Deck 19: Equity Financing

Question 1

The reputational capital of investment bankers is based on their roles as intermediaries with more in-depth knowledge of the issuer.Investment bankers maintain their reputation by:

A)certifying the issue.
B)monitoring the issuing firm's management and performance.
C)pricing issues fairly.
D)All of the above.
E)None of the above.

Answer 1

All of the above.

Question 2

During the stock exchange waiting period the potential issuing company can issue a preliminary prospectus which contains:

A)exactly the same information as the final prospectus except and indication of stock exchange approval.
B)all the information as the final prospectus including red writing stating it is a red herring.
C)very limited financial information and red writing stating it is preliminary.
D)only a description of what the funds are to be used for.
E)information very similar to the final prospectus without a price nor with stock exchange approval.

Answer 2

information very similar to the final prospectus without a price nor with stock exchange approval.

Question 3

An equity issue sold directly to the public is called:

A)a rights offer.
B)a general cash offer.
C)a restricted placement.
D)a fully funded sales.
E)a standard call issue.

Answer 3

a general cash offer.

Question 4

Under the _____ method,the underwriter buys the securityfor less than the offering price and accepts the risk of not selling the issue,while under the _____ method,the underwriter does not purchase the shares but merely acts as an agent.

A)best efforts; firm commitment
B)firm commitment; best efforts
C)general cash offer; best efforts
D)competitive offer; negotiated offer
E)seasoned; unseasoned

Question 5

The winner's curse is used to describe:

A)the payoff you receive on lottery tickets.
B)the behavior of the informed investor and why some IPOs have such a large initial return.
C)acquiring all underpriced IPO issues.
D)a fully underwritten issue.
E)None of the above.

Question 6

A new public equity issue from a company with equity previously outstanding is called a(n):

A)initial public offering.
B)seasoned equity issue.
C)unseasoned equity issue.
D)private placement.
E)syndicate.

Question 7

A group of investment bankers who pool their efforts to underwrite a security are known as a(n):

A)amalgamate.
B)conglomerate.
C)green shoe group.
D)klatch.
E)syndicate.

Question 8

Empirical evidence suggests that new equity issues are generally:

A)priced efficiently by the market.
B)overpriced by investor excitement concerning a new issue.
C)overpriced resulting from stock exchange regulation.
D)underpriced,in part,to counteract the winner's curse.
E)underpriced resulting from stock exchange regulation.

Question 9

An equity issue sold to the firm's existing shareholders is called:

A)a rights offer.
B)a general cash offer.
C)a private placement.
D)an underpriced issue.
E)an investment banker's issue.

Question 10

A firm commitment arrangement with an investment banker occurs when:

A)the syndicate is in place to handle the issue.
B)the spread between the buying and selling price is less than one percent.
C)the issue is solidly accepted in the market evidenced by a large price increase.
D)when the investment banker buys the security for less than the offering price and accepts the risk of not being able to sell them.
E)when the investment banker sells as much of the security as the market can bear without a price decrease.

Question 11

Investment banks perform which of the following services for corporate issuers:

A)formulating the method used to issue the securities.
B)pricing the new securities.
C)selling the new securities.
D)All of the above.
E)None of the above.

Question 12

A rights offering is:

A)the issuing of options on shares to the general public to acquire stock.
B)the issuing of an option directly to the shareholders to acquire stock.
C)the issuing of proxies which are used by shareholders to exercise their voting rights.
D)strictly a public market claim on the company which can be traded on an exchange.
E)the awarding of special perquisites to management.

Question 13

Potential investors learn of the information concerning the firm and its new issue from the:

A)pre-underwriting negotiating meeting.
B)red herring.
C)letter of commitment.
D)emails from their former finance professor.
E)rights offering.

Question 14

Management's first step in any issue of securityto the public is:

A)to file a registration form with the stock exchange.
B)to distribute copies of the preliminary prospectus.
C)to distribute copies of the final prospectus.
D)to obtain approval from the board of directors.
E)to prepare the tombstone advertisement.

