Question 1

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

Accepted Answer

A seasoned equity offering (SE0) is an equity issue that raises new funds for a publicly traded company. A SE0 involves the sale of additional shares of an already publicly traded company, whereas an initial public offering (IPO) is the first time a company goes public and issues shares to the public. A secondary offering refers to the sale of existing shares by current shareholders, and a firm commitment offering is a type of underwriting agreement. An underpriced offering refers to an issue price that is lower than market value.

Question 2

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

Accepted Answer

A rights offer allows current shareholders the option to purchase new shares at a discounted price, which means that they can maintain their ownership percentage without experiencing dilution or a decrease in value. This is an advantage over a cash offer, where new shares are sold to outside investors, resulting in dilution for existing shareholders.

Question 3

Niagara Novelty Stores stock trades at $46 per share and there are 34 million shares outstanding.The management would like to raise $150 million in an SEO and current investors would like to sell $30 million of their own stock.If the underwriter charges 6% of gross proceeds,how many shares must it sell in the total (primary and secondary)offering?

Accepted Answer

The answer of Niagara Novelty Stores stock trades at $46...

Question 4

Regina Respiratory Devices stock trades at $21 per share and there are 14 million shares outstanding.The management would like to raise $80 million in an SEO.If the underwriter charges 5% of gross proceeds,how many shares must it sell?

Accepted Answer

To raise $80 million after a 5% underwriting fee, the company needs to raise $80 million / (1 - 0.05) = $84.21 million in gross proceeds. At $21 per share, they need to sell $84.21 million / $21 = 4 million shares.

Question 5

Hargrave Kitchen & Bath has 6 million shares outstanding at a price of $33.25 per share.The company has decided to raise capital through a rights issue.All shareholders will be issued one right per share.For every five rights held by the stockholder,they can buy one share at a price of $33.25.How much money will this raise,if all shareholders exercise their rights?

Accepted Answer

The answer of Hargrave Kitchen & Bath has 6 million...

Question 6

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 exclusively to existing shareholders, allowing them to maintain their proportional ownership in the company, whereas a cash offer is open to all investors.

Question 7

What is a seasoned equity offering?

Accepted Answer

A seasoned equity offering (SEO) is the issuing of new equity shares by a company that has already gone public through an initial public offering (IPO). It allows the company to raise additional funds by issuing new shares to the public, and existing shareholders may also opt to sell their shares through an SEO. Option A refers to a secondary offering, while options B and E do not involve the issuance of new shares to the public. Option C may involve issuing shares to the public, but it does not necessarily have to be a proven private company.

Question 8

Saskatoon Smelting sells 25 million shares of stock in an SEO,with 20 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,the firm's stock was selling at $4.75 per share.If the underwriter charges 7% of the gross proceeds as a fee,how much money was raised in the sale?

Accepted Answer

The total number of shares sold is 25 million, out of which 20 million are primary shares and 5 million are secondary shares.
The total value of the primary shares sold = 20 million x $4.75 = $95 million
The total value of the secondary shares sold = 5 million x $4.75 = $23.75 million
Therefore, the total value of shares sold = $95 million + $23.75 million = $118.75 million
The underwriter charges a fee of 7% of the gross proceeds, which is 7% of $118.75 million = $8.31 million
Hence, the net amount raised in the sale is $118.75 million - $8.31 million = $110.44 million. 
Therefore, the correct answer is option C.

Question 9

Tangible Technologies has a market capitalization of $150 million and 8 million shares outstanding.In order to finance its growth,the firm's management plans to raise further capital through a rights issue.All shareholders will be issued one right per share.For every 4 rights held by a stockholder,they can purchase one share at a price of $15 per share.How much money will this raise,if all shareholders exercise their rights?

Accepted Answer

The company has 8 million shares outstanding, and each shareholder gets one right per share. For every 4 rights, a shareholder can purchase 1 new share. Therefore, 8 million / 4 = 2 million new shares can be issued. At $15 per share, the company will raise 2 million * $15 = $30 million.

Question 10

Manitoba Marketing sells 8 million shares of stock in an SEO,with 5 million being primary shares issued by the company and 3 million being secondary shares sold by investors in the company.At the time of the sale,the firm's stock was selling at $16 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 amount raised from the sale of 8 million shares at $16 per share is 8 million * $16 = $128 million. The underwriter's fee is 5% of $128 million, which is $6.4 million. Therefore, the amount raised after the underwriter's fee is $128 million - $6.4 million = $121.6 million. However, none of the provided options match this calculation, suggesting a misunderstanding in the question's solution process. Given the options, the closest approach to solving based on the provided information would involve a mistake in the calculation process. Re-evaluating the correct approach: The gross proceeds are indeed $128 million before fees. The underwriter's fee is 5% of this, which is $6.4 million. Subtracting this fee from the gross proceeds should give us the net amount raised. However, the mistake seems to be in the interpretation of the options rather than the calculation. The correct calculation method has been described, but the final answer does not match due to a potential misinterpretation of the question or options. Given the options and the typical approach to such a question, the expected process involves calculating the gross proceeds and then subtracting the underwriter's fees. Without a matching option, the response might require reevaluation of the provided choices or clarification of the question's intent.

