Chapter 11-Raising Long-Term Financing: Multiple Choice

Chapter 11Raising Long-Term Financing
MULTIPLE CHOICE
1. Which law mandated the separation of investment and commercial banking?
a. Gramm-Leach-Bliley Act
b. c!adden Act
c. Glass-"teagall Act
d. none of the above
A#"$ % &'!$ ( )(!$ 11.1 *he Basic %hoices in Long-*erm !inancing
+. A sec,rity offering that raises capital for firms is called a-n.
a. primary sec,rity offering
b. secondary sec,rity offering
c. sec,riti/ation
d. all of the above
A#"$ A &'!$ ( )(!$ 11.1 *he Basic %hoices in Long-*erm !inancing
0. A bond sold by foreign corporations to 1.". investors is called a-n.
a. (,robond
b. foreign bond
c. 2ankee bond
3. A bank that helps firms to ac4,ire e5ternal capital is called a
a. commercial bank
b. savings bank
c. investment bank
d. credit ,nion
A#"$ % &'!$ (
)(!$ 'nvestment Banking and the 6,blic "ale of "ec,rities
7. Which of the following is not considered an advantage of going p,blic?
a. new capital for the company
b. listed stock for ,se as compensation
c. stock price emphasis
d. personal wealth and li4,idity
A#"$ % &'!$
)(!$ 11.0 *he 1.". arket for 'nitial 6,blic 8fferings -'68s.
9. Bavarian Brewho,se is planning on going p,blic. 1nder the ,nderwriting agreement the ,nderwriting
disco,nt is :.+7;. 'f the offering price of the stock is set at <1+.7= per share> what is the per share
proceeds that Bavarian will receive?
a. <11.7?
b. <1=.9:
c. <10.31
d. <1+.7=
A#"$ A
<1+.7=-1-.=:+7. @ <11.7?
&'!$ ( )(!$ 11.+ 'nvestment Banking and the 6,blic "ale of "ec,rities
:. Bavarian Brewho,se is planning on going p,blic. 1nder the ,nderwriting agreement the ,nderwriting
disco,nt is <1.+7 per share. 'f the offering price of the stock is set at <1+.7= per share> what is the
percentage ,nderwriting disco,nt??
a. A;
b. ?;
c. 1=;
d. 11;
A#"$ %
<1.+7B<1+.7= @ .1=
A. Bavarian Brewho,se is planning on going p,blic. 1nder the ,nderwriting agreement the ,nderwriting
disco,nt is :.+7;. 'f the offering price of the stock is set at <1+.7= per share and the company is
planning on iss,ing 1 million shares> what are the total proceeds that Bavarian will receive?
a. <1+>7==>===
b. <11>7?0>:7=
c. <1=>:7=>===
d. <10>+:7>7==
A#"$ B
1+.7=-1-.=:+7.1>===>=== @ 11>7?0>:7=
?. Bavarian Brewho,se is planning on going p,blic. 1nder the ,nderwriting agreement the ,nderwriting
disco,nt is <1.+7. 'f the offering price of the stock is set at <1+.7= per share and the company is
planning on iss,ing 1 million shares> what are the total proceeds that Bavarian will receive?
a. 1+>7==>===
b. 11>+7=>===
c. 10>:7=>===
d. 1=>A:7>===
A#"$ B
-1+.7=-1.+7.1>===>=== @ 11>+7=>===
1=. Bavarian Brewho,se is planning on going p,blic. 1nder the ,nderwriting agreement the ,nderwriting
disco,nt is :.+7;. 'f the offering price of the stock is set at <1+.7= per share> how many shares does
the company have to iss,e to raise <:7 million?
a. 9>===>===
b. 9>39?>==0
c. 7>79:>3==
d. 7>===>===
A#"$ B
:7>===>===B-1+.7=.-1-.=:+7. @ 9>39?>==0
disco,nt is <1.0=. 'f the offering price of the stock is set at <1+.7= per share> how many shares does the
company have to iss,e to raise <:7 million?
a. 9>===>===
b. 7>:A?>37+
c. 7>===>===
d. 9>9?9>3+?
A#"$ &
:7>===>===B-1+.7=-1.0=. @ 9>9?9>3+?