Question 15

In a best efforts offering the investment banker makes their money primarily by:

A)earning the spread between the buying and offering price.
B)earning a commission on each share sold.
C)earning the discount between the buying and offering price.
D)charging a flat fee for all services.
E)None of the above.

Question 16

Companies use tombstone advertisements in the financial press to:

A)announce the death of the company.
B)announce the failure of a financial strategy.
C)announce the availability of a new issue of a corporate stock exchangeurity.
D)notify the public of foreclosure.
E)None of the above.

Question 17

A registration statement is effective on the 20^th day after filing unless:

A)the stock exchange is backlogged with statements.
B)a tombstone ad is issued indicating its demise.
C)a letter of comment suggesting changes is issued by the stock exchange.
D)a syndicate can be formed sooner.
E)None of the above.

Question 18

The first public equity issue made by a company is a(n):

A)initial private offering.
B)initial public offering.
C)stock exchangeondary offering.
D)seasoned new issue.
E)None of the above.

Question 19

The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below.

A)prestige
B)ability to manage selling syndicates
C)role as a firm commitment buyer
D)role as a best efforts seller
E)None of the above.

Question 20

Professor Jay Ritter found best-efforts offerings are:

A)reserved for the premier customers because they deserve 'best-efforts'.
B)used most often with seasoned equity issues.
C)used with small IPO issues.
D)attractive because of price stability.
E)None of the above.

Question 21

Debt capacity is given as a reason when the value of the equity falls when equity is issued.The reason for this is:

A)the high issue costs of a debt offering must be paid by the shareholders.
B)the priority position of the equity is lowered.
C)management has information that the probability of default has risen,limiting the debt capacity causing the firm to raise equity capital.
D)All of the above.
E)None of the above

Question 22

Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing.In exchange for financing entrepreneurs give:

A)a high interest rate debt instrument and control.
B)an equity position and usually board of director positions.
C)up the right to have an initial public offering.
D)control to a court appointed trustee.
E)hire the venture capitalists as CEOs and CFOs.

Question 23

In comparison to debt issuance expenses the total direct costs of equity issues are:

A)considerably less.
B)about the same.
C)meaningless.
D)considerably greater.
E)None of the above.

Question 24

Professor Clifford W.Smith,in evaluating issuance costs from underwritten issues,rights issues with standby underwriting and a pure rights issues found that 90% of the issues are underwritten which was the most expensive method.This is done because:

A)investment bankers know more than CFOs and they may buy the issue at an agreed price and disburse the funds sooner.
B)investment bankers can increase the price received by increasing confidence in the issue,they will buy the issue at an agreed upon price and disburse the cash sooner.
C)investment bankers provide other services including price counsel,increase public confidence and provide funds to the issuer sooner.
D)investment bankers know how to price the issue,would not need to set as low as a price as the subscription price and provide price counsel.
E)None of the above.

Question 25

Which of the following is not one of the four main functions that underwriters provide?

A)Risk bearing.
B)Marketing.
C)Auditing the financial statements.
D)Certification.
E)Monitoring.

Question 26

If a shareholder or investor wants to acquire new equity under a rights plant they must:

A)acquire new equity in the market to get a controlling fraction of shares to be eligible for rights.
B)simply pay a registration fee and turn in the subscription price.
C)acquire the correct rights per share desired,turn the rights and the total subscription price into the subscription agent.
D)acquire the correct rights and wait for the company to send you the shares.
E)call their broker and sell some CBOE options to make any money.

Question 27

To determine the value of a rights offering,the shareholder needs to know what two pieces of information in addition to the current share price:

A)the subscription price and the number of rights needed to acquire a new share.
B)the amount of new equity to be raised and the number of rights needed to acquire a new share.
C)the amount of new equity to be raised and standby fee.
D)the detachment date and the subscription price.
E)None of the above.

Question 28

A shareholder who has rights is:

A)not always better off to exercise the rights.
B)not always better off to sell the rights into the market.
C)can exercise their rights or sell them.
D)never in the same ownership position again with rights.
E)None of the above.

