Question 1

Big Box retailing has a market capitalization of $500 million and 2 million shares outstanding.In order to finance its growth,the management of Big Box plans to raise further capital through a rights issue.All shareholders will be issued ten rights to purchase ten shares at a price of $1.50 per share.How much money will this raise,if all shareholders exercise their rights?

Accepted Answer

The answer of Big Box retailing has a market capitalization...

Question 2

Parafoil Avionics sells 50 million shares of stock in an SEO - 40 million being primary shares issued by the company and 10 million being secondary shares sold by investors in the company.At the time of the sale,Parafoil's stock was selling at $12.50 per share.If the underwriter charges 5% of the gross proceeds as a fee,how much money did existing investors in the company net from the sale?

Accepted Answer

Existing investors sold 10 million secondary shares at $12.50 each, totaling $125 million. After a 5% underwriter fee, they net 95% of $125 million, which is $118.75 million.

Question 3

Big Box retailing has a market capitalization of $500 million and 20 million shares outstanding.In order to finance its growth,the management of Big Box plans to raise further capital through a rights issue.All shareholders will be issued ten rights to purchase a new share at a price of $1.50.What will the price of a share be after the SEO,if all shareholders exercise their rights?

Accepted Answer

The answer of Big Box retailing has a market capitalization...

Question 4

Convex Incorporated sells 10 million shares of stock in an SEO 6 million being primary shares issued by the company and 4 million being secondary shares sold by investors in the company.At the time of the sale,Convex's stock was selling at $8.00.If the underwriter charges 6% of the gross proceeds as a fee,how much money was raised in the sale?

Accepted Answer

The gross proceeds from the sale of the 10 million shares is $80 million (10 million shares x $8.00 per share). The underwriter's fee is 6% of the gross proceeds, or $4.8 million (0.06 x $80 million). The net proceeds from the sale are $75.2 million ($80 million - $4.8 million).

Question 5

Valiant Industries has 20 million shares of stock outstanding at a price of $28 per share.The company wishes to raise more money and plans to do so through a rights issue.Every existing stockholder will receive one right for each share of stock held.For every four rights held by the stockholder,they can buy one share at a price of $28.If all rights are exercised,how much money will be raised in this offer?

Accepted Answer

There are 20 million shares outstanding, and each share will receive one right. Therefore, there will be 20 million rights issued. For every four rights, a shareholder can buy one share at a price of $28. This means that for every one share bought, a shareholder needs to purchase four rights, which cost $28 x 4 = $112.

So, if all rights are exercised, the company will sell 20 million/4 = 5 million new shares. The total amount of money raised will be 5 million x $28 = $140 million.

Therefore, the correct answer is C: $140 million.

Question 6

Highlander Homes stock trades at $32 per share and there are 50 million shares outstanding.The management would like to raise $200 million in an SEO,and current investors would like to sell $50 million of their own stock.If the underwriter charges 5% of gross proceeds,how many shares must it sell in the total (primary and secondary)offering?

Accepted Answer

To raise $200 million, the company will need to issue (200,000,000 + 0.05 * 200,000,000) / 32 = 6,250,000 new shares, where 0.05 is the underwriter's fee.

To sell $50 million worth of stock, current investors need to sell 50,000,000 /32 = 1,562,500 shares.

Therefore, the total number of shares that need to be sold in the offering is 6,250,000 + 1,562,500 = 7,812,500 shares, which is approximately 8.22 million shares (rounded to two decimal places).

So, the correct answer is C.

Question 7

A equity issue that raises new funds for a publicly traded company is called:

Accepted Answer

A seasoned equity offering (SEO) is an equity issue that raises new funds for a publicly traded company through the sale of additional shares of stock to the public. Unlike an initial public offering (IPO), which is the first time a company issues shares to the public, an SEO is a subsequent offering of shares. A secondary offering (D) is another term used for an SEO, but an underpriced offering (C) typically refers to an offering where the price of the shares is set lower than the expected market value.

Question 8

Braynerd Chemicals sells 40 million shares of stock in an SEO 35 million being primary shares issued by the company and 5 million being secondary shares sold by investors in the company.At the time of the sale,Braynerd's stock was selling at $22.50 per share.If the underwriter charges 6% of the gross proceeds as a fee,how much money was raised in the sale?

Accepted Answer

The number of primary shares issued by the company is 35 million. The total value of these shares at the time of sale is calculated as:

35 million shares x $22.50 per share = $787.5 million

The number of secondary shares sold by investors in the company is 5 million. The total value of these shares at the time of sale is:

5 million shares x $22.50 per share = $112.5 million

So the total gross proceeds from the sale are:

$787.5 million + $112.5 million = $900 million

The underwriter charges 6% of the gross proceeds as a fee, so the amount raised in the sale after subtracting the underwriter's fee is:

$900 million - (0.06 x $900 million) = $846 million

Therefore, the correct answer is C.

