56.
|
Bakers' Town Bread is selling 1,200 shares of stock through a Dutch auction. The bids received are as follows:
How much cash will Bakers' Town Bread receive from selling these shares of stock? Ignore all transaction and flotation costs.
Total cash received = 1,200 × $10 = $12,000
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-02 How securities are sold to the public and the role of investment banks in the process. Section: 15.4 Topic: Dutch auction |
57.
|
Webster Electrics is offering 1,500 shares of stock in a Dutch auction. The bids include:
How much cash will Webster Electrics receive from selling these shares? Ignore all transaction and flotation costs.
Total cash received = 1,500 × $22 = $33,000
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-02 How securities are sold to the public and the role of investment banks in the process. Section: 15.4 Topic: Dutch auction |
58.
|
You are a broker and have been instructed to place an order for a client to purchase 500 shares of every IPO that comes to market. The next two IPOs are each priced at $25 a share and will begin trading on the same day. The client is allocated 500 shares of IPO A and 100 shares of IPO B. At the end of the first day of trading, IPO A was selling for $23.50 a share and IPO B was selling for $29 a share. What is the client's total profit or loss on these two IPOs as of the end of the first day of trading?
Total profit = [500 × ($23.50 - $25)] + [100 × ($29 - $25)] = -$350
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.5 Topic: IPO |
59.
|
Richard has an outstanding order with his stock broker to purchase 1,000 shares of every IPO. The next three IPOs are each priced at $30 a share and will all start trading on the same day. Richard is allocated 1,000 shares of IPO A, 400 shares of IPO B, and 100 shares of IPO C. On the first day of trading IPO A opened at $31.50 a share and ended the day at $28.25 a share. IPO B opened at $31 a share and finished the day at $32 a share. IPO C opened at $36.50 a share and ended the day at $38.75 a share. What is Richard's total profit or loss on these three IPOs as of the end of the first day of trading?
Total profit = [1,000 × ($28.25 - $30)] + [400 × ($32 - $30)] + [100 × ($38.75 - $30)] = -$75
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.5 Topic: IPO |
60.
|
Two IPOs will commence trading next week. Scott places an order to buy 300 shares of IPO A. Steve places an order to purchase 300 shares of IPO A and 300 shares of IPO B. Both IPOs are priced at $20 a share. Scott is allocated 100 shares of IPO A. Steve is allocated 100 shares of IPO A and 300 shares of IPO B. At the end of the first day of trading, IPO A is selling for $22.70 a share and IPO B is selling for $18.60 a share. What is the difference in the total profits or losses that Scott and Steve have as of the end of the first day of trading?
Scott's profit = 100 × ($22.70 - $20) = $270
Steve's profit = [100 × ($22.70 - $20)] + [300 × ($18.60 - $20)] = -$150 Difference = $270 - (-$150) = $420 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.5 Topic: IPO |
61.
|
Wear Ever is expanding and needs $12.6 million to help fund this growth. The firm estimates it can sell new shares of stock for $35 a share. It also estimates it will cost an additional $340,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 7 percent spread. How many shares of stock must Wear Ever sell if it is going to have $12.6 million available for its expansion needs?
Total value of issue = ($12,600,000 + $340,000)/(1 - 0.07) = $13,913,978.49
Number of shares needed = $13,913,978.49/$35 = 397,542.24 shares |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.7 Topic: Issue costs |
62.
|
Mountain Teas wants to raise $11.6 million to open a new production center. The company estimates the issue costs including the legal and accounting fees will be $440,000. The underwriters have set the stock price at $17.50 a share and the underwriting spread at 9 percent. How many shares of stock does Mountain Teas have to sell to meet its cash need?
Total value of issue = ($11,600,000 + $440,000)/(1 - 0.09) = $13,230,769
Number of shares needed = $13,230,769/$17.50 = 756,044 shares |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.7 Topic: Issue costs |
63.
|
Outdoor Living needs $7.5 million to finance modifications to its production equipment because the design of its all-season tents has changed dramatically. The underwriters estimate that the firm could sell additional shares of stock at $14.50 a share with a 7.5 percent underwriting spread. This would be a firm commitment underwriting. The estimated issue costs are $125,000. How many shares of stock will Outdoor Living need to sell to finance this project?
Total value of issue = ($7,500,000 + $125,000)/(1 - 0.075) = $8,243,243.24
Number of shares needed = $8,243,243.24/$14.50 = 568,500 shares |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.7 Topic: Issue costs |
64.
|
High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so. After discussing this with key shareholders, the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share. The current market price of the firm's stock is $22 a share. How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans?