1+. Bavarian Brewho,se is planning on going p,blic. 1nder the ,nderwriting agreement the ,nderwriting
disco,nt is <1.0=. Legal and other e5penses amo,nt to <1>07=>===. 'f the offering price of the stock is
set at <1+.7= per share> how many shares does the company have to iss,e to raise <:7 million?
a. 9>9?9>3+?
b. 9>A19>?93
c. 9>===>===
d. 7>:9?>037
A#"$ B
-:7>===>=== C 1>07=>===.B-1+.7= - 1.0=. @ 9>A19>?93
&'!$ )(!$ 11.+ 'nvestment Banking and the 6,blic "ale of "ec,rities
disco,nt is :.+7;. Legal and other e5penses amo,nt to <1>07=>===. 'f the offering price of the stock is
set at <1+.7= per share> how many shares does the company have to iss,e to raise <:7 million?
a. 9>1=A>===
b. 9>7A7>337
c. 9>9?9>3+?
d. :>1+3>07?
A#"$ B
-:7>===>=== C 1>07=>===.B-1+.7=-1-.=:+7.. @ 9>7A7>337
&'!$ )(!$ 11.+ 'nvestment Banking and the 6,blic "ale of "ec,rities
#A))B(G'#$ Bavarian Brewho,se '68
a!arian re"ho#se IPO
Bavarian Brewho,se is planning an '68. 1nder the terms of the '68> Bavarian Brewho,se will iss,e A
million shares at an offer price of <+7 per share. *he ,nderwriter charges an ?; ,nderwriting fee and
direct costs are estimated to be <: million. *he stock is e5pected to trade at <0= at the end of the first
trading day.
#A))(#&
13. What is the total amo,nt of f,nds raised by Bavarian Brew thro,gh the '68?
a. <1:7 million
b. <1A+ million
c. <+== million
d. <17= million
A#"$ A
net proceeds per share$ +7-1-.=?. @ ++.:7
net proceeds @ ++.:7-A>===>===. - :>===>=== @ 1:7>===>===
&'!$ )(!$ 11.0 *he 1.". arket for 'nitial 6,blic 8fferings -'68s.
#A)$ Bavarian Brewho,se '68
17. What is the initial ret,rn earned by investors on this Bavarian Brewho,se '68?
a. +=;
b. 17;
c. 1:;
d. ++;
A#"$ A
-0=-+7.B+7 @ .+=
&'!$ ( )(!$ 11.0 *he 1.". arket for 'nitial 6,blic 8fferings -'68s.
19. What are the total ,nderwriting fees for this Bavarian Brewho,se '68?
a. <1A million
b. <: million
c. <+7 million
d. <1= million
A#"$ %
-.=?.+7-A>===>===. C :>===>=== @ +7>===>===
1:. )efer to Bavarian Brewho,se '68. What are the total costs ca,sed by ,nderpricing?
a. <A million
b. <3= million
c. <0+ million
d. <+7 million
A#"$ B
<7-A>===>===. @ 3=>===>===
&'!$ ( )(!$ 11.0 *he 1.". arket for 'nitial 6,blic 8fferings -'68s.
1A. What are the total costs -,nderwriting and ,nderpricing. of the Bavarian Brewho,se '68?
a. <+7 million
b. <3= million
c. <97 million
d. <A= million
A#"$ %
+7>===>=== C 3=>===>=== @ 97>===>===
1?. A company faces costs of ?; of the amo,nt of cash raised for an '68. 'f the company needs to raise
<1= million> what are the total dollar costs?
a. <?==>===
b. <?A?>=11
c. <A79>:AA
d. <1>===>===
A#"$ B
1=>===>===B-1-.=?. - 1=>===>=== @ ?A?>=11
&'!$ D )(!$ 11.0 *he 1.". arket for 'nitial 6,blic 8fferings -'68s.
+=. A company faces costs of ?; of the amo,nt of cash raised for an '68. 'f the company needs to raise
net <1= million> what is the total amo,nt of money that needs to be raised?
a. <1=>A==>===
b. <1=>?A?>=11
c. <1+>379>A:7
d. <A>37A>?7=
A#"$ B
1=>===>===B-1-.=?. @ 1=>?A?>=11
#A))B(G'#$ "mith (nterprises
$mith Enterprises
"mith (nterprises recently cond,cted an '68. 'n this> "mith received <13 per share from the
,nderwriter> the offering price per share was <19 and the stock price rose to <1? on the first day of
trading.
