Corporate and International Finance (N1563)
Seminar 6
SHORT ANSWER | PROBLEMS
1) Briefly explain the term venture capital.
2) Briefly explain the term initial public offering (IPO).
3) Briefly explain the role of underwriters in the issuance of securities.
4) What are some of the costs to a firm associated with issuing new securities?
5) Briefly explain the basic procedure for a new issue.
MULTIPLE CHOICE
6) The most important function of an underwriter is to:
A) provide private placement of the firm's debt.
B) approve the prospectus before distribution to the public.
C) assess the firm's capital needs.
D) buy the securities issue from the firm and resell the securities to the public.
7) If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share, the spread per share is:
A) $2.
B) $1.
C) $40.
D) $38.
8) A major purpose of the prospectus is to:
A) distribute stock warrants to prospective investors.
B) list the security's dividend payment dates.
C) advise investors of the security's potential risks.
D) inform. investors of the security's rate of return.
9) One reason that underpricing of new issues occurs more frequently than overpricing is that:
A) the demand for a new issue is typically too high.
B) underwriters earn low rates of return.
C) issuing firms demand that equity be underpriced.
D) underwriters want to reduce the risk of a firm commitment.
10) One reason for an underwriters' syndication is to:
A) increase the size of the spread.
B) monitor the actions of the different underwriters.
C) avoid the scrutiny of the Securities and Exchange Commission.
D) reduce the risk of selling a large issue.
11) What would you expect to be the market price of stock after a sold-out rights issue, if each existing shareholder purchases one new share at $60 for each three that he or she currently holds, and the current share price is $100?
A) $80
B) $90
C) $85
D) $75
12) Pandora Box Company Inc. makes a rights issue at a subscription price of $5 a share. One new share can be purchased for every five shares held. Before the issue there were 10 million shares outstanding and the share price was $6.
a. What is the total amount of new money raised?
b. What is the expected stock price after the rights are issued?
c. By what percentage would the total value of the company need to fall before shareholders would be unwilling to take up their rights?
d. Suppose that you initially own 100 shares plus $100 in the bank. If you take up your rights issue, what will be your total wealth after the issue is completed?
e. Suppose that the company now decides to issue the new stock at $4 instead of $5 a share. How many new shares would it have needed to raise the same sum of money?
f. What is the expected stock price under this new arrangement after the rights are issued?
g. If you take up your rights issue under this new arrangement, what will be impact on your total wealth after the issue is completed?
h. Which arrangement makes you better off: the first, the second, or neither?