Question 1

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 $1.00. What will the price of a share be after the SEO, if all shareholders exercise their rights?

Accepted Answer

D) No. of new shares issued = 2 million
Total shares = (20 million + 2 million) = 22 million
New capital raised = (20 / 10) × $1.00 = $2 million
Total capitalization =$(500 + 2) = 502 million
Price per share = ($502 / 22) = $22.82

Question 2

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

A) Money raised = (250 / 2) × 1 million shares × $1.60 = $200 million
B) Money raised = (250 / 3) × 2 million shares × $1.80 = $300 million
C) Money raised = (250 / 4) × 3 million shares × $2.00 = $375 million
D) Money raised = (250 / 5) × 2 million shares × $1.50 = $150 million

Question 3

Criswell Mining stock trades at $19 per share, and there are 200 million shares outstanding. The management would like to raise $100 million in an SEO. If the underwriter charges 5% of gross proceeds, how many shares must it sell?

Accepted Answer

B) $19 × (100% - 5%) = $18.05;
Number of shares sold = $100 million / $18.05 = 5.54 million shares

Question 4

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

Accepted Answer

A seasoned equity offering is when a company that is already publicly traded issues new shares of stock to the public in order to raise more funds. An initial public offering is the first time a company goes public and sells shares to the public. An underpriced offering refers to when the initial public offering price is set lower than the expected market price. A secondary offering is another type of equity issue where existing shareholders sell their shares to the public, rather than the company issuing new shares.

Question 5

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 6

Highlander Homes stock trades at $34 per share and there are 50 million shares outstanding. The management would like to raise $200 million in an SEO. If the underwriter charges 6% of gross proceeds, how many shares must it sell?

Accepted Answer

D) $34 × (100% - 6%) = $31.96;
number of shares sold = $200 million / $31.96 = 6.26 million

Question 7

Neutrino Industries stock trades at $49 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

D) $49 × (100% - 6%) = $46.06;
Number of shares sold = $400 million / $46.06 = 8.68 million shares

Question 8

Convex Incorporated sells 10 million shares of stock in an SEO-8 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, Convex's stock was selling at $8.00. If the underwriter charges 4% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

A) $8.00 × (100% - 4%) = $7.68; 11ea84dc_f523_3cbb_9a63_1921982a393a_TB1316_00_TB1316_00

Question 9

Big Box retailing has a market capitalization of $500 million and 4 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 $1.00 per share. How much money will this raise, if all shareholders exercise their rights?

Accepted Answer

B) 10 × $1.00 million × 4 = $40.0 million

Question 10

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 11

Parafoil Avionics sells 50 million shares of stock in an SEO-20 million being primary shares issued by the company and 30 million being secondary shares sold by investors in the company. At the time of the sale, Parafoil's stock was selling at $13.00 per share. If the underwriter charges 7% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

A) 20 million shares × $13.00 × (100% - 7%) = $241.8 million

Question 12

Parafoil Avionics sells 50 million shares of stock in an SEO-30 million being primary shares issued by the company and 20 million being secondary shares sold by investors in the company. At the time of the sale, Parafoil's stock was selling at $11.50 per share. If the underwriter charges 7% of the gross proceeds as a fee, how much money did existing investors in the company raise in the sale?

Accepted Answer

A) 20 million shares × $11.50 × (100% - 7%) = $213.90 million

Question 13

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

Accepted Answer

In a cash offer, the underwriter can credibly attest to the issue's quality, which is an advantage over a rights offer where such attestation is not typically involved.

Question 14

Highlander Homes stock trades at $35 per share and there are 50 million shares outstanding. The management would like to raise $300 million in an SEO. If the underwriter charges 5% of gross proceeds, and all the shares are primary shares sold to new investors, what percentage of the company will be owned by the new investors?

Accepted Answer

D) Sale price of new share = $35 × (100% - 5%) = $33.25;
Number of shares sold = $300 million / $33.25 = 9.02255639 million shares
Percentage owned by new shareholders = 9.02255639 million / (50 million + 9.02255639 million) = 15.29%

Question 15

Braynerd Chemicals sells 40 million shares of stock in an SEO-25 million being primary shares issued by the company and 15 million being secondary shares sold by investors in the company. At the time of the sale, Braynerd's stock was selling at $21.00 per share. If the underwriter charges 5% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

C) 25 million shares × $21.00 × (100% - 5%) = $498.75 million

Question 16

What is a seasoned equity offering?

Accepted Answer

A seasoned equity offering is the issuing of new shares by a company that has already completed its initial public offering (IPO) and has become an established public company. This allows the company to raise additional capital through the sale of shares to the public. Option A refers to a secondary offering, while options B and C are not accurate descriptions of a seasoned equity offering.

Question 17

Highlander Homes stock trades at $31 per share and there are 50 million shares outstanding. The management would like to raise $300 million in an SEO, and current investors would like to sell $100 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

C) $31 × (100% - 6%) = $29.14;
Number of shares sold = ($300 million + $100 million) / $29.14 = 13.73 million shares

Question 18

Convex Incorporated sells 10 million shares of stock in an SEO-8 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, Convex's stock was selling at $7.50 per share. If the underwriter charges 4% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

B) $7.50 × 96% × 8 million shares = $57.60 million

Question 19

Valiant Industries has 30 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

C) $28 × 30 million / 4 = $210.0 million

Question 20

Highlander Homes stock trades at $30 per share and there are 50 million shares outstanding. The management would like to issue a total of 10 million (primary and secondary) shares in an SEO. If the underwriter charges 5% of gross proceeds, 25% of the shares are primary shares sold to new investors, and 75% of the shares are secondary shares sold to new investors, what percentage of the company will be owned by the new investors?

Accepted Answer

D) New shares 11ea84dc_f523_d8fc_9a63_cddcf7bc2c51_TB1316_00_TB1316_00 new shares. Percentage of company owned by new shareholders = 10 million / (50 million + 2.5 million) = 19.05%

Quiz 14: Raising Equity Capital