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Exam 15: Raising Capital

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Question 51

Multiple Choice

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Miller Fruit wants to expand and needs $1.6 million to do so. Currently, the firm has 465,000 shares of stock outstanding at a market price per share of $32.50. The firm decided on a rights offering with one right granted for each share of outstanding stock. The subscription price is $28 a share. How many rights are needed to purchase one new share of stock in this offering?

A) 8.14
B) 7.17
C) 8.22
D) 8.63
E) 9.45

F) A) and D)
G) C) and D)

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Question 52

Multiple Choice

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What is a prospectus?

A) A letter issued by the SEC authorizing a new issue of securities
B) A report stating that the SEC recommends a new security to investors
C) A letter issued by the SEC that outlines the changes required for a registration statement to be approved
D) A document that describes the details of a proposed security offering along with relevant information about the issuer
E) An advertisement in a financial newspaper that describes a security offering

F) A) and B)
G) A) and E)

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Question 53

Multiple Choice

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JLK is a partnership that was formed two years ago and has been extremely successful thus far. The owners have decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

P&T wants to raise $2.8 million through a rights offering with a subscription price of $20 a share. Currently, the company has 750,000 shares of stock outstanding at a market price of $24.50 a share. One right will be granted for each share of stock outstanding. How many rights are required to purchase one new share of stock in this offering?

If a firm commitment IPO is overpriced then the:

The Huff Co. has just gone public. Under a firm commitment agreement, the company received $17.64 for each of the 3.2 million shares sold. The initial offering price was $22.50 per share, and the stock rose to $24.15 per share in the first day of trading. The company paid $984,900 in direct legal and other costs and incurred $340,000 in indirect costs. What was the flotation cost as a percentage of the net amount raised?

Mountain Mining requires $3.3 million to expand its current operations and has decided to raise these funds through a rights offering at a subscription price of $18 a share. The current market price of the company's stock is $24.70 a share. How many shares of stock must be sold to fund the expansion plans?

Wear Ever is expanding and needs $6.8 million to help fund this growth. The company estimates it can sell new shares of stock for $43 a share. It also estimates it will cost an additional $352,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a spread of 7.5 percent. How many shares of stock must be sold for the company to fund its expansion?

You currently own 11 percent of the 2.8 million outstanding shares of Webster Mills. The company has just announced a $3.2 million rights offering with a subscription price of $25 per share with one right issued for each share of stock. Assume that all rights are exercised. What will be your new ownership position if you opt to sell your rights rather than exercise them?