Question 1

Identify six components that comprise the total costs associated with issuing securities.

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Question 2

Discuss the stages of venture capital financing,defining each in detail.

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Question 3

Lasko's has 250,000 shares of stock outstanding,$400,000 in perpetual annual earnings,and a discount rate of 16 percent.The firm is considering a new project that has initial costs of $350,000 and annual perpetual cash flows of $60,000.How many new shares must be issued to fund the new project? Ignore taxes.

Accepted Answer

The correct answer is A.The firm's current stock price is $400,000 / 250,000 = $1.60. The new project will require $350,000 / $1.60 = 218,750 new shares.

Question 4

Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds via a seasoned stock offering.Assume the firm will incur $140,000 in indirect costs and pay 8.63 percent of the gross proceeds in direct costs.How much does the firm need to raise in total to cover all the issue costs as well as fund the new project?

Accepted Answer

The firm needs to raise $1.75 million for the project, plus additional funds to cover both indirect and direct costs. The direct costs are 8.63% of the gross proceeds, and there are also $140,000 in indirect costs. Let's denote the total amount needed to be raised as X. The equation to solve is: X = $1.75 million + 0.0863X + $140,000. Solving for X gives us approximately $2,068,513.

Question 5

A stock has a rights-on price of $20,an ex-rights price of $18.25,and the number of rights needed to buy one new share is 5.Assuming everything else is held constant,what is the subscription price?

Accepted Answer

The subscription price is calculated as the ex-rights price minus the rights-on price divided by the number of rights needed to buy one new share. In this case, the subscription price is $18.25 - $20 / 5 = $9.50.

Question 6

Identify and explain the key differences between public issues of debt and direct private long-term debt financing.

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Question 7

The Direct Interactive Publishing Company is planning to raise $200 million dollars 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 new issue.List and explain three advantages/disadvantages of each issue method.

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Question 8

Assume it requires 3 rights to obtain a new share in a rights offering.If the stock's price prior to the ex-rights date is $25 and the ex-rights price is $22.75,what is the value of each right?

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Question 9

Western Markets has 150,000 shares outstanding with a market price per share of $15.Each share is entitled to one right.If the firm sets a rights offer as 5 rights plus $10 for each new share,what will be the ex-rights price per share?

Accepted Answer

First, we need to calculate the theoretical ex-rights price (TERP) before the rights offering.

TERP = (Total market value of existing shares / Number of existing shares)

Total market value of existing shares = 150,000 x $15 = $2,250,000

Number of existing shares = 150,000

TERP = $2,250,000 / 150,000 = $15

Next, we need to calculate the theoretical value of a right.

Theoretical value of a right = (TERP - Subscription price) / (1+ rights-to-subscription ratio)

Subscription price = $10

Rights-to-subscription ratio = 5:1

Theoretical value of a right = ($15 - $10) / (1+5) = $0.83

Now, we can calculate the ex-rights price per share, which is the TERP minus the theoretical value of a right.

Ex-rights price per share = TERP - Theoretical value of a right = $15 - $0.83 = $14.17

Therefore, the correct answer is B) $14.17.

Question 10

Regional Power wants to raise $2.4 million in new equity via a rights offering with a subscription price of $12.There are currently 2.6 million shares outstanding,each with one right.How many rights are needed to purchase one new share?

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Question 11

The Wordsmith Corporation has 40,000 shares outstanding with a market price of $25 each.The firm expects to raise $200,000 via a rights offering at a subscription price of $20.How many rights must be submitted to acquire one new share?

Accepted Answer

The number of rights needed to acquire one new share is determined by dividing the total amount to be raised ($200,000) by the subscription price per share ($20), which gives the total number of new shares to be issued (10,000 shares). Then, divide the total number of outstanding shares (40,000) by the new shares to be issued (10,000) to find the number of rights needed for one new share, which is 4.

Question 12

Schraeder Corporation has 20,000 shares outstanding at $30 each.The firm expects to raise $200,000 via a rights offering at a subscription price of $25.How many rights are required for each new share?

Accepted Answer

To find the number of rights required for each new share, divide the total number of existing shares by the number of new shares to be issued. The firm plans to raise $200,000 at $25 per share, which means 8,000 new shares will be issued ($200,000 / $25). With 20,000 existing shares, the number of rights required per new share is 20,000 / 8,000 = 2.5.

Question 13

Discuss what a Dutch auction is and how it works.

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Question 14

A rights offer was set at four rights plus $25 for each new share.What is the rights-on price if the ex-rights price is $30?

Accepted Answer

To find the rights-on price, we need to determine the theoretical ex-rights price, which is the price at which the stock would trade if the rights were exercised and the new shares were issued.

Since the rights offer is set at 4 rights plus $25 for each new share, we can calculate the theoretical ex-rights price as follows:

[(4 x $25) + ($30 x 1)] / (4 + 1) = ($100 + $30) / 5 = $26

This means that if the rights were exercised, the new shares would be issued at a price of $26. To find the rights-on price, we need to add the subscription price ($25) to the theoretical ex-rights price:

$26 + $25 = $51

Therefore, the answer is D) $31.25.

Question 15

Assume a stock has an ex-rights price of $32.The rights offer has a requirement of 3 rights per new share and a subscription price of $30.What is the rights-on stock price?

Accepted Answer

The rights-on stock price can be calculated using the formula: $$P = \frac{(n \times P_{ex}) + P_{s}}{n + 1}$$ where $P$ is the rights-on price, $n$ is the number of rights needed to buy one new share, $P_{ex}$ is the ex-rights price, and $P_{s}$ is the subscription price. Plugging in the given values: $$P = \frac{(3 \times 32) + 30}{3 + 1} = \frac{96 + 30}{4} = \frac{126}{4} = 31.5$$ However, since $31.5 is not an option and there seems to have been a mistake in the calculation or the interpretation of the options, let's correct the approach or acknowledge the discrepancy. The correct calculation should closely follow the formula and the given options, but without an exact match in the options, it's important to reevaluate the calculation or the understanding of the formula. Given the options, a closer inspection or a recalibration of the calculation method might be necessary to align with the provided choices.

Question 16

What are venture capitalists and what is their role in raising capital for firms?

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Question 17

You currently own 200 shares of a stock valued at $21 a share.A rights offer has just been announced that grants the option of obtaining one new share for two rights plus $17.Each current share is entitled to one right.What is the value of each right?

Accepted Answer

The value of each right can be calculated by first determining the value of exercising the rights to buy a new share at the discounted price, then finding the average price per share including the rights. With the offer, you can buy one new share for $17 using two rights. The current share price is $21. So, if you buy one share at $17 (discounted price), the total cost for three shares (two old shares + one new share at the discounted price) is $21*2 + $17 = $59. The average cost per share is $59/3 = $19.67. The difference between the current share price ($21) and the average price after exercising the rights ($19.67) is $1.33, which is the value of each right.

Quiz 20: Raising Capital