Chapter 15 - Raising Capital

Chapter 15 - Raising Capital
Chapter 15
Raising Capital

Multiple Choice Questions

1. Jones & Co. is funded by a group of individual investors for the sole purpose of providing
funding for individuals who are trying to convert their new ideas into viable products. What is
this type of funding called?
. green shoe funding
!. to"bstone underwriting
C. venture capital
#. red herring funding
$. life cycle capital

%. What is the for" called that is filed with the &$C and discloses the "aterial infor"ation on
a securities issuer when that issuer offers new securities to the general public?
. prospectus
!. red herring
C. indenture
#. public disclosure state"ent
$. registration state"ent

'. (iller & Chase is offering )* "illion of new securities to the general public. Which &$C
regulation governs this offering?
. Regulation
!. Regulation C
C. Regulation +
#. Regulation ,
$. Regulation R

15-1
*. What is a prospectus?
. a letter issued by the &$C authori-ing a new issue of securities
!. a report stating that the &$C reco""ends a new security to investors
C. a letter issued by the &$C that outlines the changes re.uired for a registration state"ent to
be approved
#. a docu"ent that describes the details of a proposed security offering along with relevant
infor"ation about the issuer
$. an advertise"ent in a financial newspaper that describes a security offering

5. Which one of the following is a preli"inary prospectus?
. to"bstone
!. green shoe
C. registration state"ent
#. rights offer
$. red herring

/. dvertise"ents in a financial newspaper announcing a public offering of securities0 along
with a list of the invest"ent ban1s handling the offering0 are called2
. red herrings.
!. to"bstones.
C. +reen &hoes.
#. registration state"ents.
$. cash offers.

3. What is an issue of securities that is offered for sale to the general public on a direct cash
basis called?
. best efforts underwriting
!. fir" co""it"ent underwriting
C. general cash offer
#. rights offer
$. herring offer

15-%
4. 5ony currently owns 1%0666 shares of +7 5ools. 8e has 9ust been notified that the fir" is
issuing additional shares of stoc1 and that he is being given a chance to purchase so"e of
these shares prior to the shares being offered to the general public. What is this type of an
offer called?
. best efforts offer
!. fir" co""it"ent offer
#. rights offer
$. priority offer

:. &oup +alore is a partnership that was for"ed three years ago for the purpose of creating0
producing0 and distributing healthy soups in a dried for". 5he fir" has been e;tre"ely
successful thus far and has decided to incorporate and offer shares of stoc1 to the general
public. What is this type of an e.uity offering called?
. venture capital offering
!. shelf offering
C. private place"ent
#. seasoned e.uity offering
$. initial public offering

16. What is a seasoned e.uity offering?
. an offering of shares by shareholders for repurchase by the issuer
!. shares of stoc1 that have been reco""ended for purchase by the &$C
C. e.uity securities held by a fir"<s founder that are being offered for sale to the general
public
#. sale of newly issued e.uity shares by a fir" that is currently publicly owned
$. a set nu"ber of e.uity shares that are issued and offered to the public annually

11. $;ecutive 5ours has decided to ta1e its fir" public and has hired an invest"ent fir" to
handle this offering. 5he invest"ent fir" is serving as a=n>2
. after"ar1et specialist.
!. venture capitalist.
C. underwriter.
#. seasoned writer.
$. pri"ary investor.

15-'
1%. What is the definition of a syndicate?
. a venture capitalist
!. a group of attorneys providing services for an ?@A
C. bloc1 of investors who control a fir"
#. a ban1 that loans funds to finance the start-up of a new fir"
$. a group of underwriters sharing the ris1 of selling a new issue of securities

1'. 5he difference between the underwriters< cost of buying shares in a fir" co""it"ent and
the offering price of those securities to the public is called the2
. gross spread.
!. under price a"ount
C. filing fee.
#. new issue pre"iu".
$. offer price.

1*. #.7. Jones & Co. recently went public. 5he fir" received )%6.46 a share on the entire
offer of %50666 shares. Beeser & Co. served as the underwriter and sold %'0366 shares to the
public at an offer price of )%% a share. What type of underwriting was this?
. best efforts
!. shelf
C. over subscribed
#. private place"ent
$. fir" co""it"ent

15. !lue &tone !uilders recently offered to sell *50666 newly issued shares of stoc1 to the
public. 5he underwriters charged a fee of 4 percent and paid !lue &tone !uilders )1/.*6 a
share on *60666 shares. Which one of the following ter"s best describes this underwriting?
. best efforts
!. shelf
C. direct rights
$. fir" co""it"ent

15-*
1/. 5he *6-day period following an ?@A during which the &$C places restrictions on the
public co""unications of the issuer is 1nown as the CCCCC period.
. silent
!. .uiet
C. loc1up
#. green
$. red

13. #enver 7i.uid Wholesalers recently offered 560666 new shares of stoc1 for sale. 5he
underwriters sold a total of 5'0666 shares to the public. 5he additional '0666 shares were
purchased in accordance with which one of the following?
. +reen shoe provision
!. Red herring provision
C. .uiet provision
#. loc1up agree"ent
$. post-issue agree"ent

14. &hares of @7& Dnited have been selling with rights attached. 5o"orrow0 the stoc1 will sell
independent of these rights. Which one of the following ter"s applies to to"orrow in relation
to this stoc1?
. pre-issue date
!. after"ar1et date
C. declaration date
#. holder-of-record date
$. e;-rights date

1:. 5he date on which a shareholder is officially listed as the recipient of stoc1 rights is called
the2
. issue date.
!. offer date
C. declaration date
#. holder-of-record date.
$. e;-rights date.

15-5
%6. rights offering in which an underwriting syndicate agrees to purchase the unsubscribed
portion of an issue is called a CCCCC underwriting.
. standby
!. best efforts
C. fir" co""it"ent
#. direct fee
$. to"bstone

%1. 5he a"ount paid to an underwriter who participates in a standby underwriting agree"ent
is called a=n>2
. gross spread.
!. optional spread.
C. standby fee.
#. additional fee.
$. oversubscription fee.

%%. Eran1lin (inerals recently had a rights offering of 10666 shares at an offer price of )16 a
share. ?sabelle is a shareholder who e;ercised her rights option by buying all of the rights to
which she was entitled based on the nu"ber of shares she owns. Currently0 there are si;
shareholders who have opted not to participate in the rights offering. ?sabelle would li1e to
purchase the unsubscribed shares. Which one of the following will allow her to do so?
. standby provision
!. oversubscription privilege
C. open offer privilege
#. new issues provision
$. overallot"ent provision

%'. Roy owns %66 shares of R.5.E.0 ?nc. 8e has opted not to participate in the current rights
offering by this fir". s a result0 Roy will "ost li1ely be sub9ect to2
. an oversubscription cost.
!. underpricing.
C. dilution.
#. the +reen &hoe provision.
$. a loc1ed in period.

15-/
%*. #irect business loans typically ranging fro" one to five years are called2
. private place"ents.
!. debt &$As.
C. notes payable.
#. debt ?@As.
$. ter" loans.

%5. group of five private investors recently loaned )/ "illion to 8enderson 8ardware for
ten years at : percent interest. 5his loan is best described as a2
. private place"ent.
!. debt &$A.
C. notes payable.
#. debt ?@A.
$. ter" loan.

%/. @earson $lectric recently registered %560666 shares of stoc1 under &$C Rule *15. 5he
fir" plans to sell 1560666 shares this year and the re"aining 1660666 shares ne;t year. What
type of registration was this?
. standby registration
!. shelf registration
C. Regulation registration
#. Regulation , registration
$. private place"ent registration

%3. &u-ie is a che"ist who has been e;peri"enting with fragrances in her ho"e laboratory
and feels that she now has three viable perfu"es that could be successfully "ar1eted. &he
1nows a venture capitalist who has offered to finance her business to the point where she
would be ready to begin the "anufacturing and "ar1eting stage. Which type of financing is
&u-ie being offered?
. syndicate
!. introduction
C. second-stage
#. "e--anine-level
$. seed "oney

15-3
%4. Which one of the following is probably the "ost successful "eans of finding venture
capital?
. internet searches
!. #utch auctions
C. newspaper advertise"ents
#. personal contacts
$. personal letters to venture capital fir"s

%:. Which one of the following state"ents concerning venture capital financing is correct?
. Fenture capitalists desire shares of co""on stoc1 but avoid preferred stoc1.
!. Fenture capital is relatively easy to obtain.
C. Fenture capitalists rarely assu"e active roles in the "anage"ent of the financed fir".
#. Fenture capitalists often re.uire at least a forty percent e.uity position as a condition of
financing.
$. Fenture capital is relatively ine;pensive in today<s co"petitive "ar1ets.

'6. Which one of the following state"ents concerning venture capitalists is correct?
. Fenture capitalists assu"e "anage"ent responsibility for the fir"s they finance.
!. $;it strategy is a 1ey consideration when selecting a venture capitalist.
C. Fenture capitalists li"it their services to providing "oney to start-up fir"s.
#. (ost venture capitalists are long-ter" investors in a fir".
$. venture capitalist nor"ally invests in a new idea and finances that idea until the newly-
for"ed fir" can issue an ?@A.

'1. Which of the following should be considered when selecting a venture capitalist?
?. level of involve"ent
??. past e;periences
???. ter"ination of funding
?F. financial strength
. ? and ??? only
!. ?? and ?F only
C. ?0 ???0 and ?F only
#. ?0 ??0 and ?F only
$. ?0 ??0 ???0 and ?F

15-4
'%. 5revor is the C$A of 8arvest Eoods0 which is a privately-held corporation. What is the
first step he "ust ta1e if he wishes to ta1e 8arvest Eoods public?
. select an underwriter
!. obtain &$C approval
C. gain board approval
#. prepare a registration state"ent
$. distribute a prospectus

''. ll new interstate security issues are regulated by the2
. registration state"ent.
!. +reen &hoe provision.
C. &ecurities $;change ct of 1:'*.
#. &ecurities ct of 1:''.
$. Eederal Reserve ct of 1:'1.

'*. 5he &ecurities and $;change Co""ission2
. verifies the accuracy of the infor"ation contained in the prospectus.
!. verifies the accuracy of the infor"ation contained in the red herring.
C. e;a"ines the registration state"ent during the +reen &hoe period.
#. is concerned only that an issue co"plies with all rules and regulations.
$. deter"ines the final offer price once they have approved the registration state"ent.

'5. Dnderwriters generally2
. pay a spread to the issuing fir".
!. provide only best efforts underwriting in the D.&.
C. receive less co"pensation under a co"petitive agree"ent than under a negotiated
agree"ent.
#. "ar1et and distribute an entire issue of new securities within their own fir".
$. pass the ris1 of unsold shares bac1 to the issuing fir" via a fir" co""it"ent agree"ent.

15-:
'/. With fir" co""it"ent underwriting0 the issuing fir"2
. is unsure of the total a"ount of funds it will receive until after the offering is co"pleted.
!. is unsure of the nu"ber of shares it will actually issue until after the offering is co"pleted.
C. 1nows e;actly how "any shares will be purchased by the general public during the offer
period.
#. retains the financial ris1 associated with unsold shares.
$. 1nows up-front the a"ount of "oney it will receive fro" the stoc1 offering.

