Question 1

Howett Pockett, Inc., needs to raise $80 million in new capital funding from a seasoned equity offering. In discussions with its investment bank, Howett Pocket learns that the bankers recommend a gross price of $47.50 per share and they will charge an underwriter's spread of $2.50. In addition, Howett Pockett must pay $3 million in legal and other administrative expenses for the seasoned stock offering. Calculate the number of shares of stock that Howett Pockett will need to sell to raise the $80 million.
A) 1,844,445
B) 1,812,007
C) 1,763,415
D) 1,702,369

Accepted Answer

The correct answer is A.The number of shares of stock that Howett Pockett will need to sell to raise the $80 million can be calculated as follows:Number of shares = $80 million / (Gross price per share - Underwriter's spread)Number of shares = $80 million / ($47.50 - $2.50)Number of shares = $80 million / $45Number of shares = 1,777,778However, Howett Pockett must also pay $3 million in legal and other administrative expenses for the seasoned stock offering. Therefore, the number of shares that Howett Pockett will need to sell to raise the $80 million is:Number of shares = 1,777,778 + (3 million / $45)Number of shares = 1,777,778 + 66,667Number of shares = 1,844,445

Question 2

During the last year you have had a loan commitment from your bank to fund working capital for your business. The total line available was $10,000,000, of which you took down $9,125,000. It is now the end of the loan commitment period and your bank had you pay the back-end fees. You have misplaced the paperwork that listed the terms of the commitment, but you know you paid total fees (this does not include any interest paid to borrow the $9,125,000) of $31,100 on this loan commitment. You remember that the back-end fee was 85 basis points. Calculate the front-end fee on this loan commitment.
A) 31 basis points
B) 28 basis points
C) 26 basis points
D) 24 basis points

Accepted Answer

The total fees paid were $31,100. The back-end fee, which is 85 basis points (0.85%) of the amount taken down ($9,125,000), equals $77,562.50. Subtracting this from the total fees gives the front-end fee amount, which when calculated as a percentage of the total line available ($10,000,000), results in 24 basis points.

Question 3

Renee's Boutique, Inc., needs to raise $75.25 million to finance firm expansion. In discussions with its investment bank, Renee's Boutique learns that the bankers recommend an offer price of $67 per share and that 1.25 million shares of stock be sold. If the net proceeds on the stock sale leaves Renee's Boutique with $75.25 million, calculate the underwriter's spread per share on the stock issue.
A) $4.98
B) $5.12
C) $5.59
D) $6.80

Accepted Answer

The answer of Renee's Boutique, Inc., needs to raise $75.25...

Question 4

Which of the following statements regarding the Small Business Administration (SBA) is not true?
A) SBA loans require at least 15% owner's equity.
B) The SBA Microloan Program provides up to $75,000 in long-term loans to small businesses.
C) SBA Microloans have repayment terms of up to 10 years.
D) All of the above

Accepted Answer

The answer of Which of the following statements regarding the...

Question 5

A syndicate is:
A) a small group of institutional investors.
B) several investment banks working together to sell and distribute a new security issue.
C) several banks working together to lend a company money for a project or expansion.
D) a group of equity investors that infuse distressed firms with major amounts of capital.

Accepted Answer

A syndicate is a group of investment banks that collaborate to sell and distribute a new security issue, sharing the risk and resources involved in the process.

Question 6

Which of the following is an example of an appropriate loan covenant?
A) The firm must increase its debt ratio by at least 10 percent.
B) The firm must reduce its total asset turnover by 10 percent.
C) The firm must purchase an insurance policy on a key employee.
D) All of the options are examples of an appropriate loan covenant.

Accepted Answer

Loan covenants are conditions that lenders put on borrowing agreements to protect their investment. Option C, requiring the firm to purchase an insurance policy on a key employee, is an example of a positive covenant designed to mitigate the lender's risk by ensuring that the company can continue operations smoothly even if something happens to a crucial member of the team. Options A and B could potentially harm the financial stability of the firm, making them inappropriate as loan covenants.

Question 7

Hughes Technology Corp. recently went public with an initial public offering in which they received a total of $42 million in new capital funding. The underwriter used a firm commitment offering in which the offer price was $22 and the underwriter's spread was $0.85. Hughes Technology also paid legal and other administrative costs of $825,000 for the IPO. Calculate the number of shares issued through this IPO.
A) 2,024,823
B) 3,125,000
C) 3,328,864
D) 4,002,179

Accepted Answer

The number of shares issued can be calculated as follows:Number of shares = Total capital raised / (Offer price - Underwriter's spread)Number of shares = $42 million / ($22 - $0.85)Number of shares = 2,024,823

Question 8

The advantage of the shelf registration is that:
A) the firm can use their red herring prospectus as a substitute for the master registration statement.
B) the firm can get stocks into the market quickly if the firm feels conditions are right without the time lag.
C) the firm can bypass the lengthy SEC process.
D) none of the options.