#A))(#&
+1. )efer to "mith (nterprises. What is the ,nderwriterEs disco,nt?
a. 13.0;
b. 1+.7;
c. 19.0;
d. 1=.+;
A#"$ B
+B19 @ ..1+7
#A)$ "mith (nterprises
++. )efer to "mith (nterprises. What is the first day ret,rn on an investment in the '68?
a. +1.3+;
b. 17.:?;
c. 1A.:7;
d. 1+.79;
A#"$ %
0B19 @ .1A:7
+0. )efer to "mith (nterprises. What is the total percentage costs of the '68 -,nderwriting and
,nderpricing.?
a. 07.:;
b. 13.0;
c. 1A.A;
d. +1.3;
A#"$ A
-1?-13.B13 @ .07:
#A))B(G'#$ "mith (nterprises +
$mith Enterprises %
"mith (nterprises wants to cond,ct an '68. *he offering price of the stock is <17> the ,nderwriterEs
disco,nt is 9; and legal and other e5penses are estimated to be <1>7==>===.
#A))(#&
+3. )efer to "mith (nterprises +. What are the net proceeds per share?
a. <17
b. <19
c. <13.1=
d. <1:.+=
A#"$ %
17-1-.=9. @ 13.1=
#A)$ "mith (nterprises +
+7. )efer to "mith (nterprises +. 'f the company iss,es 1>===>=== shares> what are the net proceeds of the
'68?
a. <10>7==>===
b. <17>===>===
c. <1+>9==>===
d. <1=>7==>===
A#"$ %
1>===>===-1-.=9.-17. - 1>7==>=== @ 1+>9==>===
#A)$ "mith (nterprises +
+9. *he dominant so,rce of financing for 1.". corporations is
a. debt financing.
b. new e4,ity.
c. internal cash flow.
d. none of the above.
+:. An instit,tion that raises capital by iss,ing liabilities against itself is a
a. financial intermediary.
b. financial broker.
c. financial agent.
+A. *he 1?00 law that prohibited commercial banks from ,nderwriting corporate sec,rity iss,es> as well as
a host of other things is
a. the Glass-"teagall Act.
b. the c!adden Act.
c. the Gramm-Leach-Bliley Act.
A#"$ A &'!$ )(!$ 11.1 *he Basic %hoices in Long-*erm !inancing
+?. When a financial intermediary repackages loans and other traditional bank-based credit prod,cts into
sec,rities that can be sold to p,blic investors we call that
a. privati/ation.
b. sec,riti/ation.
c. asset s,bstit,tion.
A#"$ B &'!$ ( )(!$ 11.1 *he Basic %hoices in Long-*erm !inancing
0=. 'n the 1.".> firms that need to raise capital e5ternally> prefer to iss,e
a. common stock.
b. preferred stock.
c. debt.
d. hybrid sec,rities.
01. A bond sold in the 1.". by a German based company is an e5ample of a-n.
a. (,robond.
b. 2ankee bond.
c. "am,rai bond.
A#"$ B &'!$ ( )(!$ 11.1 *he Basic %hoices in Long-*erm !inancing
0+. An investment banking firm that generally occ,pies the lead or co-lead managerEs position in large
sec,rity offerings is referred to as
a. a b,lge bracket firm.
b. a green shoe firm.
c. a Wall "treet firm.
A#"$ A &'!$
)(!$ 11.+ 'nvestment Banking and the 6,blic 'ss,ance of "ec,rities
00. Lead 'nvestment Banking %orp. is the lead ,nderwriter for the e4,ity iss,ance of #ew%orp. Lead is
responsible for A=; of the iss,e at a disco,nt of <1.:= per share. 'f Lead is responsible for selling
1>0==>=== shares then what is the total compensation to the ,nderwriting syndicate?
a. <1>:9A>===
b. <+>+1=>===
c. <+>:9+>7==
A#"$ %
1>0==>=== B .A @ 1>9+7>=== 1.: @ +>:9+>7==
&'!$ )(!$ 11.+ 'nvestment Banking and the 6,blic 'ss,ance of "ec,rities
03. 'n general> what is the determining factor in the ,nderwriting spread charged by investment banks?
a. the si/e of the iss,e
b. the risk inherent in the sec,rity to be iss,ed
c. the name recognition of the ,nderwriter
A#"$ B &'!$
07. *he most important law governing the sale of new sec,rities is
a. the Glass-"teagall Act.
b. the "ec,rities Act of 1?00.
c. the "ec,rities and (5change %ommission Act of 1?03.