'3. With #utch auction underwriting2
. each winning bidder pays the price he or she bid.
!. all successful bidders pay the sa"e price.
C. all bidders receive at least a portion of the .uantity for which they bid.
#. the selling fir" receives the "a;i"u" possible price for each security sold.
$. the bidder for the largest .uantity receives the first allocation of securities.

'4. ?f an ?@A is underpriced then the2
. investors in the ?@A are generally unhappy with the underwriters.
!. issue is less li1ely to sell out.
C. stoc1 price will generally decline on the first day of trading.
#. issuing fir" is guaranteed to be successful in the long ter".
$. issuing fir" receives less "oney than it probably should have.

':. Which of the following have been offered as supporting argu"ents in favor of ?@A
underpricing?
?. Dnderpricing counteracts the Gwinner<s curseG.
??. Dnderpricing rewards institutional investors for sharing their opinions of a stoc1<s "ar1et
value.
???. Dnderpricing di"inishes the underwriting ris1 of a fir" co""it"ent underwriting.
?F. Dnderpricing reduces the probability that investors will sue the underwriters.
. ? and ??? only
!. ?? and ?F only
C. ? and ?? only
#. ?0 ??0 and ??? only
$. ?0 ??0 ???0 and ?F

15-16
*6. Which one of the following is a 1ey goal of the after"ar1et period?
. collection of largest nu"ber of #utch auction bids as possible
!. best deter"ination of a fair offer price for an upco"ing ?@A
C. price support for a new issue of securities
#. establish"ent of a broad-based underwriting syndicate for an upco"ing ?@A
$. widest distribution of red herrings as possible

*1. Which one of the following state"ents is correct?
. 5he .uiet period co""ences when a registration state"ent is filed with the &$C and ends
on the day the ?@A shares co""ence trading.
!. 7oc1up agree"ents outline how oversubscribed ?@A shares will be allocated.
C. dditional ?@A shares can be issued in accordance with the loc1up agree"ent.
#. ,uiet period restrictions only apply to the issuer of new securities.
$. 5F interview with a fir"<s CEA could cause a forced delay in the fir"<s ?@A.

*%. n individual investor with a s"all portfolio who wishes to purchase 166 shares of each
?@A is "ore li1ely to receive an allocation of shares when2
. an ?@A is substantially oversubscribed than when it is not.
!. the 1nowledgeable investors feel the issue is underpriced.
C. an ?@A is severely underpriced.
#. an ?@A is undersubscribed.
$. he or she has a standing order with the underwriter to purchase shares in every ?@A handled
by that underwriter.

*'. When a fir" announces an upco"ing seasoned stoc1 offering0 the "ar1et price of the
fir"<s e;isting shares tends to2
. increase.
!. decrease.
C. re"ain constant.
#. respond but the direction of the response is not predictable as shown by past studies.
$. decrease "o"entarily and then i""ediately increase substantially within an hour
following the announce"ent.

15-11
**. 5he total direct costs of underwriting an e.uity ?@A2
. tends to increase on a percentage basis as the proceeds of the ?@A increase.
!. is generally between 3 and 4 percent0 regardless of the issue si-e.
C. can be as high as %5 percent for s"all issues.
#. e;cludes the gross spread.
$. e;cludes both the gross spread and the underpricing cost.

*5. Which one of the following state"ents is correct concerning the costs of issuing
securities?
. #o"estic bonds are generally "ore e;pensive to issue than e.uity ?@As.
!. bnor"al returns are rarely associated with seasoned issues.
C. seasoned offering is typically "ore e;pensive on a percentage basis than an ?@A.
#. 5here tends to be substantial econo"ies of scale when issuing securities.
$. 5he costs of issuing convertible bonds tend to be less on a percentage basis than the costs
of issuing straight debt.

*/. $;isting shareholders2
. "ay or "ay not have a pree"ptive right to newly issued shares.
!. "ust purchase new shares whenever rights are issued.
C. are prohibited fro" selling their rights.
#. are generally well advised to let the rights they receive e;pire.
$. can "aintain their proportional ownership positions without e;ercising their rights.

*3. 5o purchase shares in a rights offering0 a shareholder generally 9ust needs to2
. pay the subscription a"ount in cash.
!. sub"it the re.uired for" along with the re.uired nu"ber of rights.
C. pay the difference between the "ar1et price of the stoc1 and the subscription price.
#. sub"it the re.uired nu"ber of rights along with a pay"ent for the underwriting fee.
$. sub"it the re.uired nu"ber of rights along with the subscription price.

15-1%
*4. 5he value of a right depends upon2
?. the nu"ber of rights re.uired to purchase one new share.
??. the "ar1et price of the security.
???. the subscription price.
?F. the price-earnings ratio of the stoc1.
. ?? and ??? only
!. ?? and ?F only
C. ? and ?? only
#. ?0 ??0 and ??? only
$. ?0 ??0 ???0 and ?F

*:. !efore a seasoned stoc1 offering0 you owned 30566 shares of a fir" that had 5660666
shares outstanding. fter the seasoned offering0 you still owned 30566 shares but the nu"ber
of shares outstanding rose to /%50666. Which one of the following ter"s best describes this
situation?
. overallot"ent
!. percentage ownership dilution
C. +reen &hoe
#. Red herring
$. abnor"al event

56. Which one of the following state"ents concerning dilution is correct?
. #ilution of percentage ownership occurs whenever an investor participates in a rights offer.
!. (ar1et value dilution increases as the net present value of a pro9ect increases.
C. (ar1et value dilution occurs when the net present value of a pro9ect is negative.
#. Heither boo1 value dilution nor "ar1et value dilution has any direct bearing on individual
shareholders.
$. !oo1 value dilution is the cause of "ar1et value dilution.

15-1'
51. Which one of the following state"ents is correct concerning the issuance of long-ter"
debt?
. direct long-ter" loan has to be registered with the &$C.
!. #irect place"ent debt tends to have "ore restrictive covenants than publicly issued debt.
C. #istribution costs are lower for public debt than for private debt.
#. ?t is easier to renegotiate public debt than private debt.
$. Wealthy individuals tend to do"inate the private debt "ar1et.

5%. &helf registration allows a fir" to register "ultiple issues at one ti"e with the &$C and
then sell those registered shares anyti"e during the subse.uent2
. ' "onths.
!. / "onths.
C. 146 days.
#. % years.
$. 5 years.

5'. aron<s &ailboats has decided to ta1e the co"pany public by offering a total of 1%60666
shares of co""on stoc1 to the public. 5he fir" has hired an underwriter who arranges a full
co""it"ent underwriting and suggests an initial selling price of )%4 a share with an 4.5
percent spread. s it turns out0 the underwriters only sell :30*66 shares. 8ow "uch cash will
aron<s &ailboats receive fro" its first public offering?
. )%03%30%66
!. )%0*:50'44
C. )'063*0*66
#. )'0'/60666
$. )'0/*50/66

15-1*
5*. Helson @aints recently went public by offering /50666 shares of co""on stoc1 to the
public. 5he underwriters provided their services in a best efforts underwriting. 5he offering
price was set at )1/ a share and the gross spread was )%. fter co"pleting their sales efforts0
the underwriters deter"ined that they sold a total of 530566 shares. 8ow "uch cash did
Helson @aints receive fro" its ?@A?
. )4650666
!. ):160666
C. ):%60666
#. )106'50666
$. )106*60666

55. (iller (otors has decided to sell 10/66 shares of stoc1 through a #utch auction. 5he bids
received are as follows2

8ow "uch will (iller (otors receive in total fro" selling the 10/66 shares? ?gnore all
transaction and flotation costs.
. )'60*66
!. )''0*66
C. )''0/66
#. )'50*66
$. )'40/66

15-15
5/. !a1ers< 5own !read is selling 10%66 shares of stoc1 through a #utch auction. 5he bids

8ow "uch cash will !a1ers< 5own !read receive fro" selling these shares of stoc1? ?gnore
all transaction and flotation costs.
. )160466
!. )1%0666
C. )1'0*66
#. )1*0*66
$. )1/0466

53. Webster $lectrics is offering 10566 shares of stoc1 in a #utch auction. 5he bids include2

8ow "uch cash will Webster $lectrics receive fro" selling these shares? ?gnore all
. )%40566
!. )'60666
C. )'10566
#. )''0666
$. )'*0566

15-1/
54. Iou are a bro1er and have been instructed to place an order for a client to purchase 566
shares of every ?@A that co"es to "ar1et. 5he ne;t two ?@As are each priced at )%5 a share
and will begin trading on the sa"e day. 5he client is allocated 566 shares of ?@A and 166
shares of ?@A !. t the end of the first day of trading0 ?@A was selling for )%'.56 a share
and ?@A ! was selling for )%: a share. What is the client<s total profit or loss on these two
?@As as of the end of the first day of trading?
. -)*%5
!. -)'56
C. )5%5
#. ):35
$. )10156

5:. Richard has an outstanding order with his stoc1 bro1er to purchase 10666 shares of every
?@A. 5he ne;t three ?@As are each priced at )'6 a share and will all start trading on the sa"e
day. Richard is allocated 10666 shares of ?@A 0 *66 shares of ?@A !0 and 166 shares of ?@A
C. An the first day of trading ?@A opened at )'1.56 a share and ended the day at )%/ a
share. ?@A ! opened at )'1 a share and finished the day at )'% a share. ?@A C opened at
)'/.56 a share and ended the day at )*6.%5 a share. What is Richard<s total profit or loss on
these three ?@As as of the end of the first day of trading?
. -)%0135
!. -)10456
C. -)10566
#. )%0%56
$. )'0566

/6. 5wo ?@As will co""ence trading ne;t wee1. &cott places an order to buy '66 shares of
?@A . &teve places an order to purchase '66 shares of ?@A and '66 shares of ?@A !. !oth
?@As are priced at )%6 a share. &cott is allocated 166 shares of ?@A . &teve is allocated 166
shares of ?@A and '66 shares of ?@A !. t the end of the first day of trading0 ?@A is
selling for )%%.36 a share and ?@A ! is selling for )14./6 a share. What is the difference in the
total profits or losses that &cott and &teve have as of the end of the first day of trading?
. )1%6
!. )%*6
C. )'/6
#. )*%6
$. )546

15-13
/1. Wear $ver is e;panding and needs )1%./ "illion to help fund this growth. 5he fir"
esti"ates it can sell new shares of stoc1 for )'%.56 a share. ?t also esti"ates it will cost an
additional )'*60666 for filing and legal fees related to the stoc1 issue. 5he underwriters have
agreed to a 3.5 percent spread. 8ow "any shares of stoc1 "ust Wear $ver sell if it is going to
have )1%./ "illion available for its e;pansion needs?
. '360'3/ shares
!. *1:01%3 shares
C. *'60*'3 shares
#. *5*0%6: shares
$. */1046/ shares

