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Exam 14: Initial Public Offerings Investment Banking and Financial Restructuring

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Question 21

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Canadian Corporation incurred $4 million for the floatation costs and legal fees of its IPO.The issue involved 17 million shares.As a firm commitment written deal,the underwriter agreed to buy the shares at $50 each and resell them to the public at $54 per share.What will be the percentage of direct costs required in this deal?

A) 5.60%
B) 15.01%
C) 21.76%
D) 13.33%

E) A) and C)
F) All of the above

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Question 22

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Which of the following statements best describes listing on a stock exchange?

A) Listing is a decision of more significance to a firm than going public.
B) Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
C) Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the security commission.
D) The OTC is the second largest market for listed stock, and it is exceeded only by the TSX.

E) All of the above
F) A) and D)

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Question 23

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ABC WasteABC Waste (ABCW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 8.4% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. ABCW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. -Refer to Scenario: ABC Waste.What is the required after-tax refunding investment outlay,i.e.,the cash outlay at the time of the refunding?

Best efforts deals are commonly used by well-known,established issuers.

.If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision,and if the NPV of refunding is positive,then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.

Going public establishes a market value for the firm's shares,and it also ensures that a liquid market will continue to exist for the firm's shares.This is especially true for small firms that are not widely followed by security analysts.

Europa Corporation is financing an ongoing construction project.The firm will need $5,000,000 of new capital during each of the next 3 years.The firm has a choice of issuing new debt or equity each year as the funds are needed,or issuing only debt now and equity later.Its target capital structure is 40% debt and 60% equity,and it wants to be at that structure in 3 years,when the project has been completed.Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds.Yearly flotation costs for three separate issues of debt would be 3.0% of the gross amount.Ignoring time value effects,how much would the firm save by raising all of the debt now,in a single issue,rather than in three separate issues?

The principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters.However,financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks.This was not true some years ago,when the two types of banks were required by law to be completely independent of one another.

What can underwriters likely do for new IPO issues with uncertain market demand from investors?

Which of the following best describes a bought deal?

With a firm commitment underwriting,an investment bank agrees to sell 2 million shares to the public at $10 per share with a spread of $1.How much does the issuing company receive if only 1.5 million shares are sold?

Which of the following statements best describes private placements?

Which of the following entities does NOT belong to the TMX Group?

If its managers make a tender offer buying up all shares not held by the management team,this is called a private placement.

Once approved with a shelf prospectus,firms have the right to sell new stocks anytime up to a 25-month period by extending investors with a prospectus supplement.

Which of the following best describes the secondary market for stocks?

ABC WasteABC Waste (ABCW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 8.4% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. ABCW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. -Refer to Scenario: ABC Waste.What is the NPV if ABCW refunds its bonds today?

What is the average spread of new security issues in Canada?

Suppose a company issued 30-year bonds 4 years ago,when the yield curve was inverted.Since then,long-term rates (10 years or longer) have remained constant,but the yield curve has resumed its normal upward slope.Under such conditions,a bond refunding would almost certainly be profitable.

An underwriter follows a best efforts basis to sell 2 million shares at $10 each.Such a public offering price has included a $1 spread.How much will the issuer receive if only 1.5 million shares are sold in this issue?