Question 11

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

Accepted Answer

A cash offer allows the underwriter to credibly attest to the issue's quality because it involves a public sale in which the underwriter's reputation is at stake, thus providing a form of certification about the quality of the issue.

Question 12

Ontario Operating Systems sells 20 million shares of stock in an SEO,with 15 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,the firm's stock was selling at $34 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 sold by the company = 15 million
The number of secondary shares sold by investors = 5 million
Total number of shares sold = 20 million

The price of one share = $34

Total gross proceeds = Number of shares x Price per share
= 20 million x $34
= $680 million

6% of gross proceeds charged as underwriter fee = 6/100 x $680 million = $40.8 million

Therefore, the total amount of money raised in the sale = Gross proceeds - Underwriter's fee
= $680 million - $40.8 million
= $639.2 million

Thus, the best choice is B ($479.4 million) which is not the correct answer.

Question 13

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 try to sell new shares at a price that overvalues their firm to protect existing shareholders, which can lead investors to believe that the company is overvalued.

Question 14

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 15

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 of the rights schemes will raise the most money, we need to calculate the total amount of money that can be raised by each option.

Option A: 
Price per share = $1.60 
Number of shares per right = 1 
Number of rights needed to purchase one share = 2 
Total cost per share = $3.20 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $3.20 = $400 million

Option B: 
Price per share = $1.80 
Number of shares per right = 2/3 
Number of rights needed to purchase one share = 3/2 
Total cost per share = $1.80 x (3/2) / (2/3) = $2.70 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $2.70 = $337.5 million

Option C: 
Price per share = $2.00 
Number of shares per right = 3/4 
Number of rights needed to purchase one share = 4/3 
Total cost per share = $2.00 x (4/3) / (3/4) = $2.67 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $2.67 = $333.75 million

Option D: 
Price per share = $1.50 
Number of shares per right = 2/5 
Number of rights needed to purchase one share = 5/2 
Total cost per share = $1.50 x (5/2) / (2/5) = $3.75 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $3.75 = $468.75 million

Option E: 
Price per share = $1.00 
Number of shares per right = 2/10 
Number of rights needed to purchase one share = 10/2 
Total cost per share = $1.00 x (10/2) / (2/10) = $5.00 
Total cost for all shares = $800 million 
Total number of shares = 250 million 
Number of new shares issued = 125 million 
Total money raised = 125 million x $5 = $625 million

Based on the calculations, option C will raise the most money with a total of $333.75 million.

Question 16

Waterloo Waste Management sells 5 million shares of stock in an SEO,with 3 million being primary shares issued by the company and 2 million being secondary shares sold by investors in the company.At the time of the sale,the firm's stock was selling at $12.50 per share.If the underwriter charges 7% of the gross proceeds as a fee,how much money was raised in the sale?

Accepted Answer

The total amount raised from the sale of 5 million shares at $12.50 per share is $62.5 million. The underwriter's fee is 7% of $62.5 million, which is $4.375 million. Therefore, the net amount raised is $62.5 million - $4.375 million = $58.125 million. However, since the question asks for the gross amount raised, the correct answer is the total amount before the underwriter's fee, which is $62.5 million. However, this option is not provided, indicating a possible mistake in the question or the answer choices. Based on the closest available option, $58.13 million (B) would be the net amount after fees, not the gross amount raised. The correct calculation method was described, but the exact match for the calculated gross proceeds is not listed in the provided options.

Question 17

Canadian Copper stock trades at $22.50 per share and there are 82 million shares outstanding.The management would like to raise $300 million in an SEO and current investors would like to sell $40 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

The correct answer is A.The total amount of money that needs to be raised is $300 million + $40 million = $340 million. The underwriter charges 5% of gross proceeds, so the gross proceeds must be $340 million / (1 - 0.05) = $357.89 million. The number of shares that must be sold is $357.89 million / $22.50 = 15.9 million shares.

Question 18

Nunavut Mining Company stock trades at $3.25 per share and there are 46 million shares outstanding.The management would like to raise $50 million in an SEO.If the underwriter charges 6% of gross proceeds,how many shares must it sell?

Accepted Answer

To raise $50 million with a 6% underwriting fee, the company needs to net $50 million from the gross proceeds. The gross proceeds needed can be calculated as $50 million / (1 - 0.06) = $53.191 million approximately. At $3.25 per share, the number of shares to be sold is $53.191 million / $3.25 ≈ 16.36 million shares, which rounds to 16.4 million shares.

Question 19

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

Accepted Answer

An SEO (Secondary Equity Offering) typically dilutes the ownership percentage of existing shareholders and can lead to a decrease in stock price due to the increased supply of shares.

Question 20

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

A seasoned equity offering involves the company issuing new shares to the public (primary shares) and may also include existing shareholders selling their shares (secondary shares). In this case, Moon Company is issuing new shares, and Ken Moon is selling his existing shares, making it a mix of primary and secondary shares.

Quiz 14: Raising Equity Capital