/%. (ountain 5eas wants to raise )11./ "illion to open a new production center. 5he co"pany
esti"ates the issue costs including the legal and accounting fees will be )**60666. 5he
underwriters have set the stoc1 price at )13.56 a share and the underwriting spread at :
percent. 8ow "any shares of stoc1 does (ountain 5eas have to sell to "eet its cash need?
. 3%40*1* shares
!. 35/06** shares
C. 3/:0'15 shares
#. 33%0%66 shares
$. 3410:6: shares

/'. Autdoor 7iving needs )3.5 "illion to finance "odifications to its production e.uip"ent
because the design of its all-season tents has changed dra"atically. 5he underwriters esti"ate
that the fir" could sell additional shares of stoc1 at )1*.56 a share with a 3.5 percent
underwriting spread. 5his would be a fir" co""it"ent underwriting. 5he esti"ated issue
costs are )1%10666. 8ow "any shares of stoc1 will Autdoor 7iving need to sell to finance this
pro9ect?
. 5/40%61 shares
!. *440:13 shares
C. *5%0'11 shares
#. 55:0146 shares
$. 5/%0*66 shares

15-14
/*. 8igh (ountain (ining wants to e;pand its current operations and re.uires )'.5 "illion in
additional funding to do so. fter discussing this with 1ey shareholders0 the fir" has decided
to raise the necessary funds through a rights offering at a subscription price of )14 a share.
5he current "ar1et price of the fir"<s stoc1 is )%% a share. 8ow "any shares of stoc1 will the
fir" need to sell through the rights offering to fund the e;pansion plans?
. 1*60615 shares
!. 15:06:1 shares
C. 1//0//3 shares
#. 1:*0*** shares
$. %650/44 shares

/5. Horthwest Rail wants to raise )1*.% "illion through a rights offering so it can purchase
additional rail cars and upgrade its "aintenance facilities. 8ow "any shares of stoc1 will the
fir" need to sell through this offering if the current "ar1et price is )'* a share and the
subscription price is )%4 a share?
. *130/*3 shares
!. *'3045/ shares
C. *5406/5 shares
#. *4%0/6* shares
$. 56301*' shares

//. .B. &tevenson wants to raise )3.5 "illion through a rights offering. 5he subscription
price is set at )%*. Currently0 the co"pany has %.1 "illion shares outstanding with a current
"ar1et price of )%5 a share. $ach shareholder will receive one right for each share of stoc1
they currently own. 8ow "any rights will be needed to purchase one new share of stoc1 in
this offering?
. /.*6 rights
!. /./3 rights
C. /.3% rights
#. /.43 rights
$. 3.66 rights

15-1:
/3. 5he (otor @lant wants to raise )%1.* "illion through a rights offering so it can "oderni-e
its facilities. 5he subscription price for the offering is set at )1% a share. Currently0 the
co"pany has %./ "illion shares of stoc1 outstanding at a "ar1et price of )1%.56 a share. $ach
shareholder will receive one right for each share of stoc1 they own. 8ow "any rights will a
shareholder need to purchase one new share of stoc1 in this offering?
. 1.*/ rights
!. 1.5% rights
C. 1.55 rights
#. 1./6 rights
$. 1./3 rights

/4. (iller Eruit wants to e;pand its citrus grove operations. 5he fir" esti"ates that it needs
)4./ "illion to buy land and establish its operations. Currently0 the fir" has 5*60666 shares of
stoc1 outstanding at a "ar1et price per share of )'*.46. ?f the fir" decides to raise the needed
capital through a rights offering0 one right will be issued for each share of stoc1. 5he
subscription price will be set at )'' a share. 8ow "any rights will a shareholder need to
purchase one new share of stoc1 in this offering?
. %.63 rights
!. %.13 rights
C. %.%% rights
#. %.56 rights
$. %./3 rights

/:. Jefferson Refining is issuing a rights offering wherein every shareholder will receive one
right for each share of stoc1 they own. 5he new shares in this offering are priced at )%1 plus '
rights. 5he current "ar1et price of the stoc1 is )%' a share. What is the value of one right?
. )6.%5
!. )6.56
C. )1.66
#. )1.56
$. )%.66

15-%6
36. 5he stoc1 of Cleaner 8o"e @roducts is currently selling for )%/.*6 a share. 5he co"pany
has decided to raise funds through a rights offering wherein every shareholder will receive
one right for each share of stoc1 they own. 5he new shares being offered are priced at )%5
plus five rights. What is the value of one right?
. )6.1/
!. )6.%'
C. )6.%5
#. )6.*3
$. )6.56

31. !arstow ?ndustrial &upply has decided to raise )%3.5% "illion in additional funding via a
rights offering. 5he fir" will issue one right for each share of stoc1 outstanding. 5he offering
consists of a total of 4/60666 new shares. 5he current "ar1et price of the stoc1 is )'5.
Currently0 there are 5.1/ "illion shares outstanding. What is the value of one right?
. )6.'3
!. )6.*'
C. )6.*4
#. )6.5%
$. )6./6

3%. Iou currently own 4 percent of the '.5 "illion outstanding shares of Webster (ills. 5he
co"pany has 9ust announced a rights offering with a subscription price of )%4. Ane right will
be issued for each share of outstanding stoc1. 5his offering will provided ): "illion of new
financing for the fir"0 ignoring all issue costs. ssu"e that all rights are e;ercised. What will
be your new ownership position if you opted to sell your rights rather than e;ercise the"
personally?
. 3.'' percent
!. 3.*/ percent
C. 3.43 percent
#. 4.66 percent
$. 4.%1 percent

15-%1
3'. Jennifer owns 1%0666 shares of Calico Clothing. Currently0 there are 1./ "illion shares of
stoc1 outstanding. 5he co"pany has 9ust announced a rights offering whereby %660666 shares
are being offered for sale at a subscription price of )1* a share. 5he current stoc1 price is )1/
a share. ssu"e that Jennifer sells her rights and that all rights are e;ercised. What percentage
of the fir" will Jennifer own after the rights offering?
. 6./3 percent
!. 6.35 percent
C. 6.4/ percent
#. 6.:' percent
$. 1.61 percent

3*. Dnderwater $;peri"ental is considering a pro9ect which re.uires the purchase of
)*:40666 of fi;ed assets. 5he net present value of the pro9ect is )%%0566. $.uity shares will be
issued as the sole "eans of financing the pro9ect. What will the new boo1 value per share be
after the pro9ect is i"ple"ented given the following current infor"ation on the fir"?

. )1'.%5
!. )1'.36
C. )1*.%'
#. )1*.:*
$. )15./6

15-%%
35. !irds and (ore is considering a pro9ect which re.uires the purchase of )1/*0666 of fi;ed
assets. 5he net present value of the pro9ect is )*0566. $.uity shares will be issued as the sole
"eans of financing this pro9ect. 5he price-earnings ratio of the pro9ect e.uals that of the
e;isting fir". What will the new "ar1et value per share be after the pro9ect is i"ple"ented
given the following current infor"ation on the fir"?

. )%6./4
!. )%6.3%
C. )%6.46
#. )%6.:5
$. )%1.16

3/. Wagner 5ruc1ing is considering investing in a new pro9ect that will cost )1' "illion and
increase net inco"e by /.5 percent. 5his pro9ect will be co"pletely funded by issuing new
e.uity shares. Currently0 the fir" has 1.%5 "illion shares of stoc1 outstanding with a "ar1et
price of )*% per share. 5he current earnings per share are )1.4%. What will the earnings per
share be if the pro9ect is i"ple"ented?
. )1.':
!. )1.*5
C. )1.55
#. )1./%
$. )1./:

33. Iou own 15 percent or 1'0566 shares of @rinters0 $tc. 5hese shares have a total "ar1et
value of )*%/0/66. !y what percentage will the total value of your invest"ent in this fir"
change if the co"pany sells an additional 160666 shares of stoc1 at )'6 a share and you do not
buy any?
. -1.'3 percent
!. -1.%1 percent
C. -6.51 percent
#. 1.6' percent
$. 1.%: percent

15-%'
34. Burt currently owns '.* percent of Hortheastern 5ransportation. 5he co"pany has a total
of *'40666 shares outstanding with a current "ar1et price of )%/.%6 a share. t present0 the
fir" is offering an additional %50666 shares at a price of )%5 a share. Burt decides not to
participate in this offering. What will his ownership position be after the offering is
co"pleted?
. '.6/ percent
!. '.%% percent
C. '.%3 percent
#. '.*6 percent
$. '.51 percent

Essay Questions

3:. ?t can be argued that the decision to accept venture capital is one of the "ost critical
decisions an entrepreneur "ust "a1e. $;plain why.

46. $;plain both a rights offering and the basic characteristics of a right.

41. $;plain why there is a tendency for ?@As to be underpriced.

15-%*
4%. Eir"s encounter several costs when issuing new securities. ?dentify and describe at least
four of these costs.

4'. &teve is the founder of Jefferson & Westover. Recently0 the fir" decided to issue an ?@A
with &teve retaining '6 percent ownership of the fir". 5he ?@A agree"ent contained both a
+reen &hoe provision and a /-"onth loc1up agree"ent. &teve<s cost basis per share is )15.
5he offering price for the ?@A was )1/. An the first day of trading0 the "ar1et price per share
rose to )%4.%6 and closed for the day at )%5./6. How0 si; "onths after the ?@A release0 the
stoc1 is valued at )15.*6 a share. $;plain who benefited the "ost during the loc1up period0 an
outside investor or &teve0 and why.


4*. 5he 5i"1en Co"pany has announced a rights offer to raise )%5 "illion for a new 9ournal0
the Journal of Financial Excess. 5his 9ournal will review potential articles after the author
pays a nonrefundable reviewing fee of )%0566 per page. 5he stoc1 currently sells for )*4 per
share0 and there are %./ "illion shares outstanding. 5he subscription price is set at )*' per
share. What is the e;-rights price per share?
. )*5.54
!. )*3.6:
C. )*4.15
#. )*4.46
$. )*:.*%

15-%5
45. 5he War" &hoe Co. has concluded that additional e.uity financing will be needed to
e;pand operations and that the needed funds will be best obtained through a rights offering. ?t
has correctly deter"ined that as a result of the rights offering0 the share price will fall fro"
)166 to ):5 =)166 is the rights-on-priceJ ):5 is the e;-rights price0 also 1nown as the when-
issued price>. 5he co"pany is see1ing )14 "illion in additional funds with a per-share
subscription price of )56. 8ow "any shares of stoc1 are outstanding0 before the offering?
=ssu"e that the incre"ent to the "ar1et value of the e.uity e.uals the gross proceeds of the
offering.>
. '%*0666
!. '/60666
C. 104660666
#. '0%*60666
$. '0/660666

4/. 5he Woods Co. and the (ic1elson Co. have both announced ?@As at )*' per share. Ane
of these is undervalued by )%60 and the over is overvalued by )1*0 but you have no way of
1nowing which is which. Iou plan on buying 10666 shares of each issue. ?f an issue is
underpriced0 it will be rationed0 and only half your order will be filled. What is the a"ount of
the difference between your e;pected profit and the a"ount of profit you could earn if you
could get 10666 shares of Woods and 10666 shares of (ic1elson?
. -)160666
!. -)/0666
C. -)*0666
#. )*0666
$. )/0666