Accepted Answer

Shelf registration allows a company to register a new issue of stock and sell portions of it over a two-year period without having to re-register each time. This means the company can quickly take advantage of favorable market conditions to raise capital, as it eliminates the need for a new registration statement each time.

Question 9

During the last year you have had a loan commitment from your bank to fund working capital for your business. The total line available was $10,000,000, of which you took down $7,800,000. It is now the end of the loan commitment period and your bank had you pay the back-end fees. You have misplaced the paperwork that listed the terms of the commitment, but you know you paid total fees (this does not include any interest paid to borrow the $7,800,000) of $51,200 on this loan commitment. You remember that the back-end fee was 112 basis points. Calculate the front-end fee on this loan commitment.
A) 31 basis points
B) 27 basis points
C) 25 basis points
D) 23 basis points

Accepted Answer

The total fees paid were $51,200. The back-end fee, which is 112 basis points (1.12%) of the amount taken down ($7,800,000), amounts to $7,800,000 * 1.12% = $87,360. Subtracting this from the total fees gives the amount paid in front-end fees: $51,200 - $87,360 = -$36,160. This negative result indicates a mistake in calculation. Correctly, the back-end fee calculation should be based on the total line available, not the amount taken down. Thus, the correct back-end fee calculation is $10,000,000 * 1.12% = $112,000. However, the error in the initial explanation suggests a misunderstanding of the question or a miscalculation. The correct approach to find the front-end fee involves knowing the correct basis for the back-end fee calculation and accurately subtracting it from the total fees to find the front-end fees, then calculating the front-end fee percentage based on the total line of credit or the amount taken down as specified in the question. Without the correct basis for the back-end fee calculation, the explanation provided is incorrect. The correct calculation should involve accurately determining the back-end fee based on the information given (either on the total line available or the amount taken down), subtracting this from the total fees to find the front-end fee amount, and then calculating the front-end fee percentage. Since the initial explanation led to a mistake, let's correct the approach:Given:- Total fees = $51,200- Back-end fee = 112 basis points of $10,000,000 (the total line available)- Amount taken down = $7,800,000First, calculate the back-end fee:Back-end fee = 112 basis points of $10,000,000 = 0.0112 * $10,000,000 = $112,000.This calculation is incorrect because the total fees paid ($51,200) cannot be less than the calculated back-end fee ($112,000) based on the total line of credit. The mistake lies in the misinterpretation of the back-end fee calculation or the total fees. The correct approach should involve recalculating the fees based on the correct interpretation of the question's details. Let's correct the explanation:The correct calculation of the back-end fee should directly relate to the details provided in the question. If the back-end fee is indeed based on the amount taken down or the total line of credit, the calculation should reflect that accurately, and the total fees should include both front-end and back-end fees. Without accurate details on the fee structure (e.g., whether the back-end fee applies to the total line of credit or the amount taken down), it's challenging to provide a corrected explanation. The focus should be on accurately interpreting the fee structure and recalculating the fees accordingly.

Question 10

A facility fee is:
A) the back-end fee.
B) the commitment fee.
C) the fee for processing the loan documents.
D) none of the options.

Accepted Answer

A facility fee is not described accurately by any of the given options. It is typically a fee charged for the use or access to a particular facility or service, which doesn't specifically align with any of the choices provided.

Question 11

Which of the following statements is incorrect?
A) The SBA can guarantee up to $3.75 million at an interest rate not to exceed 2.75 percent more than the prime lending rate.
B) The primary function of the SBA is to guarantee loans made to new and small businesses.
C) For qualified new and small firms that are unable to obtain long-term financing on reasonable terms from banks or other financial institutions, the SBA offers a basic loan guarantee program.
D) All of the statements are correct.

Accepted Answer

All the statements are correct regarding the SBA's functions and loan guarantee programs.

Question 12

Most business loans today are:
A) pre-negotiated lines of credit.
B) spot loans.
C) collateralized lines of credit.
D) None of the options.

Accepted Answer

Most business loans today are pre-negotiated lines of credit, which allow businesses to borrow up to a certain limit as needed, providing flexibility and easier access to funds.

Question 13

A commitment fee is:
A) the back-end fee.
B) the facility fee.
C) the up-front fee.
D) none of the options.

Accepted Answer

The answer of A commitment fee is:
A) the back-end fee.
B)...