A#"$ B &'!$
09. Which of the following sho,ld not be considered a benefit to a firm that is iss,ing an '68?
a. access to additional capital
b. provide an alternative to cash for f,t,re ac4,isistions
c. have another so,rce> other than cash for e5ec,tive compensation
d. limits the fo,nderEs ownership dil,tion
A#"$ & &'!$
0:. Which of the following factors might be most important for an entreprene,r that is considering an '68
in an ind,stry where a firmEs strategy is its most important asset.
a. the ,se of stock as a compensation vehicle
b. the investment banking fee
c. the disclos,re re4,irments of p,blicly traded firms
d. all of the above are most import to s,ch a firm
A#"$ %
strategy can be interpreted as private information @@@F disclos,re is the most onero,s choice.
0A. 'f %ompany G intends to distrib,te shares of its wholly owned s,bsidiary to its c,rrent shareholders in
an effort to make the s,bsidiary a p,blicly traded company> then %ompany G is contemplating a-n.
a. e4,ity carve-o,t
b. spin-off
c. LB8
A#"$ B &'!$
0?. 'f yo, are anticipating p,rchasing shares of companies that will be offering shares to the p,blic for the
first time> yo,r most profitable strategy for p,rchasing those shares will be
a. to b,y them in the primary market.
b. to b,y them in the secondary market.
c. b,y options on the shares before the '68 date.
A#"$ A
#ote$ b,ying options on pre-'68 shares is not possible
3=. 'f yo, were to p,rchase the shares of a firm one month after its '68 as well as the shares of a
comparable si/ed -matched. firm on the same day and then hold both shares for five years> yo, wo,ld
e5pect
a. that the ret,rn of the '68 firmEs stock to be greater than that of the matched firm.
b. that the ret,rn of the matched firmEs stock to be greater than that of the '68 firm.
c. that the ret,rn of the two stocks to be e4,al.
d. that since the two firms are likely to be ,ncorrelated the relation cannot be predicted.
A#"$ B &'!$ D
31. 'f yo, are an investor that owns shares in a firm that yo, believe is abo,t to iss,e additional e4,ity>
then yo, wo,ld e5pect the price of yo,r shares to
a. increase.
b. be ,naffected.
c. decrease.
d. all three of the above co,ld happen with e4,al probability.
A#"$ % &'!$
)(!$ 11.3 "easoned (4,ity 8fferings in the 1nited "tates
3+. 'f a firm is going to iss,e additional e4,ity by offering e5isting shareholders the right> or the ability to
sell to someone else that right> to p,rchase the offering then that is called a
a. general cash offering.
b. rights offering.
c. seasonal rights offering.
A#"$ B &'!$
30. Which of the following wo,ld most likely get a firm in tro,ble if it sold private placement sec,rities to
this investor?
a. pension f,nd
b. vent,re capitalist
c. retiree
A#"$ % &'!$
33. Which of the following is a valid concern for an investor who is considering p,rchasing a bond which
has been iss,ed ,nder ),le 133A?
a. ),le 133A iss,es are less li4,id than p,blic iss,es
b. ),le 133A iss,es are traded in the secondary market too actively to acc,rately val,e them
c. ),le 133A iss,es can never be rep,rchased by the iss,ing firm
A#"$ A
"ec,rities iss,ed ,nder ),le 133A are private iss,es which are less li4,id than p,blic iss,es.
&'!$ )(!$ 11.3 "easoned (4,ity 8fferings in the 1nited "tates
37. 8ne reason that a 1.". based firm might want to iss,e its e4,ity in international markets is
a. that the firm will be able to raise markedly more capital> thro,gh a m,ch higher sec,rity
price> in the international markets.
b. that an international iss,e may help a company integrate itself into a international local
b,siness scene.
c. that 1.". "ec,rities Law states that international ownership has no voting rights.
A#"$ B &'!$ )(!$ 11.7 'nternational %ommon "tock 8fferings
39. A non-1.". based company wo,ld like to iss,e a form of its common e4,ity in the 1.". A c,rrent
method for doing so wo,ld be
a. to contract for a 1.". investment back to iss,e a sponsored A&).
b. to let a 1.". investment bank iss,e an ,nsponsored A&).
c. to sell p,t options on its own stock to 1.". investors.