43. Elagler0 ?nc. needs to raise )'6 "illion to finance its e;pansion into new "ar1ets. 5he
co"pany will sell new shares of e.uity via a general cash offering to raise the needed funds.
5he offer price is )'6 per share and the co"pany<s underwriters charge a 16 percent spread.
8ow "any shares need to be sold?
. 101110111 shares
!. 10%560666 shares
C. 10///0//3 shares
#. %05660666 shares
$. '0'''0''' shares

15-%/
44. 5he $ducated 8orses Corporation needs to raise )%6 "illion to finance its e;pansion into
new "ar1ets. 5he co"pany will sell new shares of e.uity via a general cash offering to raise
the needed funds. &uppose the offer price is )*6 per share and the co"pany<s underwriters
charge an 4 percent spread. 5he &$C filing fee and associated ad"inistrative e;penses of the
offering are )//60666. 8ow "any shares need to be sold?
. **40:63
!. */10%%%
C. 5110111
#. 5%:0:'3
$. 5/10*1'

4:. 5he 8uff Co. has 9ust gone public. Dnder a fir" co""it"ent agree"ent0 8uff received
)%1.56 for each of the / "illion shares sold. 5he initial offering price was )%'./5 per share0
and the stoc1 rose to )'6.51 per share in the first few "inutes of trading. 8uff paid
)10%/60666 in direct legal and other costs0 and )':60666 in indirect costs. 5he flotation costs
were what percentage of the funds raised?
. '4.5/ percent
!. *6.'% percent
C. *1./4 percent
#. *'.35 percent
$. **.6: percent

:6. (ountain 8o"es wishes to e;pand its facilities. 5he co"pany currently has 3 "illion
shares outstanding and no debt. 5he stoc1 sells for )55 per share0 but the boo1 value per share
is )*'. 5he fir"<s net inco"e is currently ):.1 "illion. 5he new facility will cost )'6 "illion0
and it will increase net inco"e by )'6:0666. ssu"e the fir" issues new e.uity to fund this
e;pansion while "aintaining a constant price-earnings ratio. What will be the $@& be after the
new e.uity issue?
. )1.%5
!. )1.'6
C. )1.'5
#. )1.*6
$. )1.*5

15-%3
:1. 5he (etallica 8eavy (etal (ining =(8((> Corporation wants to diversify its
operations. &o"e recent financial infor"ation for the co"pany is shown here2

(8(( is considering an invest"ent that has the sa"e @K$ ratio as the fir". 5he cost of the
invest"ent is )3:40%360 and it will be financed with a new e.uity issue. What would the RA$
on the invest"ent have to be if we wanted the price after the offering to be )116 per share?
ssu"e the @$ ratio re"ains constant.
. 14.%4 percent
!. %1.*1 percent
C. %3./' percent
#. '3.%3 percent
$. *6.6' percent

:%. @recise (achining is considering a rights offer. 5he co"pany has deter"ined that the e;-
rights price would be )*/. 5he current price is )5' per share0 and there are 3 "illion shares
outstanding. 5he rights offer would raise a total of )36 "illion. What is the subscription
price?
. )%/.*4
!. )%3.6/
C. )%3.56
#. )%4.14
$. )%:.16

15-%4
:'. tlas Corp. wants to raise )* "illion via a rights offering. 5he co"pany currently has
*560666 shares of co""on stoc1 outstanding that sell for )*6 per share. ?ts underwriter has
set a subscription price of )%/ per share and will charge the co"pany a 3 percent spread.
ssu"e that you currently own 30%66 shares of stoc1 in the co"pany and decide not to
participate in the rights offering. 8ow "uch can you get for selling all of your rights?
. )%*0:11.%1
!. )%50'/%.4*
C. )%503:%.1:
#. )%/0*1*.1*
$. )%306:*.:5

15-%:
Chapter 15 Raising Capital nswer Bey


1. Jones & Co. is funded by a group of individual investors for the sole purpose of providing
funding for individuals who are trying to convert their new ideas into viable products. What is
this type of funding called?
. green shoe funding
!. to"bstone underwriting
C. venture capital
#. red herring funding
$. life cycle capital
Refer to section 15.1

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%. What is the for" called that is filed with the &$C and discloses the "aterial infor"ation on
a securities issuer when that issuer offers new securities to the general public?
. prospectus
!. red herring
C. indenture
#. public disclosure state"ent
E. registration state"ent
Refer to section 15.%

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15-'6
'. (iller & Chase is offering )* "illion of new securities to the general public. Which &$C
regulation governs this offering?
A. Regulation
!. Regulation C
C. Regulation +
#. Regulation ,
$. Regulation R

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*. What is a prospectus?
. a letter issued by the &$C authori-ing a new issue of securities
!. a report stating that the &$C reco""ends a new security to investors
C. a letter issued by the &$C that outlines the changes re.uired for a registration state"ent to
be approved
D. a docu"ent that describes the details of a proposed security offering along with relevant
infor"ation about the issuer
$. an advertise"ent in a financial newspaper that describes a security offering

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15-'1
5. Which one of the following is a preli"inary prospectus?
. to"bstone
!. green shoe
C. registration state"ent
#. rights offer
E. red herring

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/. dvertise"ents in a financial newspaper announcing a public offering of securities0 along
with a list of the invest"ent ban1s handling the offering0 are called2
. red herrings.
B. to"bstones.
C. +reen &hoes.
#. registration state"ents.
$. cash offers.

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15-'%
3. What is an issue of securities that is offered for sale to the general public on a direct cash
basis called?
. best efforts underwriting
!. fir" co""it"ent underwriting
#. rights offer
$. herring offer
Refer to section 15.'

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4. 5ony currently owns 1%0666 shares of +7 5ools. 8e has 9ust been notified that the fir" is
issuing additional shares of stoc1 and that he is being given a chance to purchase so"e of
these shares prior to the shares being offered to the general public. What is this type of an
offer called?
. best efforts offer
!. fir" co""it"ent offer
D. rights offer
$. priority offer

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15-''
:. &oup +alore is a partnership that was for"ed three years ago for the purpose of creating0
producing0 and distributing healthy soups in a dried for". 5he fir" has been e;tre"ely
successful thus far and has decided to incorporate and offer shares of stoc1 to the general
public. What is this type of an e.uity offering called?
. venture capital offering
!. shelf offering
C. private place"ent
#. seasoned e.uity offering
E. initial public offering

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16. What is a seasoned e.uity offering?
. an offering of shares by shareholders for repurchase by the issuer
!. shares of stoc1 that have been reco""ended for purchase by the &$C
C. e.uity securities held by a fir"<s founder that are being offered for sale to the general
public
D. sale of newly issued e.uity shares by a fir" that is currently publicly owned
$. a set nu"ber of e.uity shares that are issued and offered to the public annually

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15-'*
11. $;ecutive 5ours has decided to ta1e its fir" public and has hired an invest"ent fir" to
handle this offering. 5he invest"ent fir" is serving as a=n>2
. after"ar1et specialist.
!. venture capitalist.
C. underwriter.
#. seasoned writer.
$. pri"ary investor.
Refer to section 15.*

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1%. What is the definition of a syndicate?
. a venture capitalist
!. a group of attorneys providing services for an ?@A
C. bloc1 of investors who control a fir"
#. a ban1 that loans funds to finance the start-up of a new fir"
E. a group of underwriters sharing the ris1 of selling a new issue of securities

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15-'5
1'. 5he difference between the underwriters< cost of buying shares in a fir" co""it"ent and
the offering price of those securities to the public is called the2
A. gross spread.
!. under price a"ount
C. filing fee.
#. new issue pre"iu".
$. offer price.

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1*. #.7. Jones & Co. recently went public. 5he fir" received )%6.46 a share on the entire
offer of %50666 shares. Beeser & Co. served as the underwriter and sold %'0366 shares to the
public at an offer price of )%% a share. What type of underwriting was this?
. best efforts
!. shelf
C. over subscribed
E. fir" co""it"ent

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15-'/
15. !lue &tone !uilders recently offered to sell *50666 newly issued shares of stoc1 to the
public. 5he underwriters charged a fee of 4 percent and paid !lue &tone !uilders )1/.*6 a
share on *60666 shares. Which one of the following ter"s best describes this underwriting?
A. best efforts
!. shelf
C. direct rights
$. fir" co""it"ent

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1/. 5he *6-day period following an ?@A during which the &$C places restrictions on the
public co""unications of the issuer is 1nown as the CCCCC period.
. silent
B. .uiet
C. loc1up
#. green
$. red

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15-'3
13. #enver 7i.uid Wholesalers recently offered 560666 new shares of stoc1 for sale. 5he
underwriters sold a total of 5'0666 shares to the public. 5he additional '0666 shares were
purchased in accordance with which one of the following?
A. +reen shoe provision
!. Red herring provision
C. .uiet provision
#. loc1up agree"ent
$. post-issue agree"ent

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14. &hares of @7& Dnited have been selling with rights attached. 5o"orrow0 the stoc1 will sell
independent of these rights. Which one of the following ter"s applies to to"orrow in relation
to this stoc1?
. pre-issue date
!. after"ar1et date
C. declaration date
#. holder-of-record date
E. e;-rights date

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15-'4
1:. 5he date on which a shareholder is officially listed as the recipient of stoc1 rights is called
the2
. issue date.
!. offer date
C. declaration date
D. holder-of-record date.
$. e;-rights date.

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%6. rights offering in which an underwriting syndicate agrees to purchase the unsubscribed
portion of an issue is called a CCCCC underwriting.
A. standby
!. best efforts
C. fir" co""it"ent
#. direct fee
$. to"bstone

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15-':
%1. 5he a"ount paid to an underwriter who participates in a standby underwriting agree"ent
is called a=n>2
. gross spread.
!. optional spread.
C. standby fee.
#. additional fee.
$. oversubscription fee.

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%%. Eran1lin (inerals recently had a rights offering of 10666 shares at an offer price of )16 a
share. ?sabelle is a shareholder who e;ercised her rights option by buying all of the rights to
which she was entitled based on the nu"ber of shares she owns. Currently0 there are si;
shareholders who have opted not to participate in the rights offering. ?sabelle would li1e to
purchase the unsubscribed shares. Which one of the following will allow her to do so?
. standby provision
B. oversubscription privilege
C. open offer privilege
#. new issues provision
$. overallot"ent provision

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15-*6
%'. Roy owns %66 shares of R.5.E.0 ?nc. 8e has opted not to participate in the current rights
offering by this fir". s a result0 Roy will "ost li1ely be sub9ect to2
. an oversubscription cost.
!. underpricing.
C. dilution.
#. the +reen &hoe provision.
$. a loc1ed in period.
Refer to section 15.:

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%*. #irect business loans typically ranging fro" one to five years are called2
. private place"ents.
!. debt &$As.
C. notes payable.
#. debt ?@As.
E. ter" loans.

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15-*1
%5. group of five private investors recently loaned )/ "illion to 8enderson 8ardware for
ten years at : percent interest. 5his loan is best described as a2
A. private place"ent.
!. debt &$A.
C. notes payable.
#. debt ?@A.
$. ter" loan.