Question 29

In terms of costs of issuing equity,Professor Clifford W.Smith finds that the ranking of methods,from cheapest to most expensive,is:

A)rights issue with standby underwriting,equity issue with underwriting,pure rights issue.
B)pure rights issue,rights issue with standby underwriting,equity issue with underwriting.
C)pure rights issue,preferred stock and debt issue with underwriting for an IPO,rights issue with standby underwriting.
D)equity issue with underwriting,rights issue with standby underwriting,pure rights issue.
E)equity issue with underwriting,pure rights issue,rights issue with standby underwriting.

Question 30

The six components that make up the total costs of a new issues are:

A)the spread; other direct expenses such as filing fees; indirect expenses such as management time; economies of scale; abnormal returns and the Green Shoe option.
B)the discount; other direct expenses such as filing fees; indirect expenses such as management time; due diligence costs; abnormal returns and the Green Shoe option.
C)the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option.
D)the spread; other direct expenses such as filing fees; economies of scale; due diligence costs; abnormal returns and underpricing.
E)None of the above.

Question 31

Arguments to explain why most equity issues are underwritten versus sold through a rights offering are:

A)underwriters buy at an agreed upon price and bear some risk of selling the issue.
B)cash proceeds are available sooner in underwriting and the issue is available to a wider market.
C)investment bankers can provide market advice and certify the issue for potential investors.
D)All of the above.
E)None of the above.

Question 32

The Wordsmith Corporation has 10,000 shares outstanding at €30 each.They expect to raise €150,000 by a rights offering with a subscription price of €25 how many rights must you turn in to get a new share?

A)0.60
B)1.20
C)1.67
D)2.00
E)Insufficient data to determine.

Question 33

The market for venture capital refers to the:

A)private financial marketplace for servicing small,young firms.
B)bond markets.
C)market for selling rights to individuals who already own shares.
D)market for selling equity security for firms with equity already outstanding.
E)None of the above.

Question 34

An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?

A)Insiders can sell their shares or cash out
B)Generate cash to pay down bank indebtedness
C)To establish a market value for the equity and provide funds for operations
D)All of the above.
E)None of the above.

Question 35

A study by Lee,Lockhead,Ritter and Zhao in examining the underwriting discount and other direct costs of going public with a debt or equity offering found:

A)the direct expenses are higher for equity than debt offerings.
B)substantial economies of scale are prevalent.
C)underpricing on average is similar in magnitude to total direct expenses.
D)All of the above.
E)None of the above.

Question 36

A standby underwriting arrangement provides the:

A)company with methods to cancel the offering.
B)company with an alternate investment banker if there is conflict between the issuer and the agent.
C)investment banker with an oversubscription privilege to ensure profits are earned.
D)company with an alternative avenue of sale to ensure success of the rights offering.
E)investment bankers with an added syndication for the rights offering.

Question 37

Empirical evidence suggests that upon announcement of a new equity issue,current share prices generally:

A)drop,perhaps because the new issue reflects management's view that ordinary equity is currently overvalued.
B)remain about the same since an efficient market anticipates a new equity issue.
C)increase,perhaps because the issues are associated with positive NPV projects.
D)increase,because the market supply is always less than demand.
E)increase,because underwriters exercise their green shoe option.

Question 38

The key differences between a negotiated offer and a competitive offer is that:

A)the underwriters can not set the spread in a negotiated bid but can in a competitive offer.
B)the issuing firm can offer its security to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used.
C)the issuing firm work the underwriter for the best spread in a negotiated bid which will be less than available in a competitive offer.
D)the underwriter will not do a full investigation in negotiated bid because the company is at their mercy while in a competitive bid the underwriter must be extra diligent.
E)None of the above.

Question 39

The offering price is set to make the issue attractive to the market and provide a good price to the issuer.Which of the following is/are true?

A)Empirical studies by Ritter have shown that the average firm commitments have had a 17.8% underpricing on the first day of trading.
B)Empirical studies have shown that the best efforts sales have underpricing on the first day of trading.
C)Some issues such as Shiva which rose dramatically on the first day of trading were viewed as successfully priced by the underwriter because it helped build a long-term investment base.
D)All of the above.
E)None of the above.

