Question 1

New York Investments (NYI),an investment banking firm,has proposed two types of payment plans for the IPO being considered by Albany Exploration.The first is a firm commitment of $40,000,000.The second is a best efforts arrangement in which NYI will receive $2.00 for every share sold up to a maximum of $3,600,000 for the 1,800,000 shares being offered.How much money will NYI earn under the best efforts method if it is able to sell only 95% of the offering at a price of $25.00 per share?

Accepted Answer

Under the best efforts method, NYI earns $2.00 per share sold. If 95% of 1,800,000 shares are sold, that is 1,710,000 shares. Therefore, NYI earns 1,710,000 * $2.00 = $3,420,000.

Question 2

Amalgamated Appliance Inc.has planned a 3-month issue of commercial paper with a face value of $25,000,000.The paper is set to sell at 98.5% of face value.What is the discounted selling price of the firm's commercial paper?

Accepted Answer

The discounted selling price of the commercial paper can be calculated as follows:

Discounted selling price = Face value x (selling price percentage/100) 
Discounted selling price = $25,000,000 x (98.5/100) 
Discounted selling price = $24,625,000

Therefore, the best choice is C.

Question 3

Commercial paper has a minimum denomination of ________.

Accepted Answer

Commercial paper typically has a minimum denomination of $100,000.

Question 4

Amalgamated Appliance Inc.has planned a 3-month issue of commercial paper with a face value of $25,000,000.The paper is set to sell at 98.5% of face value.What is the 3-month interest rate?

Accepted Answer

The answer of Amalgamated Appliance Inc.has planned a 3-month issue...

Question 5

During the so-called cooling-off period while an issuing company is waiting for SEC approval of its IPO,advertising and promotion of the stock usually begins.

Accepted Answer

During the cooling-off period, advertising and promotion of the stock are not allowed. It is a quiet period where the company is not allowed to promote itself to the public in any way.

Question 6

Extreme Adventures Inc.needs to raise capital and has hired Solomon Sisters to be its investment banker (IB).Solomon recommends a sale of common stock and estimate the firm could raise a gross amount of $7,500,000 if they could sell 300,000 shares of stock at $25 per share.Solomon has offered two compensation methods for its work on the sale of these securities.The first is a best efforts arrangement where Extreme will pay Solomon $1.00 for every share issued.The second is a firm-commitment of $7,000,000.If Solomon is able to sell the entire issue at the recommended price,how much money will it make under each arrangement? What is the break-even point in sales percent between firm commitment and best efforts for Extreme Adventures?

Accepted Answer

The answer of Extreme Adventures Inc.needs to raise capital and...

Question 7

Bacon Signs Inc.has planned a 3-month issue of commercial paper with a face value of $15,000,000.The paper is set to sell at 99.5% of face value.What is the EAR?

Accepted Answer

The answer of Bacon Signs Inc.has planned a 3-month issue...

Question 8

Commercial paper and banker's acceptances are two forms of corporate financing typically undertaken by ________.

Accepted Answer

Commercial paper and banker's acceptances are commonly used by established, mature firms as a means of short-term financing. Start-up firms and sole proprietorships may not have the creditworthiness or established relationships with banks necessary to access these forms of financing.

Question 9

Amalgamated Appliance Inc.has planned a 3-month issue of commercial paper with a face value of $25,000,000.The paper is set to sell at 98.5% of face value.What is the EAR?

Accepted Answer

To find the EAR, we need to use the following formula:
EAR = (1 + (r/m))^m - 1
Where r is the annualized rate, and m is the number of compounding periods in a year.
In this case, the face value of the commercial paper is $25,000,000, and it is selling at 98.5% of face value, or $24,625,000. The discount is $375,000, which is the interest paid on the paper.
The interest rate, r, can be found by dividing the discount by the face value and multiplying by the number of periods in a year. Since the paper is a 3-month issue, there are four compounding periods in a year.
r = ($375,000 / $25,000,000) x (4/3) = 0.06 or 6%
Plugging this into the EAR formula, we get:
EAR = (1 + (0.06/4))^4 - 1 = 0.0623 or 6.23%
Therefore, the best choice is B.

Question 10

Fruit Flavors Online Inc.plans to issue $5,000,000 of commercial paper with a 6-month maturity at 97% of par value.What is the 6-month interest rate?