Question 9

Parafoil Avionics sells 50 million shares of stock in an SEO 40 million being primary shares issued by the company and 10 million being secondary shares sold by investors in the company.At the time of the sale,Parafoil's stock was selling at $12.50 per share.If the underwriter charges 5% of the gross proceeds as a fee,how much money was raised in the sale?

Accepted Answer

The total proceeds from the sale are 50 million shares * $12.50 = $625 million. The underwriter's fee is 5% of $625 million, which is $31.25 million. Therefore, the net amount raised is $625 million - $31.25 million = $593.75 million, which rounds to $594 million. However, the question asks for the gross proceeds, which is $625 million, but the correct choice for the net proceeds is $594 million.

Question 10

Managers will try to protect their existing shareholders by selling new shares at a price that correctly values or overvalues their firm,leading investors to reason that the announcement of an SEO indicates that a company is over-valued.

Accepted Answer

Managers typically try to protect their existing shareholders by selling new shares at a price that correctly values or overvalues their firm, which can lead investors to believe that the company is overvalued. This is because the issuance of new shares can dilute the ownership stake of existing shareholders, and if the share price is too high, it may be difficult for the company to generate sufficient returns to justify the higher valuation. As a result, investors may view the announcement of a secondary stock offering (SEO) as a sign that a company is overvalued.

Question 11

Moon Company plans to issue 10 million shares in a seasoned equity offering.The owner,Ken Moon,plans to sell 4 million shares as part of the offering.Which of the following is true regarding the seasoned equity issue?

Accepted Answer

The seasoned equity offering involves both primary shares (new shares issued by the company to raise capital) and secondary shares (shares sold by existing shareholders, in this case, Ken Moon). Therefore, it includes elements of both a primary and a secondary offering.

Question 12

What are the advantages of a rights offer over a cash offer when issuing new shares?

Accepted Answer

Rights offers allow current shareholders to purchase new shares at a discount, preventing dilution of their ownership percentage, unlike cash offers which can dilute ownership if current shareholders do not participate.

Question 13

The announcement of an SEO usually raises a stock's price.

Accepted Answer

An SEO (Secondary Equity Offering) typically dilutes existing shares, potentially lowering the stock's price due to the increased supply of shares.

Question 14

Which of the following is an advantage of a cash offer over a rights offer?

Accepted Answer

The answer of Which of the following is an advantage...

Question 15

What is a seasoned equity offering?

Accepted Answer

A seasoned equity offering (SEO) is the issuing of shares by a company at a time after its initial public offering (IPO), typically to raise additional capital. This is different from an IPO where shares are offered to the public for the first time. Options A and C refer to share sales and issuances, but do not specifically pertain to an SEO. Option B refers to using profits to raise capital, which is not the same as an SEO.

Question 16

A cash offer differs from a rights offer in that in the latter shares are offered to both existing shareholders and investors at large.

Accepted Answer

In a rights offer, shares are offered to existing shareholders, allowing them to purchase additional shares at a discount, not to investors at large.

Question 17

Convex Incorporated sells 10 million shares of stock in an SEO 6 million being primary shares issued by the company and 4 million being secondary shares sold by investors in the company.At the time of the sale,Convex's stock was selling at $8.00 per share.If the underwriter charges 6% of the gross proceeds as a fee,how much money was raised in the sale?

Accepted Answer

The answer of Convex Incorporated sells 10 million shares of...

Question 18

Neutrino Industries stock trades at $48 per share and there are 120 million shares outstanding.The management would like to raise $400 million in an SEO.If the underwriter charges 6% of gross proceeds,how many shares must it sell?

Accepted Answer

The answer of Neutrino Industries stock trades at $48 per...

Question 19

Highlander Homes stock trades at $32 per share and there are 50 million shares outstanding.The management would like to raise $200 million in an SEO.If the underwriter charges 5% of gross proceeds,how many shares must it sell?

Accepted Answer

The answer of Highlander Homes stock trades at $32 per...

Question 20

Chambers Industries has a market capitalization of $800 million and 250 million shares outstanding.The management of this firm plans to raise further capital through a rights issue.Which of the following rights schemes will raise the most money,if all shareholders exercise their rights?

Accepted Answer

To determine which rights scheme will raise the most money, we need to calculate the total amount of money raised by each scheme.

Option A: Each shareholder will be able to purchase 2/3 of a share at $1.60 per share. Therefore, the total amount raised will be (2/3) x 250 million x $1.60 = $266.67 million.

Option B: Each shareholder will be able to purchase 1.2 shares at $1.80 per share. Therefore, the total amount raised will be 1.2 x 250 million x $1.80 = $540 million.

Option C: Each shareholder will be able to purchase 0.75 shares at $2.00 per share. Therefore, the total amount raised will be 0.75 x 250 million x $2.00 = $375 million.

Option D: Each shareholder will be able to purchase 0.4 shares at $1.50 per share. Therefore, the total amount raised will be 0.4 x 250 million x $1.50 = $150 million.

Therefore, the rights scheme that will raise the most money is option C, which will raise $375 million if all shareholders exercise their rights.

Quiz 14: Raising Equity Capital