$3.5m/$18 = 194,444 shares
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
65.
|
Northwest Rail wants to raise $14.2 million through a rights offering so it can purchase additional rail cars and upgrade its maintenance facilities. How many shares of stock will the firm need to sell through this offering if the current market price is $34 a share and the subscription price is $31 a share?
$14.2m/$31 = 458,064.52 shares
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
66.
|
A.K. Stevenson wants to raise $7.5 million through a rights offering. The subscription price is set at $24. Currently, the company has 2.1 million shares outstanding with a current market price of $25 a share. Each shareholder will receive one right for each share of stock they currently own. How many rights will be needed to purchase one new share of stock in this offering?
Number of rights issued = 1 × 2.1m = 2.1m; Number of shares needed = $7.5m/$24 = 312,500; Rights needed for each new share = 2.1m/312,500 = 6.72 rights
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
67.
|
The Motor Plant wants to raise $21.4 million through a rights offering so it can modernize its facilities. The subscription price for the offering is set at $11 a share. Currently, the company has 2.6 million shares of stock outstanding at a market price of $12.50 a share. Each shareholder will receive one right for each share of stock they own. How many rights will a shareholder need to purchase one new share of stock in this offering?
Number of rights issued = 1 × 2.6m = 2.6m; Number of shares needed = $21.4m/$11 = 1,945,454.55; Rights needed for each new share = 2.6m/1,945,454.55 = 1.34 rights
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
68.
|
Miller Fruit wants to expand its citrus grove operations. The firm estimates that it needs $8.6 million to buy land and establish its operations. Currently, the firm has 540,000 shares of stock outstanding at a market price per share of $34.80. If the firm decides to raise the needed capital through a rights offering, one right will be issued for each share of stock. The subscription price will be set at $33 a share. How many rights will a shareholder need to purchase one new share of stock in this offering?
Number of rights issued = 1 × 540,000 = 540,000; Number of shares needed = $8.6m/$33 = 260,606.06; Rights needed for each new share = 540,000/260,606.06 = 2.07 rights
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AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
69.
|
Jefferson Refining is issuing a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares in this offering are priced at $19 plus 3 rights. The current market price of the stock is $23 a share. What is the value of one right?
Value per share excluding right = [$19 + (3 × $23)]/(1 + 3) = $22.00
Value of one right = $23 - $22.00 = $1.00 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Right value |
70.
|
The stock of Cleaner Home Products is currently selling for $26.40 a share. The company has decided to raise funds through a rights offering wherein every shareholder will receive one right for each share of stock they own. The new shares being offered are priced at $25 plus five rights. What is the value of one right?
Cost per share = [$25 + (5 × $26.40)]/(1 + 5) = $26.17
Value of right = $26.40 - $26.17 = $0.23 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Right value |
71.
|
Barstow Industrial Supply has decided to raise $27.52 million in additional funding via a rights offering. The firm will issue one right for each share of stock outstanding. The offering consists of a total of 860,000 new shares. The current market price of the stock is $38. Currently, there are 5.16 million shares outstanding. What is the value of one right?
Subscription price = $27.52m/860,000 shares = $32 a share
Number of shares issued = 1 × 5.16m = 5.16m Number of rights needed = 5.16m/860,000 = 6 |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Right value |
72.
|
You currently own 8 percent of the 3.5 million outstanding shares of Webster Mills. The company has just announced a rights offering with a subscription price of $28. One right will be issued for each share of outstanding stock. This offering will provided $9 million of new financing for the firm, ignoring all issue costs. Assume that all rights are exercised. What will be your new ownership position if you opted to sell your rights rather than exercise them personally?
Number of shares owned = 0.08 × 3.5m = 280,000 shares
Number of shares offered = $9m/$28 = 321,428.57 shares New ownership position = 280,000/(3.5m + 321,428.57) = 7.33 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.9 Topic: Dilution |
73.
|
Jennifer owns 14,000 shares of Calico Clothing. Currently, there are 1.6 million shares of stock outstanding. The company has just announced a rights offering whereby 200,000 shares are being offered for sale at a subscription price of $14 a share. The current stock price is $16 a share. Assume that Jennifer sells her rights and that all rights are exercised. What percentage of the firm will Jennifer own after the rights offering?
New ownership percentage = 14,000/(1.6m + 0.2m) = 0.78 percent
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.9 Topic: Dilution |
74.
|
Underwater Experimental is considering a project which requires the purchase of $498,000 of fixed assets. The net present value of the project is $22,500. Equity shares will be issued as the sole means of financing the project. What will the new book value per share be after the project is implemented given the following current information on the firm?