Question 40

Assuming everything else is constant,when an equity goes ex-rights its price should:

A)decrease since the shareholder is losing an option.
B)increase since the corporation no longer has the right to force the shareholder to convert.
C)remain the same since an efficient market would anticipate this change.
D)move up or down depending on whether a small investor wanted to exercise his/his rights.
E)None of the above.

Question 41

Lamar Inc.is attempting to raise €5,000,000 in new equity with a rights offering.The subscription price for the 125,000 new shares will be €40 per share.The equity currently sells for €50 per share and there are 250,000 shares outstanding.What will the price per share be if all rights are exercised?

Question 42

Regional Power wants to raise €10 million in new equity.The subscription price is €20.There are currently 3 million shares outstanding,each with 1 right.How may rights are needed to purchase 1 share?

A)1
B)3
C)5
D)6
E)8

Question 43

The LaPorte Corporation has a new rights offering,you can buy one share with 3 rights and €20 per share.The stock is now selling ex-rights for €26.The price rights-on is:

A)€22.00
B)€24.00
C)€26.00
D)€28.00
E)impossible to determine without the cum-rights price.

Question 44

The Holyoke Corporation has 120,000 shares outstanding with a current market price of €8.10 per share.The company needs to raise an additional €36,000 to finance new expenditures,and has decided on a rights issue.The issue will allow current shareholders to purchase one additional share for 20 rights at a subscription price of €6 per share.
Suppose that the company was also considering structuring the rights issue to allow for an additional share to be purchased for 10 rights at a subscription price of €3.Prove that a shareholder with 100 shares would be indifferent between purchasing a new share for 10 rights at €3 or purchasing a new share for 20 rights at €6.

Question 45

The Holyoke Corporation has 120,000 shares outstanding with a current market price of €8.10 per share.The company needs to raise an additional €36,000 to finance new expenditures,and has decided on a rights issue.The issue will allow current shareholders to purchase one additional share for 20 rights at a subscription price of €6 per share.
Calculate the ex-rights price that would make a new shareholder indifferent between buying shares at the old share price and exercising the rights or buying the shares ex-rights.

Question 46

Discuss what a Dutch auction is and how it works.

Question 47

Assuming everything else is constant,if a share's old price is €25 and the ex-rights or new share price is €19,then the value of the right is:

A)€-6.
B)€ 6.
C)impossible to determine without the subscription price.
D)impossible to determine without the number of rights needed to buy one share.
E)None of the above.

Question 48

The evidence on IPO sales is varied from issue to issue,but there are three common themes; underpricing,underperformance,and the reasons for going public.Explain these three themes.

Question 49

The Holyoke Corporation has 120,000 shares outstanding with a current market price of €8.10 per share.The company needs to raise an additional €36,000 to finance new expenditures,and has decided on a rights issue.The issue will allow current shareholders to purchase one additional share for 20 rights at a subscription price of €6 per share.
If the ex-rights price were set at €7.90,would you as a potential new shareholder choose to buy shares ex-rights or buy shares at the old price and exercise your rights?

Question 50

The Overland Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities.The current share price is €40 and there are 500,000 shares outstanding.The number of rights needed to buy a share should be:

A)1
B)10
C)40
D)400
E)indeterminate without the subscription price.

Question 51

The Direct Interactive Publishing Company is planning to raise €200 million euros in new capital.There are currently 50 million shares outstanding with an estimated market price of €60 each.The corporate officers are debating whether to use a rights offering (with or without a standby underwriting)or have the issue fully underwritten.The company is currently listed on a regional exchange and plans to list on a national exchange after the security issue.
List and explain three advantages/disadvantages of each method.

Question 52

For a particular stock the old share price is €20,the ex-rights price is €15,and the number of rights needed to buy a new share is 2.Assuming everything else constant,the subscription price is ______ .

A)€ 5
B)€13
C)€17
D)€18
E)€20

Question 53

Lamar Inc.is attempting to raise €5,000,000 in new equity with a rights offering.The subscription price will be €40 per share.The stock currently sells for €50 per share and there are 250,000 shares outstanding.How many rights are needed to buy a new share?

Question 54

Explain the advantages of a shelf-registration to an issuer.How can timeliness of disclosure and a potential market overhang work against a shelf-registration?