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Exam 18: Issuing Capital and the Investment Banking Process

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Question 21

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Which of the following is the firm allowing its equity, some of which was held privately by managers and venture capital investors, to be publicly traded in stock markets for the first time?

A) Over the counter market transaction
B) Private market transaction
C) Initial public offering
D) Public market transaction

E) None of the above
F) A) and C)

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Question 22

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Your company needs to raise $4 million to finance plant expansion. In discussions with its investment bank, you learn that the bankers recommend a gross price of $50 per share and that 90,000 shares of stock be sold. If the net proceeds on the stock sale leaves your company with $4 million, what is the underwriter's spread on the stock issue?

A) $2.78
B) $5.55
C) $44.44
D) $38.89

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

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Question 23

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Which of the following refers to when a single investment bank obtains the exclusive right to originate, underwrite, and distribute the new bonds through a one-on-one negotiation process?

Most business loans today are:

Video Games, Inc., with the help of its investment bank recently issued 10 million shares of new stock. The offer price on the stock was $47.50 per share and Video Games received a total of $446,500,000 through this stock offering. Calculate the net proceeds and the underwriter's spread on the stock offering. What percentage of the gross price is the investment bank charging Video Games for underwriting the stock issue?

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 percent.

A security issued in which the underwriter does not guarantee a firm price to the issuer and acts more as a placing or distribution agent for a fee is referred to as:

Which of the following terms is defined as the group of investment banks used to help sell and distribute a new security issue?

R&D, Inc., needs to raise $200 million to finance firm expansion. In discussions with its investment bank, R&D's learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter's spread of 3 percent of the gross price. How many bonds will R&D need to sell in order to receive the $200 million they need?

Sipe's Paint and Wallpaper, Inc., needs to raise $1.05 million to finance plant expansion. In discussions with its investment bank, Sipe's Paint and Wallpaper 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 Paint and Wallpaper with $1.05 million, what percent of the stock price does the underwriter's spread represent?

A "thin" market is characterized by:

Which of the following is an example of an appropriate loan covenant?

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

Howett Pockett, Inc., plans to issue 10 million new shares of its stock. In discussions with its investment bank, Howett Pockett learns that the bankers recommend a net proceed of $15 per share and they will charge an underwriter's spread of 6.5 percent of the gross proceeds. In addition, Howett Pockett must pay $1 million in legal and other administrative expenses for the seasoned stock offering. Calculate the gross proceeds per share from the sale of the 10 million shares of stock.

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 raise through this bond issue?

Mick E Inc. plans to issue 25 million new shares of its stock. In discussions with its investment bank, Mick E learns that the bankers recommend a net proceed of $29.80 per share and they will charge an underwriter's spread of 8.5 percent of the gross proceeds. In addition, Mick E must pay $3 million in legal and other administrative expenses for the seasoned stock offering. Calculate the gross proceeds per share received by Mick E from the sale of the 25 million shares of 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?

Renee's Boutique, Inc., needs to raise $25 million to finance firm expansion. In discussions with its investment bank, Renee's Boutique learns that the bankers recommend an offer price of $9 per share and that 5 million shares of stock be sold. If the net proceeds on the stock sale leaves Renee's Boutique with $25 million, calculate the underwriter's spread on the stock issue.

Which of the following is the type of financing that includes capital funds borrowed from personal savings, friends and relatives, financial institutions such as commercial banks, or venture capitalists?

Shocks and Struts, Inc., needs to raise $40 million to finance its plan for nationwide expansion. In discussions with its investment bank, they learn that the bankers recommend an offer price (or gross price) of $125 per share and they will charge an underwriter's spread of $12.50 per share. Calculate the net proceeds to Shocks and Struts from the sale of stock. How many shares of stock will Shocks and Struts need to sell in order to receive the $40 million they need?