Current market value per share = $936,000/60,000 = $15.60
Number of new shares needed = $498,000/$15.60 = 31,923.08 shares New book value per share = ($720,000 + $498,000)/(60,000 + 31,923.08) = $13.25 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.9 Topic: Book value |
75.
|
Birds and More is considering a project which requires the purchase of $175,000 of fixed assets. The net present value of the project is $4,500. Equity shares will be issued as the sole means of financing this project. The price-earnings ratio of the project equals that of the existing firm. What will the new market value per share be after the project is implemented given the following current information on the firm?
Current market value per share = $457,600/24,000 = $19.07
Number of new shares needed = $175,000/$19.07 = 9,178.32 shares New market value per share = ($457,600 + $175,000 + $4,500)/(24,000 + 9,178.32) = $19.20 |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.9 Topic: Market value |
76.
|
Wagner Trucking is considering investing in a new project that will cost $13 million and increase net income by 6.5 percent. This project will be completely funded by issuing new equity shares. Currently, the firm has 1.25 million shares of stock outstanding with a market price of $42 per share. The current earnings per share are $1.82. What will the earnings per share be if the project is implemented?
New earnings per share = ($1.82 × 1.25m × 1.065)/[1.25m + ($13m/$42)] = $1.55
|
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.9 Topic: Earnings per share |
77.
|
You own 15 percent or 13,500 shares of Printers, Etc. These shares have a total market value of $435,000. By what percentage will the total value of your investment in this firm change if the company sells an additional 10,000 shares of stock at $30 a share and you do not buy any?
Current number of shares outstanding = 13,500/0.15 = 90,000
Price per share = $435,000/13,500 = $32.22 New market value per share = [(90,000 × $32.22) + (10,000 × $30)]/(90,000 + 10,000) = $32.00 Percent change = ($32.00 - $32.22)/$32.22 = -0.69 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.9 Topic: Dilution |
78.
|
Kurt currently owns 3.4 percent of Northeastern Transportation. The company has a total of 438,000 shares outstanding with a current market price of $26.20 a share. At present, the firm is offering an additional 25,000 shares at a price of $25 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?
Number of shares owned = 0.034 × 438,000 = 14,892
New ownership position = 14,892/(438,000 + 25,000) = 3.22 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.9 Topic: Dilution |
79.
|
The Timken Company has announced a rights offer to raise $25 million for a new journal, the Journal of Financial Excess. This journal will review potential articles after the author pays a nonrefundable reviewing fee of $2,500 per page. The stock currently sells for $48 per share, and there are 2.6 million shares outstanding. The subscription price is set at $43 per share. What is the ex-rights price per share?
Number of new shares = $25m/$43 = 581,395.35
Number of rights needed to buy one share = 2.6m/581,395.35 = 4.472 Ex-rights price per share = [$43 + 4.472($48)]/[1 + 4.472] = $47.09 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 15-2 Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
80.
|
The Warm Shoe Co. has concluded that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $100 to $90 ($100 is the rights-on-price; $90 is the ex-rights price, also known as the when-issued price). The company is seeking $18 million in additional funds with a per-share subscription price of $50. How many shares of stock are outstanding, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds of the offering.)
PEx = $90 = ($50 + $100N)/(N + 1); N = 4
Number of new shares = $18m/$50 = 360,000 shares Number of old shares = 4 × 360,000 = 1,440,000 shares |
AACSB: Analytic
Blooms: Analyze Difficulty: 1 Easy EOC: 15-3 Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
81.
|
The Woods Co. and the Mickelson Co. have both announced IPOs at $43 per share. One of these is undervalued by $20, and the over is overvalued by $14, but you have no way of knowing which is which. You plan on buying 1,000 shares of each issue. If an issue is underpriced, it will be rationed, and only half your order will be filled. What is the amount of the difference between your expected profit and the amount of profit you could earn if you could get 1,000 shares of Woods and 1,000 shares of Mickelson?
Expected profit = 500($20) + 1,000(-$14) = -$4,000
Profit if 1,000 shares of each = 1,000($20) + 1,000(-$14) = $6,000 Difference = -$4,000 - $6,000 = -$10,000 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 15-4 Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.5 Topic: IPO underpricing |
82.
|
Flagler, Inc. needs to raise $30 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $40 per share and the company's underwriters charge a 10 percent spread. How many shares need to be sold?
