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

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What is an issue of securities that is offered for sale to the general public on a direct cash basis called?


A) best efforts underwriting
B) firm commitment underwriting
C) general cash offer
D) rights offer
E) herring offer

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

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Birds and More is considering a project which requires the purchase of $175,000 of fixed assets.The net present value of the project is $4,500.Equity shares will be issued as the sole means of financing this project.The price-earnings ratio of the project equals that of the existing firm.What will the new market value per share be after the project is implemented given the following current information on the firm? Birds and More is considering a project which requires the purchase of $175,000 of fixed assets.The net present value of the project is $4,500.Equity shares will be issued as the sole means of financing this project.The price-earnings ratio of the project equals that of the existing firm.What will the new market value per share be after the project is implemented given the following current information on the firm? A) $18.68 B) $18.72 C) $18.80 D) $19.20 E) $21.10


A) $18.68
B) $18.72
C) $18.80
D) $19.20
E) $21.10

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

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The Huff Co.has just gone public.Under a firm commitment agreement,Huff received $21.50 for each of the 6 million shares sold.The initial offering price was $23.65 per share,and the stock rose to $31.42 per share in the first few minutes of trading.Huff paid $1,260,000 in direct legal and other costs,and $390,000 in indirect costs.The flotation costs were what percentage of the funds raised?


A) 38.56 percent
B) 40.32 percent
C) 41.68 percent
D) 48.03 percent
E) 49.09 percent

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

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Flagler,Inc.needs to raise $30 million to finance its expansion into new markets.The company will sell new shares of equity via a general cash offering to raise the needed funds.The offer price is $40 per share and the company's underwriters charge a 10 percent spread.How many shares need to be sold?


A) 833,334 shares
B) 1,250,000 shares
C) 1,666,667 shares
D) 2,500,000 shares
E) 3,333,333 shares

F) B) and D)
G) A) and B)

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A

Jennifer owns 14,000 shares of Calico Clothing.Currently,there are 1.6 million shares of stock outstanding.The company has just announced a rights offering whereby 200,000 shares are being offered for sale at a subscription price of $14 a share.The current stock price is $16 a share.Assume that Jennifer sells her rights and that all rights are exercised.What percentage of the firm will Jennifer own after the rights offering?


A) 0.78 percent
B) 0.75 percent
C) 0.86 percent
D) 0.67 percent
E) 1.01 percent

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

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Firms encounter several costs when issuing new securities.Identify and describe at least four of these costs.

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Students should provide a partial discussion of the information found at the beginning of SECTION 15.7 where 6 different types of costs are identified and defined.These are: 11ea8a5b_2dda_9c39_9a87_3726c64de3e5_TB5617_00_TB5617_00

Which of the following have been offered as supporting arguments in favor of IPO underpricing? I.Underpricing counteracts the "winner's curse". II.Underpricing rewards institutional investors for sharing their opinions of a stock's market value. III.Underpricing diminishes the underwriting risk of a firm commitment underwriting. IV.Underpricing reduces the probability that investors will sue the underwriters.


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

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

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The Securities and Exchange Commission:


A) verifies the accuracy of the information contained in the prospectus.
B) verifies the accuracy of the information contained in the red herring.
C) examines the registration statement during the Green Shoe period.
D) is concerned only that an issue complies with all rules and regulations.
E) determines the final offer price once they have approved the registration statement.

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

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If an IPO is underpriced then the:


A) investors in the IPO are generally unhappy with the underwriters.
B) issue is less likely to sell out.
C) stock price will generally decline on the first day of trading.
D) issuing firm is guaranteed to be successful in the long term.
E) issuing firm receives less money than it probably should have.

F) B) and D)
G) C) and D)

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Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering.The firm will issue one right for each share of stock outstanding.The offering consists of a total of 860,000 new shares.The current market price of the stock is $38.Currently,there are 5.16 million shares outstanding.What is the value of one right?


A) $0.97
B) $0.86
C) $0.48
D) $0.52
E) $0.60

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

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B

Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction.The bids received are as follows: Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction.The bids received are as follows: How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs. A) $10,800 B) $12,000 C) $13,400 D) $14,400 E) $16,800 How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.


A) $10,800
B) $12,000
C) $13,400
D) $14,400
E) $16,800

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

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Shares of PLS United have been selling with rights attached.Tomorrow,the stock will sell independent of these rights.Which one of the following terms applies to tomorrow in relation to this stock?


A) pre-issue date
B) aftermarket date
C) declaration date
D) holder-of-record date
E) ex-rights date

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

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Atlas Corp.wants to raise $4 million via a rights offering.The company currently has 450,000 shares of common stock outstanding that sell for $40 per share.Its underwriter has set a subscription price of $24 per share and will charge the company a 7 percent spread.Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering.How much can you get for selling all of your rights?


A) $24,911.21
B) $25,362.84
C) $25,792.19
D) $27,094.95
E) $32,811.16

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

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


A) increase.
B) decrease.
C) remain constant.
D) respond but the direction of the response is not predictable as shown by past studies.
E) decrease momentarily and then immediately increase substantially within an hour following the announcement.

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

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Which one of the following statements concerning dilution is correct?


A) Dilution of percentage ownership occurs whenever an investor participates in a rights offer.
B) Market value dilution increases as the net present value of a project increases.
C) Market value dilution occurs when the net present value of a project is negative.
D) Neither book value dilution nor market value dilution has any direct bearing on individual shareholders.
E) Book value dilution is the cause of market value dilution.

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

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Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction.The bids received are as follows: Miller Motors has decided to sell 1,800 shares of stock through a Dutch auction.The bids received are as follows: How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs. A) $30,400 B) $33,400 C) $36,000 D) $36,400 E) $38,600 How much will Miller Motors receive in total from selling the 1,600 shares? Ignore all transaction and flotation costs.


A) $30,400
B) $33,400
C) $36,000
D) $36,400
E) $38,600

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

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Before a seasoned stock offering,you owned 7,500 shares of a firm that had 500,000 shares outstanding.After the seasoned offering,you still owned 7,500 shares but the number of shares outstanding rose to 625,000.Which one of the following terms best describes this situation?


A) overallotment
B) percentage ownership dilution
C) Green Shoe
D) Red herring
E) abnormal event

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

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High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so.After discussing this with key shareholders,the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share.The current market price of the firm's stock is $22 a share.How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans?


A) 140,015 shares
B) 159,091 shares
C) 166,667 shares
D) 194,444 shares
E) 205,688 shares

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

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Underwriters generally:


A) pay a spread to the issuing firm.
B) provide only best efforts underwriting in the U.S.
C) receive less compensation under a competitive agreement than under a negotiated agreement.
D) market and distribute an entire issue of new securities within their own firm.
E) pass the risk of unsold shares back to the issuing firm via a firm commitment agreement.

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

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