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%/. @earson $lectric recently registered %560666 shares of stoc1 under &$C Rule *15. 5he
fir" plans to sell 1560666 shares this year and the re"aining 1660666 shares ne;t year. What
type of registration was this?
. standby registration
B. shelf registration
C. Regulation registration
#. Regulation , registration
$. private place"ent registration

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15-*%
%3. &u-ie is a che"ist who has been e;peri"enting with fragrances in her ho"e laboratory
and feels that she now has three viable perfu"es that could be successfully "ar1eted. &he
1nows a venture capitalist who has offered to finance her business to the point where she
would be ready to begin the "anufacturing and "ar1eting stage. Which type of financing is
&u-ie being offered?
. syndicate
!. introduction
C. second-stage
#. "e--anine-level
E. seed "oney

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%4. Which one of the following is probably the "ost successful "eans of finding venture
capital?
. internet searches
!. #utch auctions
C. newspaper advertise"ents
D. personal contacts
$. personal letters to venture capital fir"s

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15-*'
%:. Which one of the following state"ents concerning venture capital financing is correct?
. Fenture capitalists desire shares of co""on stoc1 but avoid preferred stoc1.
!. Fenture capital is relatively easy to obtain.
C. Fenture capitalists rarely assu"e active roles in the "anage"ent of the financed fir".
D. Fenture capitalists often re.uire at least a forty percent e.uity position as a condition of
financing.
$. Fenture capital is relatively ine;pensive in today<s co"petitive "ar1ets.

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'6. Which one of the following state"ents concerning venture capitalists is correct?
. Fenture capitalists assu"e "anage"ent responsibility for the fir"s they finance.
B. $;it strategy is a 1ey consideration when selecting a venture capitalist.
C. Fenture capitalists li"it their services to providing "oney to start-up fir"s.
#. (ost venture capitalists are long-ter" investors in a fir".
$. venture capitalist nor"ally invests in a new idea and finances that idea until the newly-
for"ed fir" can issue an ?@A.

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15-**
'1. Which of the following should be considered when selecting a venture capitalist?
?. level of involve"ent
??. past e;periences
???. ter"ination of funding
?F. financial strength
. ? and ??? only
!. ?? and ?F only
C. ?0 ???0 and ?F only
#. ?0 ??0 and ?F only
E. ?0 ??0 ???0 and ?F

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'%. 5revor is the C$A of 8arvest Eoods0 which is a privately-held corporation. What is the
first step he "ust ta1e if he wishes to ta1e 8arvest Eoods public?
. select an underwriter
!. obtain &$C approval
C. gain board approval
#. prepare a registration state"ent
$. distribute a prospectus

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ifficul!": Basic
#earning $%&ec!i'e: ()-. and ()-1
Sec!ion: ()*.
+o,ic: 30$

15-*5
''. ll new interstate security issues are regulated by the2
. registration state"ent.
!. +reen &hoe provision.
C. &ecurities $;change ct of 1:'*.
D. &ecurities ct of 1:''.
$. Eederal Reserve ct of 1:'1.

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+o,ic: Securi!ies Ac! of (:11

'*. 5he &ecurities and $;change Co""ission2
. verifies the accuracy of the infor"ation contained in the prospectus.
!. verifies the accuracy of the infor"ation contained in the red herring.
C. e;a"ines the registration state"ent during the +reen &hoe period.
D. is concerned only that an issue co"plies with all rules and regulations.
$. deter"ines the final offer price once they have approved the registration state"ent.

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15-*/
'5. Dnderwriters generally2
. pay a spread to the issuing fir".
!. provide only best efforts underwriting in the D.&.
C. receive less co"pensation under a co"petitive agree"ent than under a negotiated
agree"ent.
#. "ar1et and distribute an entire issue of new securities within their own fir".
$. pass the ris1 of unsold shares bac1 to the issuing fir" via a fir" co""it"ent agree"ent.

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+o,ic: 6nderwri!ers

'/. With fir" co""it"ent underwriting0 the issuing fir"2
. is unsure of the total a"ount of funds it will receive until after the offering is co"pleted.
!. is unsure of the nu"ber of shares it will actually issue until after the offering is co"pleted.
C. 1nows e;actly how "any shares will be purchased by the general public during the offer
period.
#. retains the financial ris1 associated with unsold shares.
E. 1nows up-front the a"ount of "oney it will receive fro" the stoc1 offering.

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ifficul!": Basic
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+o,ic: Firm commi!men! underwri!ing

15-*3
'3. With #utch auction underwriting2
. each winning bidder pays the price he or she bid.
B. all successful bidders pay the sa"e price.
C. all bidders receive at least a portion of the .uantity for which they bid.
#. the selling fir" receives the "a;i"u" possible price for each security sold.
$. the bidder for the largest .uantity receives the first allocation of securities.

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'4. ?f an ?@A is underpriced then the2
. investors in the ?@A are generally unhappy with the underwriters.
!. issue is less li1ely to sell out.
C. stoc1 price will generally decline on the first day of trading.
#. issuing fir" is guaranteed to be successful in the long ter".
E. issuing fir" receives less "oney than it probably should have.

AACSB: N/A
ifficul!": Basic
Sec!ion: ()*)
+o,ic: 30$ under,ricing

15-*4
':. Which of the following have been offered as supporting argu"ents in favor of ?@A
underpricing?
?. Dnderpricing counteracts the Gwinner<s curseG.
??. Dnderpricing rewards institutional investors for sharing their opinions of a stoc1<s "ar1et
value.
???. Dnderpricing di"inishes the underwriting ris1 of a fir" co""it"ent underwriting.
?F. Dnderpricing reduces the probability that investors will sue the underwriters.
. ? and ??? only
!. ?? and ?F only
C. ? and ?? only
#. ?0 ??0 and ??? only
E. ?0 ??0 ???0 and ?F

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*6. Which one of the following is a 1ey goal of the after"ar1et period?
. collection of largest nu"ber of #utch auction bids as possible
!. best deter"ination of a fair offer price for an upco"ing ?@A
C. price support for a new issue of securities
#. establish"ent of a broad-based underwriting syndicate for an upco"ing ?@A
$. widest distribution of red herrings as possible

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15-*:
*1. Which one of the following state"ents is correct?
. 5he .uiet period co""ences when a registration state"ent is filed with the &$C and ends
on the day the ?@A shares co""ence trading.
!. 7oc1up agree"ents outline how oversubscribed ?@A shares will be allocated.
C. dditional ?@A shares can be issued in accordance with the loc1up agree"ent.
#. ,uiet period restrictions only apply to the issuer of new securities.
E. 5F interview with a fir"<s CEA could cause a forced delay in the fir"<s ?@A.

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+o,ic: 30$ ,ro'isions

*%. n individual investor with a s"all portfolio who wishes to purchase 166 shares of each
?@A is "ore li1ely to receive an allocation of shares when2
. an ?@A is substantially oversubscribed than when it is not.
!. the 1nowledgeable investors feel the issue is underpriced.
C. an ?@A is severely underpriced.
D. an ?@A is undersubscribed.
$. he or she has a standing order with the underwriter to purchase shares in every ?@A handled
by that underwriter.

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Sec!ion: ()*)
+o,ic: 30$ alloca!ions

15-56
*'. When a fir" announces an upco"ing seasoned stoc1 offering0 the "ar1et price of the
fir"<s e;isting shares tends to2
. increase.
B. decrease.
C. re"ain constant.
#. respond but the direction of the response is not predictable as shown by past studies.
$. decrease "o"entarily and then i""ediately increase substantially within an hour
following the announce"ent.
Refer to section 15./

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Sec!ion: ()*=
+o,ic: S!oc< issue announcemen!

**. 5he total direct costs of underwriting an e.uity ?@A2
. tends to increase on a percentage basis as the proceeds of the ?@A increase.
!. is generally between 3 and 4 percent0 regardless of the issue si-e.
C. can be as high as %5 percent for s"all issues.
#. e;cludes the gross spread.
$. e;cludes both the gross spread and the underpricing cost.

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15-51
*5. Which one of the following state"ents is correct concerning the costs of issuing
securities?
. #o"estic bonds are generally "ore e;pensive to issue than e.uity ?@As.
!. bnor"al returns are rarely associated with seasoned issues.
C. seasoned offering is typically "ore e;pensive on a percentage basis than an ?@A.
D. 5here tends to be substantial econo"ies of scale when issuing securities.
$. 5he costs of issuing convertible bonds tend to be less on a percentage basis than the costs
of issuing straight debt.

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+o,ic: 3ssue cos!s

*/. $;isting shareholders2
A. "ay or "ay not have a pree"ptive right to newly issued shares.
!. "ust purchase new shares whenever rights are issued.
C. are prohibited fro" selling their rights.
#. are generally well advised to let the rights they receive e;pire.
$. can "aintain their proportional ownership positions without e;ercising their rights.

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15-5%
*3. 5o purchase shares in a rights offering0 a shareholder generally 9ust needs to2
. pay the subscription a"ount in cash.
!. sub"it the re.uired for" along with the re.uired nu"ber of rights.
C. pay the difference between the "ar1et price of the stoc1 and the subscription price.
#. sub"it the re.uired nu"ber of rights along with a pay"ent for the underwriting fee.
E. sub"it the re.uired nu"ber of rights along with the subscription price.

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*4. 5he value of a right depends upon2
?. the nu"ber of rights re.uired to purchase one new share.
??. the "ar1et price of the security.
???. the subscription price.
?F. the price-earnings ratio of the stoc1.
. ?? and ??? only
!. ?? and ?F only
C. ? and ?? only
D. ?0 ??0 and ??? only
$. ?0 ??0 ???0 and ?F

AACSB: N/A
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ifficul!": Basic
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+o,ic: /igh!s

15-5'
*:. !efore a seasoned stoc1 offering0 you owned 30566 shares of a fir" that had 5660666
shares outstanding. fter the seasoned offering0 you still owned 30566 shares but the nu"ber
of shares outstanding rose to /%50666. Which one of the following ter"s best describes this
situation?
. overallot"ent
B. percentage ownership dilution
C. +reen &hoe
#. Red herring
$. abnor"al event

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+o,ic: ilu!ion

56. Which one of the following state"ents concerning dilution is correct?
. #ilution of percentage ownership occurs whenever an investor participates in a rights offer.
!. (ar1et value dilution increases as the net present value of a pro9ect increases.
C. (ar1et value dilution occurs when the net present value of a pro9ect is negative.
#. Heither boo1 value dilution nor "ar1et value dilution has any direct bearing on individual
shareholders.
$. !oo1 value dilution is the cause of "ar1et value dilution.

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+o,ic: ilu!ion

15-5*
51. Which one of the following state"ents is correct concerning the issuance of long-ter"
debt?
. direct long-ter" loan has to be registered with the &$C.
B. #irect place"ent debt tends to have "ore restrictive covenants than publicly issued debt.
C. #istribution costs are lower for public debt than for private debt.
#. ?t is easier to renegotiate public debt than private debt.
$. Wealthy individuals tend to do"inate the private debt "ar1et.

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ifficul!": Basic
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+o,ic: #ong-!erm de%!

5%. &helf registration allows a fir" to register "ultiple issues at one ti"e with the &$C and
then sell those registered shares anyti"e during the subse.uent2
. ' "onths.
!. / "onths.
C. 146 days.
D. % years.
$. 5 years.

