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Exam 19: Raising Capital

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Question 21

Multiple Choice

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Which of the following have been offered as justification for IPO underpricing? I.Young firms tend to be very risky. II.The best IPOs are oversubscribed. III.Underwriters like to avoid lawsuits. IV.It benefits the existing shareholders.

A) I and III only
B) II and IV only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV

F) A) and B)
G) A) and C)

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Question 22

Multiple Choice

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Which one of the following best describes an initial public offering?

A) Shares held by a firm's founder
B) Any newly issued shares offered to the general public
C) Shares issued to the public on a cash basis
D) The first sale of equity shares to the general public
E) Any shares initially offered to a firm's existing shareholders

F) A) and B)
G) All of the above

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Question 23

Multiple Choice

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Which one of the following is an underwriting of securities where the offer price is determined by investor bids?

Phil and Terry started a new business three years ago.Two years ago,they incorporated the business and issued themselves each 20,000 shares of stock.Last year,they took the company public in an initial public offering (IPO) and issued an additional 100,000 shares of stock at that time.The offer price was $14 a share,the spread was 8 percent,and the lockup period was six months.The stock closed at $17 a share at the end of the first day of trading.During the first six months of trading,the stock had a price range of $13 to $23 per share.During the second six months of trading,the stock sold between $15 and $21 per share.Both Tracie and Amy purchased 100 shares at the offer price.Given this,which one of the following statements is correct? Ignore trading costs and taxes.

Kate is the sole founder of the exclusive retail store,Kate's Interiors.Kate identified additional locations that she believed offered profitable opportunities for expansion so decided to take her firm public in order to finance her expansion plans.Bob is an investor who purchased shares of Kate's Interiors stock at the offer price.After one month as a public firm,Kate realized that Bob had earned $1.1 million in profit on his investment and had already cashed out and moved on.Kate on the other hand,had made no profit and still owns her shares.Explain how this could happen.

Which of the following duties belong to the underwriters of a firm commitment securities offer? I.duty to purchase any unsold shares II.duty to set the offer price III.duty to distribute the offered shares IV.duty to offer the Green Shoe provision to all investors who buy at the offer price

You own 100 of the 15,000 outstanding shares of Delta Movers stock.The firm just announced that it will be issuing an additional 5,000 shares to the general public in a cash offer at $22 per share.What type of event are you participating in if you opt to purchase 100 of these additional shares?

Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?

Which one of the following statements concerning underwriting is correct?

Which one of the following best describes a private placement?

The Road House Diner is offering 10,000 shares of stock to the general public on a cash basis.Which one of the following terms best applies to this offer?

Venture capital is most apt to be the source of funding for which one of the following?

Northern Air would like to sell 700 shares of stock using the Dutch auction method.The bids received are as follows: Bidder A will receive _____ shares and pay a price per share of ____.

If the market price of existing publicly traded shares declines due to the announcement of a seasoned issue of stock,the decline is referred to as which one of the following?

High Mountain Gear issued 240,000 shares of stock last week.The underwriters charged a 7.85 percent spread in exchange for agreeing to a firm commitment.The legal and accounting fees were $385,000.The company incurred $98,000 in indirect costs related to management time and other internal expenses.The offer price was $21 a share.Within the first hour of trading,the stock was selling for $23.20 a share.What was the flotation cost as a percentage of the funds raised?

Gee Whiz Underwriters retains the difference between its buying price and its offering price on new securities.What is this amount called?

The Bread Basket needs to raise $38 million to expand its operations nationally.The company will sell new shares of common stock using a general cash offering.The underwriters charge a 7.65 percent spread,the administrative costs are $395,000,and the offer price is $25 per share.How many shares of stock must be sold for The Bread Basket to receive the total funds it desires?

Lisa is interested in purchasing 1,000 shares of TJH,Inc.when the shares are issued.Her broker just gave Lisa a preliminary prospectus on these shares for her to review as she waits for the shares to be cleared for sale.What is the name of this prospectus?

Which one of the following statements is correct?

Explain how a Dutch auction operates and why a firm might choose to sell its securities in this manner.