A#"$ A &'!$ D )(!$ 11.7 'nternational %ommon "tock 8fferings
3:. American &epository )eceipts provide 1.". 'nvestors with
a. the ability to p,rchase foreign sec,rities in the foreign companies domestic c,rrency.
b. the ability to p,rchase foreign sec,rities in 1.". dollars.
c. the ability to p,rchase 1.". sec,rities in foreign c,rrency denominations.
A#"$ B &'!$ )(!$ 11.7 'nternational %ommon "tock 8fferings
3A. An e5ample of a share privati/ation iss,e wo,ld be
a. the p,blic iss,e of sec,rities representing ownership in the telephone system which is
c,rrently owned by the government of a foreign co,ntry.
b. the p,blic iss,e of sec,rities representing ownership in a firm that is c,rrently privately
owned by a foreign citi/en.
c. the private iss,e of sec,rities representing ownership in a firm that is c,rrently privately
owned by a foreign citi/en.
A#"$ A &'!$ D )(!$ 11.7 'nternational %ommon "tock 8fferings
3?. ost of the short-term capital gains of share privati/ation '68s are capt,red by
a. investors and citi/ens who vote in the co,ntry of the firm that is being privati/ed.
b. the investor base that is determined to pay the ma5im,m price for the '68.
c. the international monetary f,nd that helped inHect m,ch of the initial capital for the initial
start ,p.
A#"$ A &'!$ )(!$ 11.7 'nternational %ommon "tock 8fferings
7=. 8ne characteristic of share privati/ations is
a. that they are generally m,ch larger than the '68s of their private-sector co,nterparts.
b. that they are generally m,ch smaller than the '68s of their private-sector co,nterparts.
c. that the decision to privati/e is made solely on economic gro,nds.
A#"$ A
#ote$ % is incorrect beca,se m,ch of the economic benefit flows to voters rather than investors that
might ma5imi/e the price of the '68.
&'!$ )(!$ 11.7 'nternational %ommon "tock 8fferings
71. Ass,me that yo, p,rchase shares of a company that recently e5ec,ted an '68 at the post-offering
market price of <0+ per share> and yo, hold the shares for one year. 2o, then sell yo,r shares for <09
per share. *he company does not pay dividends> and yo, are not s,bHect to capital gains ta5ation. What
net ret,rn did yo, earn on yo,r share investment?
a. 11.11;
b. 1+.==;
c. 1+.7=;
d. 10.==;
A#"$ %
@-<09-<0+.B<0+ @ .1+7=
&'!$ ( )(!$ 11.1 *he Basic %hoices in Long-*erm !inancing
7+. Ass,me that yo, p,rchase shares of a company that recently e5ec,ted an '68 at the post-offering
market price of <7= per share> and yo, hold the shares for one year. 2o, then sell yo,r shares for
<7+.7= per share. *he company does not pay dividends> and yo, are not s,bHect to capital gains
ta5ation. What net ret,rn did yo, earn on yo,r share investment?
a. +.7=;
b. 3.A1;
c. 7.==;
d. :.7=;
A#"$ %
@-<7+.7=-<7=.B<7= @ .=7==
&'!$ ( )(!$ 11.1 *he Basic %hoices in Long-*erm !inancing
#A))B(G'#$ "ea Grove Beach %orp.
$ea &ro!e each Corporation
"ea Grove Beach %orporation is e5ec,ting an initial p,blic offering with the following characteristics.
*he company will sell 1+ million shares at an offer price of <+= per share> the ,nderwriter will charge
a : percent ,nderwriting fee> and the shares are e5pected to sell for <+:.7= per share by the end of the
first dayEs trading. Ass,ming this '68 is e5ec,ted as e5pected.
#A))(#&
70. )efer to "ea Grove Beach %orporation. What is the initial ret,rn earned by investors allocated shares
in the '68?
a. +=.+:;
b. +:.+:;
c. 0=.7=;
d. 0:.7=;
A#"$ &
@-<+:.7=-<+=.B<+= @ .0:7
&'!$ )(!$ 11.+ 'nvestment Banking and the 'ss,ance of 6,blic "ec,rities
#A)$ "ea Grove Beach %orp.