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+o,ic: Shelf regis!ra!ion

15-55
5'. aron<s &ailboats has decided to ta1e the co"pany public by offering a total of 1%60666
shares of co""on stoc1 to the public. 5he fir" has hired an underwriter who arranges a full
co""it"ent underwriting and suggests an initial selling price of )%4 a share with an 4.5
percent spread. s it turns out0 the underwriters only sell :30*66 shares. 8ow "uch cash will
aron<s &ailboats receive fro" its first public offering?
. )%03%30%66
!. )%0*:50'44
C. )'063*0*66
#. )'0'/60666
$. )'0/*50/66
5otal cash received L 1%60666 )%4 =1 - 6.645> L )'063*0*66

AACSB: Anal"!ic
Bloom's: A,,lica!ion
ifficul!": Basic
Sec!ion: ()*>

5*. Helson @aints recently went public by offering /50666 shares of co""on stoc1 to the
public. 5he underwriters provided their services in a best efforts underwriting. 5he offering
price was set at )1/ a share and the gross spread was )%. fter co"pleting their sales efforts0
the underwriters deter"ined that they sold a total of 530566 shares. 8ow "uch cash did
Helson @aints receive fro" its ?@A?
A. )4650666
!. ):160666
C. ):%60666
#. )106'50666
$. )106*60666
5otal cash received L 530566 =)1/ - )%> L )4650666

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*>

15-5/
55. (iller (otors has decided to sell 10/66 shares of stoc1 through a #utch auction. 5he bids

8ow "uch will (iller (otors receive in total fro" selling the 10/66 shares? ?gnore all
. )'60*66
!. )''0*66
C. )''0/66
#. )'50*66
$. )'40/66
5otal cash received L 10/66 )%1 L )''0/66

AACSB: Anal"!ic
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ifficul!": Basic
Sec!ion: ()*5
+o,ic: u!ch auc!ion

15-53
5/. !a1ers< 5own !read is selling 10%66 shares of stoc1 through a #utch auction. 5he bids

8ow "uch cash will !a1ers< 5own !read receive fro" selling these shares of stoc1? ?gnore
all transaction and flotation costs.
. )160466
B. )1%0666
C. )1'0*66
#. )1*0*66
$. )1/0466
5otal cash received L 10%66 )16 L )1%0666

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*5
+o,ic: u!ch auc!ion

15-54
53. Webster $lectrics is offering 10566 shares of stoc1 in a #utch auction. 5he bids include2

8ow "uch cash will Webster $lectrics receive fro" selling these shares? ?gnore all
. )%40566
!. )'60666
C. )'10566
#. )''0666
$. )'*0566
5otal cash received L 10566 )%1 L )'10566

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*5
+o,ic: u!ch auc!ion

15-5:
54. Iou are a bro1er and have been instructed to place an order for a client to purchase 566
shares of every ?@A that co"es to "ar1et. 5he ne;t two ?@As are each priced at )%5 a share
and will begin trading on the sa"e day. 5he client is allocated 566 shares of ?@A and 166
shares of ?@A !. t the end of the first day of trading0 ?@A was selling for )%'.56 a share
and ?@A ! was selling for )%: a share. What is the client<s total profit or loss on these two
?@As as of the end of the first day of trading?
. -)*%5
B. -)'56
C. )5%5
#. ):35
$. )10156
5otal profit L M566 =)%'.56 - )%5>N O M166 =)%: - )%5>N L -)'56

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*)
+o,ic: 30$

5:. Richard has an outstanding order with his stoc1 bro1er to purchase 10666 shares of every
?@A. 5he ne;t three ?@As are each priced at )'6 a share and will all start trading on the sa"e
day. Richard is allocated 10666 shares of ?@A 0 *66 shares of ?@A !0 and 166 shares of ?@A
C. An the first day of trading ?@A opened at )'1.56 a share and ended the day at )%/ a
share. ?@A ! opened at )'1 a share and finished the day at )'% a share. ?@A C opened at
)'/.56 a share and ended the day at )*6.%5 a share. What is Richard<s total profit or loss on
these three ?@As as of the end of the first day of trading?
A. -)%0135
!. -)10456
C. -)10566
#. )%0%56
$. )'0566
5otal profit L M10666 =)%/ - )'6>N O M*66 =)'% - )'6>N O M166 =)*6.%5 - )'6>N L -)%0135

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*)
+o,ic: 30$

15-/6
/6. 5wo ?@As will co""ence trading ne;t wee1. &cott places an order to buy '66 shares of
?@A . &teve places an order to purchase '66 shares of ?@A and '66 shares of ?@A !. !oth
?@As are priced at )%6 a share. &cott is allocated 166 shares of ?@A . &teve is allocated 166
shares of ?@A and '66 shares of ?@A !. t the end of the first day of trading0 ?@A is
selling for )%%.36 a share and ?@A ! is selling for )14./6 a share. What is the difference in the
total profits or losses that &cott and &teve have as of the end of the first day of trading?
. )1%6
!. )%*6
C. )'/6
D. )*%6
$. )546
&cott<s profit L 166 =)%%.36 - )%6> L )%36
&teve<s profit L M166 =)%%.36 - )%6>N O M'66 =)14./6 - )%6>N L -)156
#ifference L )%36 - =-)156> L )*%6

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*)
+o,ic: 30$

/1. Wear $ver is e;panding and needs )1%./ "illion to help fund this growth. 5he fir"
esti"ates it can sell new shares of stoc1 for )'%.56 a share. ?t also esti"ates it will cost an
additional )'*60666 for filing and legal fees related to the stoc1 issue. 5he underwriters have
agreed to a 3.5 percent spread. 8ow "any shares of stoc1 "ust Wear $ver sell if it is going to
have )1%./ "illion available for its e;pansion needs?
. '360'3/ shares
!. *1:01%3 shares
C. *'60*'3 shares
#. *5*0%6: shares
$. */1046/ shares
5otal value of issue L =)1%0/660666 O )'*60666>K=1 - 6.635> L )1'0:4:014:.1:
Hu"ber of shares needed L )1'0:4:014:.1:K)'%.56 L *'60*'3 shares

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*>
+o,ic: 3ssue cos!s

15-/1
/%. (ountain 5eas wants to raise )11./ "illion to open a new production center. 5he co"pany
esti"ates the issue costs including the legal and accounting fees will be )**60666. 5he
underwriters have set the stoc1 price at )13.56 a share and the underwriting spread at :
percent. 8ow "any shares of stoc1 does (ountain 5eas have to sell to "eet its cash need?
. 3%40*1* shares
B. 35/06** shares
C. 3/:0'15 shares
#. 33%0%66 shares
$. 3410:6: shares
5otal value of issue L =)110/660666 O )**60666>K=1 - 6.6:> L )1'0%'603/:
Hu"ber of shares needed L )1'0%'603/:K)13.56 L 35/06** shares

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*>
+o,ic: 3ssue cos!s

/'. Autdoor 7iving needs )3.5 "illion to finance "odifications to its production e.uip"ent
because the design of its all-season tents has changed dra"atically. 5he underwriters esti"ate
that the fir" could sell additional shares of stoc1 at )1*.56 a share with a 3.5 percent
underwriting spread. 5his would be a fir" co""it"ent underwriting. 5he esti"ated issue
costs are )1%10666. 8ow "any shares of stoc1 will Autdoor 7iving need to sell to finance this
pro9ect?
A. 5/40%61 shares
!. *440:13 shares
C. *5%0'11 shares
#. 55:0146 shares
$. 5/%0*66 shares
5otal value of issue L =)305660666 O )1%10666>K=1 - 6.635> L )40%'40:14.:%
Hu"ber of shares needed L )40%'40:14.:%K)1*.56 L 5/40%61 shares

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*>
+o,ic: 3ssue cos!s

15-/%
/*. 8igh (ountain (ining wants to e;pand its current operations and re.uires )'.5 "illion in
additional funding to do so. fter discussing this with 1ey shareholders0 the fir" has decided
to raise the necessary funds through a rights offering at a subscription price of )14 a share.
5he current "ar1et price of the fir"<s stoc1 is )%% a share. 8ow "any shares of stoc1 will the
fir" need to sell through the rights offering to fund the e;pansion plans?
. 1*60615 shares
!. 15:06:1 shares
C. 1//0//3 shares
D. 1:*0*** shares
$. %650/44 shares
)'.5"K)14 L 1:*0*** shares

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*8
+o,ic: /igh!s offer

/5. Horthwest Rail wants to raise )1*.% "illion through a rights offering so it can purchase
additional rail cars and upgrade its "aintenance facilities. 8ow "any shares of stoc1 will the
fir" need to sell through this offering if the current "ar1et price is )'* a share and the
subscription price is )%4 a share?
. *130/*3 shares
!. *'3045/ shares
C. *5406/5 shares
#. *4%0/6* shares
E. 56301*' shares
)1*.%"K)%4 L 56301*' shares

AACSB: Anal"!ic
ifficul!": Basic
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+o,ic: /igh!s offer

15-/'
//. .B. &tevenson wants to raise )3.5 "illion through a rights offering. 5he subscription
price is set at )%*. Currently0 the co"pany has %.1 "illion shares outstanding with a current
"ar1et price of )%5 a share. $ach shareholder will receive one right for each share of stoc1
they currently own. 8ow "any rights will be needed to purchase one new share of stoc1 in
this offering?
. /.*6 rights
!. /./3 rights
C. /.3% rights
#. /.43 rights
$. 3.66 rights
Hu"ber of rights issued L 1 %.1" L %.1"J Hu"ber of shares needed L )3.5"K)%* L
'1%0566J Rights needed for each new share L %.1"K'1%0566 L /.3% rights

AACSB: Anal"!ic
ifficul!": Basic
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+o,ic: /igh!s offer

/3. 5he (otor @lant wants to raise )%1.* "illion through a rights offering so it can "oderni-e
its facilities. 5he subscription price for the offering is set at )1% a share. Currently0 the
co"pany has %./ "illion shares of stoc1 outstanding at a "ar1et price of )1%.56 a share. $ach
shareholder will receive one right for each share of stoc1 they own. 8ow "any rights will a
shareholder need to purchase one new share of stoc1 in this offering?
A. 1.*/ rights
!. 1.5% rights
C. 1.55 rights
#. 1./6 rights
$. 1./3 rights
Hu"ber of rights issued L 1 %./" L %./"J Hu"ber of shares needed L )%1.*"K)1% L
1034'0'''.''J Rights needed for each new share L %./"K1034'0'''.'' L 1.*/ rights

AACSB: Anal"!ic
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Sec!ion: ()*8
+o,ic: /igh!s offer

15-/*
/4. (iller Eruit wants to e;pand its citrus grove operations. 5he fir" esti"ates that it needs
)4./ "illion to buy land and establish its operations. Currently0 the fir" has 5*60666 shares of
stoc1 outstanding at a "ar1et price per share of )'*.46. ?f the fir" decides to raise the needed
capital through a rights offering0 one right will be issued for each share of stoc1. 5he
subscription price will be set at )'' a share. 8ow "any rights will a shareholder need to
purchase one new share of stoc1 in this offering?
A. %.63 rights
!. %.13 rights
C. %.%% rights
#. %.56 rights
$. %./3 rights
Hu"ber of rights issued L 1 5*60666 L 5*60666J Hu"ber of shares needed L )4./"K)'' L
%/60/6/.6/J Rights needed for each new share L 5*60666K%/60/6/.6/ L %.63 rights