Question 14

Which of the following is an example of an appropriate loan covenant?
A) The firm must not increase its debt ratio by more than 3 percent.
B) The firm must keep its current ratio above 2.2.
C) The firm must purchase an insurance policy on a key employee.
D) All of the options are examples of appropriate loan covenants.

Accepted Answer

Loan covenants are conditions that lenders put on borrowing agreements to maintain the financial stability of the borrower and ensure the loan is repaid. All the options listed (A, B, C) are examples of such covenants. Option A is a financial covenant related to leverage, option B is a liquidity covenant, and option C is a protective covenant related to risk management.

Question 15

Wealthy individuals who make equity investments in firms are referred to as:
A) equity consolidators
B) red herring investors
C) private equity investors
D) angel venture capitalists

Accepted Answer

The answer of Wealthy individuals who make equity investments in...

Question 16

A ________ is a contractual commitment by a bank to loan a firm up to a certain maximum amount at given interest rate for a stated length of time over which the firm has the option to take down this loan.
A) Loan commitment agreement
B) Spot loan
C) Facility fee
D) Commitment fee

Accepted Answer

A loan commitment agreement is precisely a contractual commitment by a bank to loan a firm up to a certain maximum amount at a given interest rate for a stated length of time, during which the firm has the option to draw down on this loan.

Question 17

Sipe's Paint and Wallpaper, Inc., needs to raise $1.25 million to finance plant expansion. In discussions with its investment bank, Sipe's Paint and Wallpaper learns that the bankers recommend a gross price of $37.20 per share and that 48,500 shares of stock be sold. If the net proceeds on the stock sale leaves Sipe's Paint and Wallpaper with $1.25 million, calculate the underwriter's spread per share on the stock issue.
A) $11.43
B) $9.28
C) $7.14
D) $6.91

Accepted Answer

The underwriter's spread is the difference between the gross price and the net proceeds per share. In this case, the gross price is $37.20 and the net proceeds are $1.25 million / 48,500 shares = $25.79. Therefore, the underwriter's spread is $37.20 - $25.79 = $11.41.

Question 18

Which of the following statements regarding the Small Business Investment Companies (SBIC) is true?
A) SBICs are privately organized venture capital firms licensed by the SBA.
B) SBIC make equity investments and loans to entrepreneurs for start-up activities and expansions.
C) SBICs rely on investment funds from the U.S. Treasury.
D) All of the above

Accepted Answer

All of the statements regarding Small Business Investment Companies (SBIC) are true. SBICs are privately organized, licensed by the Small Business Administration (SBA), make equity investments and loans to entrepreneurs, and rely on investment funds from the U.S. Treasury.

Question 19

All of the following are advantages of an IPO EXCEPT:
A) the market provides a market value for the firm's common stock.
B) the original owners can reallocate their personal wealth away from the firm into more diversified portfolios.
C) the market provides a transparent measure of firm performance which can attract more investors.
D) IPOs are traditionally priced at a premium to cover the costs of the underwriters.

Accepted Answer

IPOs are typically priced to attract investors, not at a premium to cover underwriting costs. The pricing strategy aims to balance the company's need for capital and investor interest, rather than directly covering the costs associated with the IPO process.

Question 20

A security issued in which the underwriter does not guarantee a firm price to the issuer and acts more as a placing or distribution agent for a fee is referred to as:
A) negotiated sale.
B) competitive sale.
C) best efforts underwriting.
D) none of the options.

Accepted Answer

In a best efforts underwriting, the underwriter agrees to sell as much of the issue as possible at the agreed-upon offering price but does not guarantee the sale of the entire issue. This contrasts with a firm commitment underwriting, where the underwriter guarantees the sale of the entire issue at a specific price.

Quiz 18: Issuing Capital and the Investment Banking Process

Which of the following statements regarding the Small Business Administration (SBA) is not true?

A syndicate is:

Which of the following is an example of an appropriate loan covenant?

The advantage of the shelf registration is that:

A facility fee is:

Which of the following statements is incorrect?

Most business loans today are:

A commitment fee is:

Which of the following is an example of an appropriate loan covenant?

Wealthy individuals who make equity investments in firms are referred to as:

A ________ is a contractual commitment by a bank to loan a firm up to a certain maximum amount at given interest rate for a stated length of time over which the firm has the option to take down this loan.

Which of the following statements regarding the Small Business Investment Companies (SBIC) is true?

All of the following are advantages of an IPO EXCEPT:

A security issued in which the underwriter does not guarantee a firm price to the issuer and acts more as a placing or distribution agent for a fee is referred to as: