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Exam 18: Issuing Capital and the Investment Banking Process

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Question 31

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All of the following are advantages of an IPO except ________________.

A) The market provides a market value for the firm's common stock.
B) The original owners can reallocate their personal wealth away from the firm into more diversified portfolios.
C) The market provides a transparent measure of firm performance which can attract more investors.
D) IPOs are traditionally priced at a premium to cover the costs of the underwriters.

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

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Question 32

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Calculate the total fees a firm would have to pay when its bank offers the firm the following loan commitment: A loan commitment of $1,500,000 with an up-front fee of 95 basis points and a back-end fee of 25 basis points. The take-down on the loan is 50%.

A) $15,550
B) $16,125
C) $18,125
D) $15,955

E) B) and D)
F) A) and C)

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Question 33

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Calculating Costs of Issuing Debt Tennis Games, Inc., with the help of its investment bank recently issued $25 million of new debt. The offer price (and face value) on the debt was $1,000 per bond and the underwriter's spread was 8 percent of the gross proceeds. What is the amount of capital funding Tennis Games, Inc., raised through this debt offering?

Which of the following statements is correct?

Calculating Costs of Issuing Stock WuShock, Inc., needs to raise $500 million to finance its plan for nationwide expansion. In discussions with its investment bank, WuShock learns that the bankers recommend an offer price (or gross price) of $50 per share and they will charge an underwriter's spread of $2.00 per share. Calculate the net proceeds to WuShock from the sale of stock. How many shares of stock will WuShock need to sell in order to receive the $500 million they need?

Calculating Costs of Issuing Debt Just Add Water, Inc., with the help of its investment bank recently issued $200,000,000 of new debt. The offer price on the debt was $1,000 per bond and the underwriter's spread was 4 percent of the gross proceeds. What amount of capital funding did Just Add Water, Inc., raise through this bond issue?

A professionally managed pool of money used to finance new and often high-risk firms is referred to as _______________________.

Calculating Costs of Issuing Stock Paige's Purses, Inc., needs to raise $25 million to finance plant expansion. In discussions with its investment bank, Paige's learns that the bankers recommend an offer price (or gross proceeds) of $50 per share and Paige's will receive $45 per share. What is the underwriter's spread on the issue?

Which of these is the type of loan where the firm borrows against pre-negotiated lines of credit or loan commitments?

Calculating Fees on a Loan Commitment You have approached your local bank for a start-up loan commitment for $1,000,000 needed to open a car repair store. You have requested that the term of the loan be one-year. Your bank has offered you the following terms: size of loan commitment = $1,000,000, term = 1 year, up-front fee = 20 basis points, back-end fee = 50 basis points, and rate on the loan = 9%. If you immediately take down $750,000 and no more during the year, what is the total interest and fees you have paid on this loan commitment?

Which of these is the type of loan where the interest payments change over the life of the loan?

Sipe's Paint and Wallpaper, Inc., needs to raise $1.05 million to finance plant expansion. In discussions with its investment bank, Sipe's learns that the bankers recommend a gross price of $22 per share and that 50,000 shares of stock be sold. If the net proceeds on the stock sale leave Sipe's with $1.05 million, what percent of the stock price does the underwriter's spread represent?

A syndicate is ___________________________.

Calculating Fees on a Loan Commitment You have approached your local bank for a start-up loan commitment for $200,000 needed to open a computer repair store. You have requested that the term of the loan be one-year. Your bank has offered you the following terms: size of loan commitment = $200,000, term = 1 year, up-front fee = 50 basis points, back-end fee = 80 basis points. If you take down 95 percent of the total loan commitment, calculate the total fees you have paid on this loan commitment.

A facility fee is ________________.

You have approached your local bank for a start-up loan commitment for $175,000 needed to open a computer repair store. You have requested that the term of the loan be one-year. Your bank has offered you the following terms: size of loan commitment = $175,000, term = 1 year, up-front fee = 75 basis points, back-end fee = 80 basis points. If you take down 75 percent of the total loan commitment, calculate the total fees you have paid on this loan commitment.

Which of these is the fee charged by a bank for making funds available through a loan commitment?

Calculating Costs of Issuing Stock River Valley Corp. recently went public with an initial public offering in which they received a total of $40 million in new capital funding. The underwriter used a firm commitment offering in which the offer price was $10 and the underwriter's spread was $0.50. River Valley also paid legal and other administrative costs of $750,000 for the IPO. What is the number of shares issued through this IPO?

A lead bank in a syndicate, which directly negotiates with the issuing firm on behalf of the syndicate, is referred to as the _____________.

Bailey's Dog Pens, Inc., with the help of its investment bank recently issued 5 million shares of new stock. The offer price on the stock was $19.5 per share and Bailey's received a total of $70 million from the stock offering. What percentage of the gross proceeds is the investment bank charging Bailey's Dog Pens for underwriting the stock issue?