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*8
+o,ic: /igh!s offer

/:. Jefferson Refining is issuing a rights offering wherein every shareholder will receive one
right for each share of stoc1 they own. 5he new shares in this offering are priced at )%1 plus '
rights. 5he current "ar1et price of the stoc1 is )%' a share. What is the value of one right?
. )6.%5
B. )6.56
C. )1.66
#. )1.56
$. )%.66
Falue per share e;cluding right L M)%1 O =' )%'>NK=1 O '> L )%%.56
Falue of one right L )%' - )%%.56 L )6.56

AACSB: Anal"!ic
ifficul!": Basic
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+o,ic: /igh! 'alue

15-/5
36. 5he stoc1 of Cleaner 8o"e @roducts is currently selling for )%/.*6 a share. 5he co"pany
has decided to raise funds through a rights offering wherein every shareholder will receive
one right for each share of stoc1 they own. 5he new shares being offered are priced at )%5
plus five rights. What is the value of one right?
. )6.1/
B. )6.%'
C. )6.%5
#. )6.*3
$. )6.56
Cost per share L M)%5 O =5 )%/.*6>NK=1 O 5> L )%/.13
Falue of right L )%/.*6 - )%/.13 L )6.%'

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*8
+o,ic: /igh! 'alue

31. !arstow ?ndustrial &upply has decided to raise )%3.5% "illion in additional funding via a
rights offering. 5he fir" will issue one right for each share of stoc1 outstanding. 5he offering
consists of a total of 4/60666 new shares. 5he current "ar1et price of the stoc1 is )'5.
Currently0 there are 5.1/ "illion shares outstanding. What is the value of one right?
. )6.'3
B. )6.*'
C. )6.*4
#. )6.5%
$. )6./6
&ubscription price L )%3.5%"K4/60666 shares L )'% a share
Hu"ber of shares issued L 1 5.1/" L 5.1/"
Hu"ber of rights needed L 5.1/"K4/60666 L /
Cost per share L M)'% O =/ )'5>NK=1 O /> L )'*.53
Falue of a right L )'5 - )'*.53 L )6.*'

AACSB: Anal"!ic
ifficul!": 3n!ermedia!e
Sec!ion: ()*8
+o,ic: /igh! 'alue

15-//
3%. Iou currently own 4 percent of the '.5 "illion outstanding shares of Webster (ills. 5he
co"pany has 9ust announced a rights offering with a subscription price of )%4. Ane right will
be issued for each share of outstanding stoc1. 5his offering will provided ): "illion of new
financing for the fir"0 ignoring all issue costs. ssu"e that all rights are e;ercised. What will
be your new ownership position if you opted to sell your rights rather than e;ercise the"
personally?
A. 3.'' percent
!. 3.*/ percent
C. 3.43 percent
#. 4.66 percent
$. 4.%1 percent
Hu"ber of shares owned L 6.64 '.5" L %460666 shares
Hu"ber of shares offered L ):"K)%4 L '%10*%4.53 shares
Hew ownership position L %460666K='.5" O '%10*%4.53> L 3.'' percent

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*:
+o,ic: ilu!ion

3'. Jennifer owns 1%0666 shares of Calico Clothing. Currently0 there are 1./ "illion shares of
stoc1 outstanding. 5he co"pany has 9ust announced a rights offering whereby %660666 shares
are being offered for sale at a subscription price of )1* a share. 5he current stoc1 price is )1/
a share. ssu"e that Jennifer sells her rights and that all rights are e;ercised. What percentage
of the fir" will Jennifer own after the rights offering?
A. 6./3 percent
!. 6.35 percent
C. 6.4/ percent
#. 6.:' percent
$. 1.61 percent
Hew ownership percentage L 1%0666K=1./" O 6.%"> L 6./3 percent

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*:
+o,ic: ilu!ion

15-/3
3*. Dnderwater $;peri"ental is considering a pro9ect which re.uires the purchase of
)*:40666 of fi;ed assets. 5he net present value of the pro9ect is )%%0566. $.uity shares will be
issued as the sole "eans of financing the pro9ect. What will the new boo1 value per share be
after the pro9ect is i"ple"ented given the following current infor"ation on the fir"?

A. )1'.%5
!. )1'.36
C. )1*.%'
#. )1*.:*
$. )15./6
Current "ar1et value per share L ):'/0666K/60666 L )15./6
Hu"ber of new shares needed L )*:40666K)15./6 L '10:%'.64 shares
Hew boo1 value per share L =)3%60666 O )*:40666>K=/60666 O '10:%'.64> L )1'.%5

AACSB: Anal"!ic
Bloom's: Anal"sis
Sec!ion: ()*:
+o,ic: Boo< 'alue

15-/4
35. !irds and (ore is considering a pro9ect which re.uires the purchase of )1/*0666 of fi;ed
assets. 5he net present value of the pro9ect is )*0566. $.uity shares will be issued as the sole
"eans of financing this pro9ect. 5he price-earnings ratio of the pro9ect e.uals that of the
e;isting fir". What will the new "ar1et value per share be after the pro9ect is i"ple"ented
given the following current infor"ation on the fir"?

. )%6./4
!. )%6.3%
C. )%6.46
D. )%6.:5
$. )%1.16
Current "ar1et value per share L )*530/66K%%0666 L )%6.46
Hu"ber of new shares needed L )1/*0666K)%6.46 L 3044*./% shares
Hew "ar1et value per share L =)*530/66 O )1/*0666 O )*0566>K=%%0666 O 3044*./%> L )%6.:5

AACSB: Anal"!ic
Sec!ion: ()*:
+o,ic: ?ar<e! 'alue

15-/:
3/. Wagner 5ruc1ing is considering investing in a new pro9ect that will cost )1' "illion and
increase net inco"e by /.5 percent. 5his pro9ect will be co"pletely funded by issuing new
e.uity shares. Currently0 the fir" has 1.%5 "illion shares of stoc1 outstanding with a "ar1et
price of )*% per share. 5he current earnings per share are )1.4%. What will the earnings per
share be if the pro9ect is i"ple"ented?
. )1.':
!. )1.*5
C. )1.55
#. )1./%
$. )1./:
Hew earnings per share L =)1.4% 1.%5" 1.6/5>KM1.%5" O =)1'"K)*%>N L )1.55

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*:
+o,ic: Earnings ,er share

33. Iou own 15 percent or 1'0566 shares of @rinters0 $tc. 5hese shares have a total "ar1et
value of )*%/0/66. !y what percentage will the total value of your invest"ent in this fir"
change if the co"pany sells an additional 160666 shares of stoc1 at )'6 a share and you do not
buy any?
. -1.'3 percent
!. -1.%1 percent
C. -6.51 percent
#. 1.6' percent
$. 1.%: percent
Current nu"ber of shares outstanding L 1'0566K6.15 L :60666
@rice per share L )*%/0/66K1'0566 L )'1./6
Hew "ar1et value per share L M=:60666 )'1./6> O =160666 )'6>NK=:60666 O 160666> L
)'1.**
@ercent change L =)'1.** - )'1./6>K)'1./6 L -6.51 percent

AACSB: Anal"!ic
Sec!ion: ()*:
+o,ic: ilu!ion

15-36
34. Burt currently owns '.* percent of Hortheastern 5ransportation. 5he co"pany has a total
of *'40666 shares outstanding with a current "ar1et price of )%/.%6 a share. t present0 the
fir" is offering an additional %50666 shares at a price of )%5 a share. Burt decides not to
participate in this offering. What will his ownership position be after the offering is
co"pleted?
. '.6/ percent
B. '.%% percent
C. '.%3 percent
#. '.*6 percent
$. '.51 percent
Hu"ber of shares owned L 6.6'* *'40666 L 1*04:%
Hew ownership position L 1*04:%K=*'40666 O %50666> L '.%% percent

AACSB: Anal"!ic
ifficul!": Basic
Sec!ion: ()*:
+o,ic: ilu!ion

Essay Questions

3:. ?t can be argued that the decision to accept venture capital is one of the "ost critical
decisions an entrepreneur "ust "a1e. $;plain why.
5he potential rewards fro" venture capital can be substantial but the costs to the entrepreneur
are e.ually substantial. 5he pri"ary advantage of venture capital funding is the access to
capital when funds are unavailable fro" other sources. ?n addition0 a venture capitalist
provides industry e;perience0 e;pertise0 and valuable business contacts. 8owever0 nothing is
free. ?n e;change for this funding0 entrepreneurs have to sacrifice a large percentage of their
ownership rights to the venture capitalist. ?f venture capital is not accepted0 the fir" "ay fail
for lac1ing of funding. ?f venture capital is accepted0 there<s no guarantee of successJ only a
guarantee that the entrepreneur will own less of the fir".

AACSB: /eflec!i'e !hin<ing
Bloom's: Anal"sis
ifficul!": Basic
Sec!ion: ()*(

15-31
46. $;plain both a rights offering and the basic characteristics of a right.
rights offering is an issue of co""on stoc1 that is initially offered for sale to a fir"<s
current shareholders. &hareholders generally receive one right for each share of stoc1 owned.
$ach right grants its holder the ability to purchase a stated a"ount of new shares at a stated
price during a stated period of ti"e. ?f the recipient of a right decides not to participate in the
rights offering0 then he or she can sell that right to another investor who does want to
participate. &elling stoc1 via a rights offering is generally a cheaper "ethod of issuing
securities than a general cash offer.

ifficul!": Basic
Sec!ion: ()*8
+o,ic: /igh!s offer

41. $;plain why there is a tendency for ?@As to be underpriced.
&everal reasons have been given for underpricing an ?@A. 5hese include2
1. deter"ining the correct offering price is e;tre"ely difficult0
%. underpricing helps ensure the success of the security offering0
'. underpricing is 9ust an indirect cost of a securities issue0
*. underpricing rewards ?@A investors for purchasing ris1y securities0
5. underpricing addresses the issue of the Gwinner<s curseG0 and
/. underpricing rewards institutional investors for the infor"ation they provide to
underwriters regarding the potential interest in and value of a security issue.

ifficul!": Basic
Sec!ion: ()*)

15-3%
4%. Eir"s encounter several costs when issuing new securities. ?dentify and describe at least
four of these costs.
&tudents should provide a partial discussion of the infor"ation found at the beginning of
&$C5?AH 15.3 where / different types of costs are identified and defined. 5hese are2

Bloom's: Knowledge
ifficul!": Basic
Sec!ion: ()*>
+o,ic: 6nderwri!ing cos!s

15-3'
4'. &teve is the founder of Jefferson & Westover. Recently0 the fir" decided to issue an ?@A
with &teve retaining '6 percent ownership of the fir". 5he ?@A agree"ent contained both a
+reen &hoe provision and a /-"onth loc1up agree"ent. &teve<s cost basis per share is )15.
5he offering price for the ?@A was )1/. An the first day of trading0 the "ar1et price per share
rose to )%4.%6 and closed for the day at )%5./6. How0 si; "onths after the ?@A release0 the
stoc1 is valued at )15.*6 a share. $;plain who benefited the "ost during the loc1up period0 an
outside investor or &teve0 and why.
s a co"pany insider0 the loc1up agree"ent has prevented &teve fro" selling any of his
shares and benefiting fro" the substantial price increase to )%4.%6 a share. 5hus0 &teve still
owns all of his shares and has a current profit of )6.*6 a share. (eanwhile0 Autside ?nvestor
could have purchased shares for )1/ and sold the" at )%4.%6 each. Autside ?nvestor !0 could
have bought the shares at )%4.%6 and suffered a loss since the shares have declined in value
since that point. 5hus0 who is better off depends upon the price at which the outside investor
purchased shares.

