Question 1

How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally,the firm pays $600,000 in legal fees.

Accepted Answer

250,000 shares at $40 each equals $10,000,000 in total offering proceeds. 
The underwriting spread is 10% of the offering price, so the underwriter's price is $36 per share. 
The underwriter will pay the issuer $9,000,000 ($36 x 250,000 shares). 
After deducting the $600,000 legal fees, the issuer will receive a net amount of $8,490,000.

Question 2

What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm?

Accepted Answer

The total investment made by the entrepreneur and the venture capitalist is $4 million ($1 million + $3 million). Since they have purchased a 50% interest in the firm, the market value of the firm is twice the total investment, which is $8 million. Therefore, the market value placed on the firm at first-stage financing is $6 million ($8 million x 50%). Hence, the correct answer is option B.

Question 3

An investor exercises her right to buy one additional share at $20 for every five shares held.How much should each share be worth after the rights issue if they previously sold for $50 each?

Accepted Answer

The answer of An investor exercises her right to buy...

Question 4

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.What is the cost of underpricing?

Accepted Answer

Cost of underpricing = ($70 − 43) × 3m = $81m

Question 5

An underwriter issues a firm commitment to sell 1 million shares at $20 each,including a $2 spread.How much does the issuing firm receive if only 500,000 shares are sold?

Accepted Answer

Proceeds to firm = ($20 - 2) × 1m = $18m

Question 6

What would you expect to be the market price of stock after a sold-out rights issue if each existing shareholder purchases one new share at $60 for each three that they currently hold and the current share price is $100?

Accepted Answer

The answer of What would you expect to be the...

Question 7

Private placement contracts may be custom tailored for each individual investor.

Accepted Answer

Private placement contracts offer flexibility to customize the terms and conditions according to the specific needs of each individual investor.

Question 8

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.What is the total cost (direct expenses plus underpricing cost)?

Accepted Answer

The answer of Assume the issuer incurs $1 million in...

Question 9

When issuing new stock,a firm received $50 million while the underwriting spread was $4 million and total direct expenses were $6 million.The %age of the proceeds absorbed by direct expenses was:

Accepted Answer

Total expenses = Underwriting spread + Direct expenses
Total expenses = $4 million + $6 million = $10 million
Proceeds from new stock issue = $50 million
%age of proceeds absorbed by direct expenses = (Direct expenses/Proceeds)*100
%age of proceeds absorbed by direct expenses = ($6 million/$50 million)*100 = 12%
Therefore, the correct option is C) 10.71%.

Question 10

What %age of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

Accepted Answer

The answer of What %age of direct expense is required...

Question 11

If an investor can earn 20% on underpriced IPOs,but will lose 10% on overpriced IPOs in which he was awarded $2,000 worth of the overpriced issue,how much of the underpriced issue must he be awarded in order to gain $500?

Accepted Answer

Let x be the amount of underpriced IPOs needed to gain $500.

To earn $500, the investor needs to have a profit of $500.

For the overpriced IPOs, the investor has a loss of 10% on $2,000, which is $200.

So, the investor needs to have a profit of $500 + $200 = $700 on the underpriced IPOs.

If the investor earns 20% on the underpriced IPOs, then the profit would be 0.2x.

Now we can set up an equation to solve for x:

0.2x = $700

x = $700 / 0.2

x = $3,500

Therefore, the investor needs to be awarded $3,500 worth of underpriced IPOs.

Question 12

A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own.What should be the stock price after the rights issue if the stock sells for $80 per share before the issue?

Accepted Answer

Before the issue, the shareholder owns 3 shares at $80 per share, for a total value of $240. Each shareholder will be offered 1 new share at $40. Therefore, the shareholder will have to spend $40 for an additional share.

After the rights issue, the shareholder will own 4 shares for a total cost of $240 + $40 = $280.

Thus, the new stock price can be calculated as the total value of the firm divided by the total number of shares, which is $280 / 4 = $70.00.

Question 13

One advantage to private placements is the low cost associated with its issue.

Accepted Answer

Private placements often have lower issuance costs compared to public offerings due to less regulation and paperwork required.

Question 14

What was the market price of a share of stock before a rights issue if one share of new stock could be purchased at $100 for every four shares that were previously owned? The stock price after the successful rights issue was $200.

Accepted Answer

Let's assume that the market price of the stock before the rights issue was $x per share.
If one share of new stock could be purchased at $100 for every four shares that were previously owned, it means the subscription price for the new shares was $100/4 = $25 per share. 
So, the total value of one share after the rights issue would be the sum of the current value of the share (x) and the value of one entitlement (the right to purchase one share for $25). This can be expressed as: x + $25.
Since the market price after the successful rights issue was $200, we can equate this with the value of one share after the rights issue: 
x + $25 = $200
Solving for x, we get:
x = $175
Therefore, the market price of the stock before the rights issue was $175 per share. 
With this information, we can calculate the value of one entitlement before the rights issue as: ($175 + $25) = $200
And since one entitlement entitled the holder to purchase one share at $100, the value of one share before the rights issue was $200 - $100 = $100.
After the successful rights issue, the market price of the stock was $200, indicating that the value of each share doubled. So, if the value of one share before the rights issue was $100, the market price would have been $200/2 = $100 per share.
Therefore, the market price of a share of stock before the rights issue was $100. 
The best choice is B as it correctly calculates the market price of the stock before the rights issue.

Question 15

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $34 each to an underwriter and the underwriter sells the shares at $40 each?

Accepted Answer

The answer of What percentage of direct expense is required...

Question 16

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.In %age terms,how much market value is absorbed by the total cost (direct expenses plus underpricing cost)?

Accepted Answer

The answer of Assume the issuer incurs $1 million in...

Question 17

Typical firms that engage in private placements usually have a low degree of risk.

Accepted Answer

Typically, firms that engage in private placements are non-public companies and start-ups that have a higher degree of risk than publicly traded companies. Therefore, private placements are often used to raise capital from wealthy individuals and institutional investors who are willing to take on higher risks in exchange for potentially higher returns.

Question 18

If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share,the spread per share is:

Accepted Answer

The underwriter's profit or the spread is the difference between what they charge the public and what they have promised to pay the issuer. 
Spread per share = Public Offering Price - Issuer's Offer Price 
Spread per share = $40 - $38 = $2.00 per share.

Question 19

Plasti-tech Inc.has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share.The underwriter then sold them to the public for $22 each.Plasti-tech also encountered $0.5 million in administrative fees.Soon after the issue,the stock price rose to $25.Find Plasti-tech Inc.'s total cost of this issue.

Accepted Answer

The total cost of the issue includes the cost of issuing the shares (admin fees) and the cost of the shares sold to the underwriter.

Cost of shares sold to underwriter= 2,000,000 x $20= $40,000,000

Administrative fees= $0.5 million

Total cost= $40,000,000 + $0.5 million= $40.5 million

However, the stock price increased to $25, which means the market value of Plasti-tech Inc. is:

Market value= 2,000,000 x $25= $50,000,000

Therefore, Plasti-tech Inc.'s total cost of the issue is $10.5 million ($40.5 million - $50,000,000).

Question 20

A firm has just issued $250 million of equity,which caused its stock price to drop by 3%.Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue.(Use value in millions)

Accepted Answer

A 3% drop in the stock price would result in a loss of 3/100 * $1 billion = $30 million.

Quiz 15: Venture Capital, IPOs, and Seasoned Offerings