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Exam 15: Raising Capital

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Question 31

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Franklin Oil issued 150,000 shares of stock last week.The underwriters charged a 7.5 percent spread in exchange for agreeing to a firm commitment.The legal and accounting fees amounted to $310,000 and the company incurred $65,000 in indirect costs.The offer price was $31 a share.Within the first hour of trading,the stock price increased to $34 a share.What was the flotation cost as a percentage of the funds raised?

A) 20.89 percent
B) 24.03 percent
C) 24.47 percent
D) 26.55 percent
E) 29.89 percent

F) B) and C)
G) None of the above

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Question 32

Multiple Choice

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Which one of the following statements related to IPO underpricing is correct?

A) The IPOs of larger-sized firms tend to be more underpriced than the IPOs of smaller-sized firms.
B) IPO underpricing is limited to the U.S. markets.
C) The percentage of underpricing remains stable over time in the U.S.
D) The only period in the U.S. when underpricing produced first day returns of 50 percent or more was during the tech bubble of 1999-2000.
E) Some of the greatest IPO underpricing has occurred in China.

F) A) and E)
G) A) and C)

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Question 33

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Which one of the following is the name given to a registration of securities under SEC 415 which permits a firm to issue the securities over a two-year period?

When issuing securities,which of the following can occur prior to receiving the approval by the SEC of a registration statement? I.Oral offer to buy shares II.Written offer to buy shares III.Final determination of the offer price IV.Distribution of a preliminary prospectus

Scott placed an order with his broker to purchase 1,000 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $24 a share.The number of shares allocated to Scott along with the closing stock price at the end of the first day of trading for each stock,are as follows: What is Scott's total profit or loss on these three stocks as of the end of the first day of trading for each stock?

Assume the SEC approved the registration statement for a new securities issue this morning.Which one of the following statements must be true about this issue?

Richardson Marina has 18,000 shares of stock outstanding that were sold to the general public last year.The firm has just decided to issue an additional 6,000 shares of common stock and has also decided to make the shares available to the firm's current shareholders before making any offer of these shares to the general public.Which one of the following terms best applies to this offer?

Which of the following are true statements? I.Venture capitalists tend to be long-term investors in a firm. II.Venture capital is relatively easy to obtain for most new firms. III.Venture capitalists generally have an exit strategy. IV.Venture capitalists tend to specialize in one type of financing for a select type of firm.

Which one of the following is an aftermarket function performed by the underwriters of a securities issue?

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

What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering?

What are some of the key factors an individual should consider before selecting a first-stage venture capitalist?

Which one of the following statements is correct?

Sly's just arranged a three-year direct business loan.Which one of the following terms matches this loan arrangement?

Fresh Foods would like to sell 1,600 shares of stock using a Dutch auction.The bids received are as follows: What is the total amount the issuer will receive from this auction? Ignore costs.

Abbott Co.and Costello Co.have both announced IPOs at $24 per share.One of these is undervalued by $3,and the other is overvalued by $1.30,but you have no way of knowing which is which.You plan on buying 1,000 shares of each issue.If an issue is underpriced,it will be rationed,and only half your order will be filled.What profit do you actually expect?

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?

Jersey T's is preparing to sell new shares of stock to the general public.As part of this process,the firm just filed the required paperwork with the SEC that contains the material information related to this issue of stock.What is the name associated with this paperwork?

What is the legal document called that is provided to potential investors and describes a new security offering?

Which one of the following statements concerning issue costs is correct?