Bloom's: Anal"sis
Sec!ion: ()*5
+o,ic: #oc<u, agreemen!


15-3*
4*. 5he 5i"1en Co"pany has announced a rights offer to raise )%5 "illion for a new 9ournal0
the Journal of Financial Excess. 5his 9ournal will review potential articles after the author
pays a nonrefundable reviewing fee of )%0566 per page. 5he stoc1 currently sells for )*4 per
share0 and there are %./ "illion shares outstanding. 5he subscription price is set at )*' per
share. What is the e;-rights price per share?
. )*5.54
B. )*3.6:
C. )*4.15
#. )*4.46
$. )*:.*%
Hu"ber of new shares L )%5"K)*' L 5410':5.'5
Hu"ber of rights needed to buy one share L %./"K5410':5.'5 L *.*3%
$;-rights price per share L M)*' O *.*3%=)*4>NKM1 O *.*3%N L )*3.6:

AACSB: Anal"!ic
ifficul!": Basic
E$C @: ()-.
Sec!ion: ()*8
+o,ic: /igh!s offer

15-35
45. 5he War" &hoe Co. has concluded that additional e.uity financing will be needed to
e;pand operations and that the needed funds will be best obtained through a rights offering. ?t
has correctly deter"ined that as a result of the rights offering0 the share price will fall fro"
)166 to ):5 =)166 is the rights-on-priceJ ):5 is the e;-rights price0 also 1nown as the when-
issued price>. 5he co"pany is see1ing )14 "illion in additional funds with a per-share
subscription price of )56. 8ow "any shares of stoc1 are outstanding0 before the offering?
=ssu"e that the incre"ent to the "ar1et value of the e.uity e.uals the gross proceeds of the
offering.>
. '%*0666
!. '/60666
C. 104660666
D. '0%*60666
$. '0/660666
@$; L ):5 L =)56 O )166H>K=H O 1>J H L :
Hu"ber of new shares L )14"K)56 L '/60666 shares
Hu"ber of old shares L : '/60666 L '0%*60666 shares

AACSB: Anal"!ic
Bloom's: Anal"sis
ifficul!": Basic
E$C @: ()-1
Sec!ion: ()*8
+o,ic: /igh!s offer

15-3/
4/. 5he Woods Co. and the (ic1elson Co. have both announced ?@As at )*' per share. Ane
of these is undervalued by )%60 and the over is overvalued by )1*0 but you have no way of
1nowing which is which. Iou plan on buying 10666 shares of each issue. ?f an issue is
underpriced0 it will be rationed0 and only half your order will be filled. What is the a"ount of
the difference between your e;pected profit and the a"ount of profit you could earn if you
could get 10666 shares of Woods and 10666 shares of (ic1elson?
A. -)160666
!. -)/0666
C. -)*0666
#. )*0666
$. )/0666
$;pected profit L 566=)%6> O 10666=-)1*> L -)*0666
@rofit if 10666 shares of each L 10666=)%6> O 10666=-)1*> L )/0666
#ifference L -)*0666 - )/0666 L -)160666

AACSB: Anal"!ic
ifficul!": Basic
E$C @: ()-5
Sec!ion: ()*)

43. Elagler0 ?nc. needs to raise )'6 "illion to finance its e;pansion into new "ar1ets. 5he
co"pany will sell new shares of e.uity via a general cash offering to raise the needed funds.
5he offer price is )'6 per share and the co"pany<s underwriters charge a 16 percent spread.
8ow "any shares need to be sold?
A. 101110111 shares
!. 10%560666 shares
C. 10///0//3 shares
#. %05660666 shares
$. '0'''0''' shares
Re.uired sales proceeds2 )'6" L ; =1 - 6.16>J ; L )''0'''0'''
Hu"ber of shares needed L )''0'''0'''K)'6 L 101110111

AACSB: Anal"!ic
ifficul!": Basic
E$C @: ()-)
Sec!ion: ()*>
+o,ic: Flo!a!ion cos!s

15-33
44. 5he $ducated 8orses Corporation needs to raise )%6 "illion to finance its e;pansion into
new "ar1ets. 5he co"pany will sell new shares of e.uity via a general cash offering to raise
the needed funds. &uppose the offer price is )*6 per share and the co"pany<s underwriters
charge an 4 percent spread. 5he &$C filing fee and associated ad"inistrative e;penses of the
offering are )//60666. 8ow "any shares need to be sold?
. **40:63
!. */10%%%
C. 5110111
#. 5%:0:'3
E. 5/10*1'
Re.uired sales proceeds2 )%6" O )6.//" L ; =1 - 6.64>J ; L )%%0*5/05%%
Hu"ber of shares needed L )%%0*5/05%%K)*6 L 5/10*1'

AACSB: Anal"!ic
ifficul!": Basic
E$C @: ()-=
Sec!ion: ()*>

15-34
4:. 5he 8uff Co. has 9ust gone public. Dnder a fir" co""it"ent agree"ent0 8uff received
)%1.56 for each of the / "illion shares sold. 5he initial offering price was )%'./5 per share0
and the stoc1 rose to )'6.51 per share in the first few "inutes of trading. 8uff paid
)10%/60666 in direct legal and other costs0 and )':60666 in indirect costs. 5he flotation costs
were what percentage of the funds raised?
. '4.5/ percent
!. *6.'% percent
C. *1./4 percent
D. *'.35 percent
$. **.6: percent
Het a"ount raised L /" =)%1.56> - )10%/60666 - )':60666 L )1%30'560666
5otal direct costs L )10%/60666 O =)%'./5 - )%1.56> =/"> L )1*01/60666
5otal indirect costs L )':60666 L =)'6.51 - )%'./5> =/"> L )*105560666
5otal costs L )1*01/60666 O )*105560666 L )5503160666
Elotation cost percentage L )5503160666K)1%30'560666 L *'.35 percent

AACSB: Anal"!ic
ifficul!": Basic
E$C @: ()->
Sec!ion: ()*>

15-3:
:6. (ountain 8o"es wishes to e;pand its facilities. 5he co"pany currently has 3 "illion
shares outstanding and no debt. 5he stoc1 sells for )55 per share0 but the boo1 value per share
is )*'. 5he fir"<s net inco"e is currently ):.1 "illion. 5he new facility will cost )'6 "illion0
and it will increase net inco"e by )'6:0666. ssu"e the fir" issues new e.uity to fund this
e;pansion while "aintaining a constant price-earnings ratio. What will be the $@& be after the
new e.uity issue?
A. )1.%5
!. )1.'6
C. )1.'5
#. )1.*6
$. )1.*5
Hu"ber of shares after the offering L 3" O =)'6"K)55> L 305*50*5*.5*5*55
Hew $@& L =):.1" O )'6:0666>K305*50*5*.5*5*55 L )1.%5

AACSB: Anal"!ic
Bloom's: Anal"sis
E$C @: ()-:
Sec!ion: ()*:
+o,ic: ilu!ion

15-46
:1. 5he (etallica 8eavy (etal (ining =(8((> Corporation wants to diversify its
operations. &o"e recent financial infor"ation for the co"pany is shown here2

(8(( is considering an invest"ent that has the sa"e @K$ ratio as the fir". 5he cost of the
invest"ent is )3:40%360 and it will be financed with a new e.uity issue. What would the RA$
on the invest"ent have to be if we wanted the price after the offering to be )116 per share?
ssu"e the @$ ratio re"ains constant.
. 14.%4 percent
!. %1.*1 percent
C. %3./' percent
D. '3.%3 percent
$. *6.6' percent
Current RA$ L )*510666K=)*0/'10666 - )%0'150566> L 6.1:*33*'5
Hew net inco"e L 6.1:*33*'5 =)*0/'10666 - )%0'150566 O )3:40%36> L )/6/0*4'
Hu"ber of new shares L )3:40%36K)116 L 30%53
Hew $@& L )/6/0*4'K=110666 O 30%53> L)''.%%
Current @K$ L )116K=)*510666K110666> L %./4%:
Hecessary $@& L )116 L %./4%:=Hecessary $@&>J Hecessary $@& L )*1
Hecessary net inco"e L )*1 =30%53> L )%:305'3
Hew RA$ L )%:305'3K)3:40%36 L '3.%3 percent

AACSB: Anal"!ic
Bloom's: Anal"sis
E$C @: ()-((
Sec!ion: ()*:
+o,ic: ilu!ion

15-41
:%. @recise (achining is considering a rights offer. 5he co"pany has deter"ined that the e;-
rights price would be )*/. 5he current price is )5' per share0 and there are 3 "illion shares
outstanding. 5he rights offer would raise a total of )36 "illion. What is the subscription
price?
. )%/.*4
B. )%3.6/
C. )%3.56
#. )%4.14
$. )%:.16
Hu"ber of new shares L )36"K@&
H$; L 3"K=)36"K@&> L 6.1@&
@P L )*/ L M6.1@&=)5'> O @&NK=6.1@& O 1>J @& L )%3.6/

AACSB: Anal"!ic
E$C @: ()-(.
Sec!ion: ()*8
+o,ic: /igh!s offer

15-4%
:'. tlas Corp. wants to raise )* "illion via a rights offering. 5he co"pany currently has
*560666 shares of co""on stoc1 outstanding that sell for )*6 per share. ?ts underwriter has
set a subscription price of )%/ per share and will charge the co"pany a 3 percent spread.
ssu"e that you currently own 30%66 shares of stoc1 in the co"pany and decide not to
participate in the rights offering. 8ow "uch can you get for selling all of your rights?
. )%*0:11.%1
!. )%50'/%.4*
C. )%503:%.1:
#. )%/0*1*.1*
E. )%306:*.:5
Het proceeds to fir" L )%/ =1 - 6.63> L )%*.14
Hew shares offered L )*"K)%*.14 L 1/50*%5.:3
Hu"ber of rights needed per share L *560666K1/50*%5.:3 L %.3%6%5
@$; L M)%/ O %.3%6%5=)*6>NK=1 O %.3%6%5> L )'/.%*
Right value L )*6 - )'/.%* L )'.3/
&ale proceeds L )'.3/ =30%66> L )%306:*.:5

AACSB: Anal"!ic
Bloom's: Anal"sis
E$C @: ()-(5
Sec!ion: ()*8
+o,ic: /igh!s offer

15-4'

Chapter 15 - Raising Capital

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