rights will current stockholders receive?
b. How many rights are needed to buy one additional share?
c. What is the value of a right if the stock is trading: rights-on versus ex-rights?

Accepted Answer

The answer of Company XYZ has 30 million shares of...

Question 10

Buy Rite plans to sell 4,000,000 shares of new common stock. A rights offering is to be used. The subscription price is $10 per share and the firm has 24,000,000 shares outstanding. The record date is Monday, July 29.
a. How many rights will be required to purchase one new share of stock?
c. If the rights-on market price of firm's common stock were $15/share, calculate the value of a right.

Accepted Answer

The answer of Buy Rite plans to sell 4,000,000 shares...

Question 11

Tidelle Corporation has 2,000,000 voting shares of common stock outstanding with a market price of $10/share. The firm is planning a rights offering with a $5/share subscription price to issue 2,000,000 new shares.
a. What is the number of rights required to purchase one new share of the firm's common stock?
b. What is the theoretical value of a right if the stock is selling rights-on?
c. What is the value of a right on the ex-rights date?

Accepted Answer

The answer of Tidelle Corporation has 2,000,000 voting shares of...

Question 12

Could a controlling interest in a firm be obtained by shareholders owning only 5% of the outstanding voting shares of common stock?

Accepted Answer

The answer of Could a controlling interest in a firm...

Question 13

Why might a firm choose a best efforts offering for an IPO?

Accepted Answer

The answer of Why might a firm choose a best...

Question 14

How do you value a stock that is not publicly traded?

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The answer of How do you value a stock that...

Question 15

You own shares in a company that has just announced a rights issue. In a strictly financial sense, why must you either exercise the rights or sell them? Assume the price of the stock does not change after the record date.

Accepted Answer

The answer of You own shares in a company that...

Question 16

Why would an investor use put options to protect the value of a shareholding they currently own?

Accepted Answer

The answer of Why would an investor use put options...

Question 17

Security issuance is an extremely lucrative opportunity for investment banking firms. Why do these firms typically form syndicates and share the earnings?

Accepted Answer

The answer of Security issuance is an extremely lucrative opportunity...

Question 18

As long as there is time remaining until expiration, the actual market price of a warrant will be greater than its exercise value. Why?

Accepted Answer

The answer of As long as there is time remaining...

Quiz 5: Long-Term Financing Decisions