73. Dow m,ch will "ea Grove Beach %orporation receive from the offering?
a. <9.0= million
b. <++0.+= million
c. <+3=.7= million
d. <0=9.?= million
A#"$ B
@ 1+I<+=I.?0 @ <++0.+=
77. What is the total cost -,nderwriting fee and ,nderpricing. of this iss,e to "ea Grove Beach
%orporation?
a. <9.0= million
b. <19.A= million
c. <1=9.A= million
d. <1+7.== million
A#"$ %
@ 1+I<+:.7= - 1+I<+=I.?0 @ <1=9.A=
79. ontigo agic 6etrole,m %orporation is interested in selling common stock to raise capital for a new
oil well. *he firm has contacted !irst Bank of anhattan> a large ,nderwriting firm> which believes
that the stock can be sold for <3= per share. *he ,nderwriter also believes> after caref,l research> that
its administrative costs will be +.:7 percent of the sale price and its selling costs will be +.3= percent of
the sale price. 'f the ,nderwriter re4,ires a profit e4,al to 1.+7 percent of the sale price> how m,ch will
the spread have to be in dollars to cover the ,nderwriterEs costs and profit?
a. <=.93
b. <1.A=
c. <+.19
d. <+.79
A#"$ &
@ +.:7; C +.3=; C 1.+7; @ 9.3=;
@ <3=I9.3=; @ <+.79
&'!$ ( )(!$ 11.+ 'nvestment Banking and the 'ss,ance of 6,blic "ec,rities
#A))B(G'#$ "ea Grove Beach %o.
$ea &ro!e each Compan'
"ea Grove Beach %ompany needs to raise <0= million of new e4,ity capital. 'ts common stock is
c,rrently selling for <33 per share. *he investment bankers re4,ire an ,nderwriting spread of : percent
of the offering price> and the companyEs legal> acco,nting> and printing e5penses associated with the
seasoned offering are estimated to be <7==>===.
#A))(#&
7:. )efer to "ea Grove Beach %ompany. Dow many new shares m,st the company sell to net <0= million?
a. :37>07:
b. :37>A7:
c. :39>1+:
d. :39>0+:
A#"$ A
@ <0=>===>=== @ G I .?0 I <33 - <7==>===
G @ :37>07:
#A)$ "ea Grove Beach %o.
7A. What is the net price per share that "ea Grove Beach %ompany will receive from this offering?
a. <3=.+3
b. <3=.?+
c. <3+.+3
d. <30.?0
A#"$ B
@ .=:I<33 @ <0.=A
#et @ <33 - <0.=A @<3=.?+
#A)$ "ea Grove Beach %o.
#A))B(G'#$ 6anama %ity
Panama Cit' each Compan'
6anama %ity Beach %ompany needs to raise <9= million of new e4,ity capital. 'ts common stock is
c,rrently selling for <:= per share. *he investment bankers re4,ire an ,nderwriting spread of 7 percent
of the offering price> and the companyEs legal> acco,nting> and printing e5penses associated with the
seasoned offering are estimated to be <+==>===.
#A))(#&
7?. What is the net price per share that 6anama %ity Beach %ompany will receive from this offering?
a. <99.==
b. <99.+=
c. <99.7=
d. <9:.==
A#"$ %
@ .=7I<:= @ <0.7=
#et @ <:= - <0.7= @<99.7=
&'!$ D )(!$ 11.+ 'nvestment Banking and the 'ss,ance of 6,blic "ec,rities
#A)$ 6anama %ity
9=. )efer to 6anama %ity Beach %ompany. Dow many shares m,st be sold to net <9= million?
a. ?=7>+90
b. ?=+>+79
c. AA7>:17
d. A7:>130
A#"$ A
@ .=7I<:= @ <0.7=
#et @ <:= - <0.7= @<99.7=
<9+>===>===B<99.7= @ ?=7>+90
&'!$ D )(!$ 11.+ 'nvestment Banking and the 'ss,ance of 6,blic "ec,rities
#A)$ 6anama %ity
#A))B(G'#$ Brooks %orporation
roo(s Corporation
Brooks %orporation has H,st received <3= million in net proceeds from a seasoned offering. *he
offering was ,nderwritten by AB% 'nvestments> an investment bank that foc,ses on small company
offerings. !or the offering> A million shares of stock were iss,ed and the ,nderwriting e5penses for
AB% 'nvestments were <A==>===.