Required sales proceeds: $30m = x (1 - 0.10); x = $33,333,333
Number of shares needed = $33,333,333/$40 = 1,111,111 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 15-5 Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.7 Topic: Flotation costs |
83.
|
The Educated Horses Corporation needs to raise $20 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. Suppose the offer price is $40 per share and the company's underwriters charge an 8 percent spread. The SEC filing fee and associated administrative expenses of the offering are $660,000. How many shares need to be sold?
Required sales proceeds: $20m + $0.66m = x (1 - 0.08); x = $22,456,522
Number of shares needed = $22,456,522/$40 = 561,413 |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 15-6 Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.7 Topic: Flotation costs |
84.
|
The Huff Co. has just gone public. Under a firm commitment agreement, Huff received $21.50 for each of the 6 million shares sold. The initial offering price was $23.65 per share, and the stock rose to $31.42 per share in the first few minutes of trading. Huff paid $1,260,000 in direct legal and other costs, and $390,000 in indirect costs. The flotation costs were what percentage of the funds raised?
Net amount raised = 6m ($21.50) - $1,260,000 - $390,000 = $127,350,000
Total direct costs = $1,260,000 + ($23.65 - $21.50) (6m) = $14,160,000 Total indirect costs = $390,000 + ($31.42 - $23.65) (6m) = $47,010,000 Total costs = $14,160,000 + $47,010,000 = $61,170,000 Flotation cost percentage = $61,170,000/$127,350,000 = 48.03 percent |
AACSB: Analytic
Blooms: Apply Difficulty: 1 Easy EOC: 15-7 Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.7 Topic: Flotation costs |
85.
|
Mountain Homes wishes to expand its facilities. The company currently has 7 million shares outstanding and no debt. The stock sells for $55 per share, but the book value per share is $43. The firm's net income is currently $9.1 million. The new facility will cost $30 million, and it will increase net income by $309,000. Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio. What will be the EPS be after the new equity issue?
Number of shares after the offering = 7m + ($30m/$55) = 7,545,454.545455
New EPS = ($9.1m + $309,000)/7,545,454.545455 = $1.25 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 15-9 Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.9 Topic: Dilution |
86.
|
The Metallica Heavy Metal Mining (MHMM) Corporation wants to diversify its operations. Some recent financial information for the company is shown here:
MHMM is considering an investment that has the same P/E ratio as the firm. The cost of the investment is $800,000, and it will be financed with a new equity issue. What would the ROE on the investment have to be if we wanted the price after the offering to be $115 per share? Assume the PE ratio remains constant.
Current ROE = $451,000/($4,631,000 - $2,315,500) = 0.19477435
New net income = 0.19477435 ($4,631,000 - $2,315,500 + $800,000) = $606,819 Number of new shares = $800,000/$115 = 6956.522 New EPS = $606,819/(11,000 + 6,956.522) =$33.79 Current P/E = $115/($451,000/11,000) = 2.804878 Necessary EPS = $115 = 2.804878(Necessary EPS); Necessary EPS = $41 Necessary net income = $41 (6,956.522) = $285,217 New ROE = $285,217/$800,000 = 35.65 percent |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 15-11 Learning Objective: 15-03 Initial public offerings and some of the costs of going public. Section: 15.9 Topic: Dilution |
87.
|
Precise Machining is considering a rights offer. The company has determined that the ex-rights price would be $46. The current price is $53 per share, and there are 7 million shares outstanding. The rights offer would raise a total of $70 million. What is the subscription price?
Number of new shares = $70m/PS
NEx = 7m/($70m/PS) = 0.1PS PX = $46 = [0.1PS($53) + PS]/(0.1PS + 1); PS = $27.06 |
AACSB: Analytic
Blooms: Apply Difficulty: 2 Medium EOC: 15-12 Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
88.
|
Atlas Corp. wants to raise $4 million via a rights offering. The company currently has 450,000 shares of common stock outstanding that sell for $40 per share. Its underwriter has set a subscription price of $24 per share and will charge the company a 7 percent spread. Assume that you currently own 7,200 shares of stock in the company and decide not to participate in the rights offering. How much can you get for selling all of your rights?
Net proceeds to firm = $24 (1 - 0.07) = $22.32
New shares offered = $4m/$22.32 = 179,211.47 Number of rights needed per share = 450,000/179,211.47 = 2.511 PEx = [$24 + 2.511($40)]/(1 + 2.511) = $35.44 Right value = $40 - $35.44 = $4.56 Sale proceeds = $4.56 (7,200) = $32,811.16 |
AACSB: Analytic
Blooms: Analyze Difficulty: 2 Medium EOC: 15-14 Learning Objective: 15-04 How rights are issued to existing shareholders and how to value those rights. Section: 15.8 Topic: Rights offer |
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