Chap 20

A firm commitment arrangement with an investment banker occurs when the:

• a.

  syndicate is in place to handle the issue.

• b.

  investment banker sells as much of the security as the market can bear without a price decrease.

• c.

  spread between the buying and selling price is less than one percent.

• d.

  investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.

• e.

  issue is solidly accepted in the market as evidenced by a large price increase.

A preliminary prospectus contains:

• a.

  information very similar to the final prospectus but excludes the selling price

• b.

  only a description of how the funds raised will be used.

• c.

  the same information as the final prospectus but has bold red letters on the cover.

• d.

  exactly the same information as the final prospectus except for the SEC approval.

• e.

  only a brief synopsis of the final prospectus.

A stock has a rights-on price of $20, an ex-rights price of $18.25, and the number of rights needed to buy one new share is 5. Assuming everything else is held constant, what is the subscription price?

• a.

  $9.50

• b.

  $11.25

• c.

  $21.90

• d.

  $16.67

• e.

  $14.50

An equity issue sold to the firm's existing stockholders is called a:

• a.

  restricted placement.

• b.

  general cash offer.

• c.

  private placement.

• d.

  direct placement.

• e.

  rights offer.

Assume it requires 3 rights to obtain a new share in a rights offering. If the stock's price prior to the ex-rights date is $25 and the ex-rights price is $22.75, what is the value of each right?

• a.

  $.67

• b.

  $.56

• c.

  $.60

• d.

  $.75

• e.

  $.72

Dream Makers has expended almost all of its start-up funds and is seeking venture capital to begin manufacturing. Which type of financing is it seeking?

• a.

  seed money financing

• b.

  second-round financing

• c.

  first-round financing

• d.

  bridge financing

• e.

  mezzanine financing

If current shareholders want to acquire one share of stock under a rights plan they must:

• a.

  acquire new shares of stock that are being issued with rights attached.

• b.

  simply pay a registration fee plus the subscription price per share requested.

• c.

  submit the number of rights required plus the subscription price.

• d.

  exchange their current shares for new shares that have rights attached.

• e.

  inform the issuer and submit the market price per share desired.

In a best efforts offering the investment bank makes its money primarily by earning:

• a.

  a commission on each share sold

• b.

  a flat fee charged for services rendered.

• c.

  the spread between the buying and offering price.

• d.

  the difference between the offer price and the warrant price.

• e.

  a negotiated percentage of the offering price.

Lee started a firm which he recently took public with a new stock issue of 1 million shares. As the firm's founder he personally owns 1.2 million shares, all of which he owned prior to the new stock issue. The offer price of the IPO was $16 a share. The price paid to the firm was $14.20 a share and the closing price on the IPO date was $19 a share. How much of a loss did Lee personally experience due to the IPO's underpricing?

• a.

  $3.6 million

• b.

  $2.4 million

• c.

  $5.76 million

• d.

  $0

• e.

  $1.2 million 

Management's first step in any issue of securities to the public is to:

• a.

  obtain approval from the board of directors.

• b.

  prepare the tombstone advertisement.

• c.

  distribute copies of the final prospectus.

• d.

  file a registration form with the SEC.

• e.

  distribute copies of the preliminary prospectus.