#A))(#&
91. )efer to Brooks %orporation. !or AB% 'nvestments to make a profit on this offering> what is the
minim,m price they m,st sell the stock for on the secondary market?
a. <7.==
b. <7.=3
c. <7.1=
d. <7.17
A#"$ %
Break even @ AIG - <3= - <=.A @ <=
G @ <7.1=
#A)$ Brooks %orporation
9+. )efer to Brooks %orporation. AB% 'nvestments is able to sell the stock on the secondary market at
<9.==. What is the profit for AB% 'nvestments for ,nderwriting this seasoned offering?
a. <:.+ million
b. <:.9 million
c. <A.= million
d. <A.A million
A#"$ A
6rofit @ AI<9 - <3= - <=.A @ <=
6rofit @ <:.+
#A)$ Brooks %orporation
#A))B(G'#$ J!lipJ shares 1
)F*ip) shares 1
*hree companies went p,blic last month with initial p,blic offerings -'68.. *he offer price and first
day closing price are shown below for the three firms. An investor was able to p,rchase 1== shares of
each company at the offer price and then KflipL the shares at the end of the day for the f,ll ret,rn.
"tock 8ffer 6rice %losing 6rice
A <1= <1+.7=
B <A= <?9.==
C <3= <77
#A))(#&
90. )efer to J!lipJ shares 1. What was the total dollar val,e of this investment at the end of the first day?
-'gnore any ta5 implications for this 4,estion.
a. <10>===
b. <13>97=
c. <17>A7=
d. <19>07=
A#"$ &
A$ 1==I<1+.7= @ <1+7=
B$ 1==I<?9.==@ <?9==
%$ 1==I<77 @ <77==
*8*AL$ <19>07=
#A)$ J!lipJ shares 1
93. )efer to J!lipJ shares 1. What was the ret,rn on this investment at the end of the first day? -'gnore any
ta5 implications for this 4,estion.
a. +0.1;
b. +7.A;
c. +:.7;
d. +?.1;
A#"$ B
avg. ret,rn @ -1B10.I-+7;.C-AB10.I-+=;.C-3B10.I-0:.7;. @ +7.A;
#A)$ J!lipJ shares 1
#A))B(G'#$ J!lipJ shares +
)F*ip) shares %
*hree companies went p,blic last month with initial p,blic offerings -'68.. An investor was able to
p,rchase shares of each company at the offer price and then KflipL the shares at the end of the day for
the f,ll ret,rn. *he shares of each company sold for a <+= offer price. *he n,mber of shares p,rchased
and the first day ret,rn are shown below.
"tock
"hares
Bo,ght
!irst &ay
)et,rn
A 7= +=;
B :7 1+;
C :7 7;
#A))(#&
97. )efer to J!lipJ shares +. What was the ret,rn on this investment at the end of the first day? -'gnore any
ta5 implications for this 4,estion.
a. 11.0A;
b. 11.91;
c. 11.AA;
d. 1+.00;
A#"$ A
@7=B+==I+=;C:7B+==I1+;C:7B+==I7;@ 11.0A;
#A)$ J!lipJ shares +
99. )efer to J!lipJ shares +. What was the dollar val,e of the '68 investment after the first day? -'gnore
any ta5 implications for this 4,estion.
a. <3>3?0
b. <3>3::
c. <3>377
d. <3>3==
A#"$ %
@7=B+==I+=;C:7B+==I1+;C:7B+==I7;@ 11.0A;
@<+=I-7=C:7C:7.I-1.110A. @ <3>377
#A)$ J!lipJ shares +
#A))B(G'#$ AB% Logistics
+C Logistics
*he managers of AB% Logistics -AB%. have decided to e5pand the companyEs operations into a few
new markets. *o f,nd this opport,nity> AB% has decided to la,nch a seasoned e4,ity offering to raise
new e4,ity capital. AB% c,rrently has 1+ million shares o,tstanding> and yesterdayEs closing market
price was <3=.== per AB% share. *he company plans to sell 0 million newly iss,ed shares in its
seasoned offering. *he investment banking firm of Armstrong 'ncorporated has agreed to ,nderwrite
the new stock iss,e for a 3 percent disco,nt from the offering price> which AB% and Armstrong have
agreed sho,ld be <=.7= per share lower than AB%Es closing price the day before the offering is sold.