Accepted Answer

The price of commercial paper is calculated as follows: 
Price = Par value × (1 − Discount rate × Time in years)

Substituting the given values, we get: 
$4,850,000 = $5,000,000 × (1 − Discount rate × 0.5)

Solving for the discount rate, we get: 
Discount rate = (1 − Price/Par value) ÷ Time in years 
Discount rate = (1 − 0.97) ÷ 0.5 
Discount rate = 0.06 or 6%

Therefore, the 6-month interest rate is 6%/2 = 3.09% (since the annual interest rate is divided by 2 to get the semi-annual rate).

The best choice is C.

Question 11

Pacific Motors Inc.plans to issue $3,000,000 of commercial paper with a 6-month maturity at 98% of par value.What is the discounted selling price of the firm's commercial paper?

Accepted Answer

To find the discounted selling price, we need to multiply the par value by the discount rate. In this case, the discounted selling price would be:

$3,000,000 x 0.98 = $2,940,000

Therefore, the best choice is B.

Question 12

Commercial paper has a maturity of ________.

Accepted Answer

Commercial paper has a maturity of less than 270 days, meaning it is a short-term debt instrument typically issued by large corporations to raise funds for short-term financial obligations.

Question 13

Pacific Motors Inc.plans to issue $3,000,000 of commercial paper with a 6-month maturity at 98% of par value.What is the EAR?

Accepted Answer

The effective annual rate (EAR) can be calculated using the formula: EAR = (1 + (discount rate / number of periods))^number of periods - 1. The discount rate is 2% (100% - 98%), and since the maturity is 6 months, there are 2 periods in a year. EAR = (1 + 0.02/1)^2 - 1 = 0.0404 or 4.12%.

Question 14

Pacific Motors Inc.plans to issue $3,000,000 of commercial paper with a 6-month maturity at 98% of par value.What is the 6-month interest rate?

Accepted Answer

The formula for computing the interest rate on commercial paper is:

Interest rate = (Par value - Price) / (Price x ((days to maturity / 360) ))

where
Par value = $3,000,000
Price = $3,000,000 x 0.98 = $2,940,000
Days to maturity = 6 months = 180 days

Plugging in the values:

Interest rate = (3,000,000 - 2,940,000) / (2,940,000 x (180/360))
= 60,000 / 2,940,000 x 0.5
= 0.020408163, or 2.04%

Therefore, the answer is C, 2.04%.

Question 15

In a best efforts arrangement,the investment bank pledges to use its best efforts to sell all the authorized shares and takes a cut on each individual share that it sells,but provides no guarantee as to how many shares it will sell.

Accepted Answer

In a best efforts arrangement, the investment bank is not obligated to sell all the authorized shares and provides no guarantee on the number of shares it will sell. However, it will still receive a cut on each share that it is able to sell using its best efforts.

Question 16

Investment bankers are commonly compensated for their services through a best efforts or a firm commitment method.Explain how the two compensation methods work.

Accepted Answer

The answer of Investment bankers are commonly compensated for their...

Question 17

The firm commitment method of compensation for investment bankers is always more risky financially for issuing firms than the best efforts method.

Accepted Answer

In the firm commitment method, the investment banker buys the entire issue of new securities from the issuing firm at a set price, assuming the risk of selling the securities to the public. If the securities sell for more, the issuer doesn't benefit from the additional revenue, but if they sell for less, the issuer doesn't bear the loss. In contrast, with the best efforts method, the investment banker does not guarantee the sale of securities and acts only as an agent to sell as much as possible. The issuing firm bears the risk of the securities not being sold, which can be financially riskier if the market does not respond well.

Question 18

If there is missing information in the prospectus,the investment banker issues a letter of comment to the company and the public.

Accepted Answer

The regulatory authority (such as the SEC in the United States) issues a letter of comment to the company if there is missing information in the prospectus, not the investment banker. The investment banker may assist the company in responding to these comments, but they do not issue the letter themselves.

Question 19

If the auction of an IPO is oversubscribed,shares of the IPO are allocated pro-rata to all bidders.

Accepted Answer

If the auction of an IPO is oversubscribed, shares of the IPO are allocated pro-rata to all bidders. This means that each bidder receives a percentage of the shares they requested, depending on the total demand for the shares.

Question 20

Regulation A is an exemption from filing with the SEC for an IPO issue of less than $5 million;instead,it requires only a brief offering statement.

Accepted Answer

The answer of Regulation A is an exemption from filing...

Quiz 15: Raising Capital