#A))(#&
9:. 'f AB%Es stock price closes at <0?.== the day before the offering> what will be the net proceeds for
AB% from this offering?
a. <1=?.77 million
b. <11=.AA million
c. <11+.0+ million
d. <11:.== million
A#"$ B
@ 0I.?9I0A.7= @<11=.AA million
#A)$ AB% Logistics
9A. 'f AB%Es stock price closes at <0?.== the day before the offering> calc,late the ret,rn earned by AB%Es
existing stockholders on their shares from the time before the seasoned offering was anno,nced
thro,gh the time it was act,ally sold for <0A.7= per share.
a. -0.:7;
b. -+.==;
c. 1.+7;
d. 0.:7;
A#"$ A
@ -<0A.7=-<3=.B<3= @ -=.=0:7
#A)$ AB% Logistics
9?. 'f AB%Es stock price closes at <0?.== the day before the offering> calc,late the total cost of the
seasoned e4,ity offering to AB%Es e5isting stockholders as a percentage of the offering proceeds.
a. 19.+0;
b. 1A.71;
c. +=.1=;
d. +=.3=;
A#"$ &
6roceeds from offer @ 0I.?9I<0A.7=@<11=.AA
market val,e of firmEs shares after offering @ 17I0A.7= @<7::.7=
Wealth loss for e5isting holders @ 1+ I <1.7= @ <1A
1nderwriting fee @ .=3I0I<0A.7= @ <3.9+
Wealth loss C ,nderwriting fee @ <++.9+
%ost of iss,e @ <++.9+B<11=.AA @ +=.3=;
&'!$ D )(!$ 11.3 "easoned (4,ity 8fferings in the 1nited "tates
#A)$ AB% Logistics
:=. 'f AB%Es stock price closes at <39.:7 the day before the offering> calc,late the total cost of the
seasoned e4,ity offering to AB%Es e5isting stockholders as a percentage of the offering proceeds.
a. 0+.:+;
b. 01.97;
c. 0=.1:;
d. +?.A?;
A#"$ A
6roceeds from offer @ 7I.?7I<39@<+1A.7=
market val,e of firmEs shares after offering @ +=I39 @<?+=
Wealth loss for e5isting holders @ 17 I <3 @ <9=
1nderwriting fee @ .=7I7I<39 @ <11.7=
Wealth loss C ,nderwriting fee @ <:1.7=
%ost of iss,e @ <:1.7=B<+1A.7= @ 0+.:+;
&'!$ D )(!$ 11.3 "easoned (4,ity 8fferings in the 1nited "tates
#A)$ AB% Logistics
:1. What is an instit,tion that raises f,nds by iss,ing liabilities against itself?
a. !inancial intermediary
b. ,t,al f,nd company
c. 'nvestment bank
d. 'nitial p,blic offering
:+. What is the term for the repackaging of loans and other traditional bank-based credit prod,cts into
sec,rities that can be sold to p,blic investors?
a. 6rivati/ation
b. Asset B,ndling
c. "ec,riti/ation
d. 6rimary offering
:0. Which statement is !AL"( regarding the iss,ance of sec,rities by investment banks?
a. *he profits for an investment bank are determined by the si/e of the ,nderwriting spread.
b. *he prospect,s is the legal doc,ment that describes the terms of the '68.
c. Banks charge higher spreads for seasoned e4,ity offerings than ,nseasoned e4,ity
offerings.
d. Banks charge higher spreads on e4,ity iss,es than debt iss,es.
A#"$ % &'!$
)(!$ 11.+ 'nvestment Banking and the 'ss,ance of 6,blic "ec,rities
:3. What is the most important federal law regarding the iss,e of new sec,rities?
a. "ec,rities Act of 1?+0
b. "ec,rities Act of 1?00
c. "ec,rities Act of 1?30
d. "ec,rities Act of 1?70
A#"$ B &'!$ (
)(!$ 11.+ 'nvestment Banking and the 'ss,ance of 6,blic "ec,rities
:7. Which of the following is #8* a benefit of going p,blic for a private firm?
a. #ew capital for the company.
b. 6,blicly traded stock for ac4,isitions
c. 6ersonal wealth and li4,idity
d. Low managerial cost in iss,ing the '68.
A#"$ & &'!$

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