Chapter 18 Issuing Capital and the Investment Banking Process

1. Which of the following is the type of financing
that includes capital funds borrowed from personal savings, friends and
relatives, financial institutions such as commercial banks, or venture
capitalists?
A. debt financing
B. equity financing
C. public financing
D. capital financing

2. Which of the following is the type of financing
that includes capital funds invested or venture capitalists?
A. debt financing
B. equity financing
C. public financing
D. capital financing

3. Which of the following best describes the type of
financing provided by government agencies such as the Small Business
Administration?
A. debt financing
B. equity financing
C. public sources of financing
D. capital financing

4. Which of these is the type of loan where the firm
would receive the funds as soon as the bank approved the loan?
A. loan commitment agreements
B. spot loans
C. take-down loans
D. back-end loans

5. Which of these is the type of loan where the firm
borrows against pre-negotiated lines of credit or loan commitments?
A. loan commitment agreements
B. spot loans
C. take-down loans
D. back-end loans

6. Which of these is a contractual commitment to loan
the firm a certain maximum amount at a given interest rate?
A. loan commitment agreements
B. spot loans
C. take-down loans
D. back-end loans

7. Which of these is the fee charged by a bank for
making funds available through a loan commitment?
A. back-end (or commitment) fee
B. simple interest expense
C. discounted interest
D. up-front (or facility) fees

8. Which of these is the fee charged by a bank on any
unused balances of a loan commitment line at the end of the loan commitment
period?
A. back-end (or commitment) fee
B. simple interest expense
C. discounted interest
D. up-front (or facility) fees

9. Which of these is the type of loan where the firm
makes fixed interest payments over the life of the loan?
A. fixed-rate loans
B. variable-rate loans
C. take-down loans
D. spot loans

10. Which of these is the type of loan where the
interest payments change over the life of the loan?
A. fixed-rate loans
B. variable-rate loans
C. take-down loans
D. spot loans

11. Which of these is defined as a professionally managed
pool of money used to finance new and often high-risk firms?
A. equity capital
B. debt capital
C. venture capital
D. expertise capital

12. Which of the following describes the type of
venture capital firms whose sole purpose is to find and fund the most promising
new firms?
A. blue chip venture capital firms
B. institutional venture capital firms
C. angel venture capitalists
D. expertise venture capitalists

13. Which of the following describes the type of
venture capital firms who are wealthy individuals who make equity
investments?
A. blue chip venture capital firms
B. institutional venture capital firms
C. angel venture capitalists
D. expertise venture capitalists

14. Which of the following is the firm allowing its
equity, some of which was held privately by managers and venture capital
investors, to be publicly traded in stock markets for the first time?
A. over the counter market transaction
B. private market transaction
C. initial public offering
D. public market transaction

15. Which of the following is an unsecured short-term
promissory note issued by a public firm to raise short-term cash, often to
finance working capital requirements?
A. initial public offering
B. angel capital
C. venture capital
D. commercial paper

16. Which of the following is a security issue in
which the investment bank guarantees the issuer a price for newly issued
securities by buying the whole issue at a fixed price from the security issuer,
and where the investment bank then seeks to resell the securities to investors
at a higher price?
A. best efforts underwriting
B. firm commitment underwriting
C. underwriter’s spread
D. venture capital

17. Which of the following is a security issue in
which the underwriter does not guarantee a firm price to the issuer and acts
more as a placing or distribution agent for a fee?
A. best efforts underwriting
B. firm commitment underwriting
C. underwriter’s spread
D. venture capital

18. Which of the following is defined as when the bond
issuing firm invites bids from a number of underwriters?
A. competitive sale
B. negotiated sale
C. commercial sale
D. auction

19. Which of the following is defined as when a single
investment bank obtains the exclusive right to originate, underwrite, and
distribute the new bonds through a one-on-one negotiation process?
A. competitive sale
B. negotiated sale
C. commercial sale
D. silent auction sale

20. These are the markets in which corporations raise
funds through new stock issues.
A. primary
B. secondary
C. commercial
D. over the counter

21. Which of these is defined as the compensation for
the expenses and risks incurred by the investment bank to conduct primary sales
of stock for a firm?
A. net proceeds
B. gross proceeds
C. underwriter’s spread
D. initial public offering

22. This term is defined as the group of investment
banks used to help sell and distribute a new security issue.
A. take down
B. syndicate
C. underwriter’s spread
D. originating house

23. This term is defined as the lead bank(s) in a
syndicate, who directly negotiate with the issuing firm on behalf of the
syndicate.
A. take down
B. syndicator
C. underwriter’s spread
D. originating house

24. This is defined as the preliminary registration
statement filed with the SEC.
A. shelf prospectus
B. red herring prospectus
C. SEC prospectus
D. originating prospectus

25. This is defined as a method of registering
securities that allows firms that plan to offer multiple issues of the security
over a two-year period to submit one registration statement.
A. shelf registration
B. shelf prospectus
C. SEC registration
D. originating registration

26. Calculating Fees on a Loan Commitment You
have approached your local bank for a start-up loan commitment for $1,000,000
needed to open an auto repair store. You have requested that the term of the
loan be one-year. Your bank has offered you the following terms: size of loan
commitment = $1,000,000, term = 1 year, up-front fee = 20 basis points,
back-end fee = 50 basis points. If you take down 90 percent of the total loan
commitment, calculate the total fees you have paid on this loan
commitment.
A. $2,000
B. $2,500
C. $5,000
D. d.$ 6,500

27. Calculating Fees on a Loan Commitment You
have approached your local bank for a start-up loan commitment for $200,000
needed to open a computer repair store. You have requested that the term of the
loan be one-year. Your bank has offered you the following terms: size of loan
commitment = $200,000, term = 1 year, up-front fee = 50 basis points, back-end
fee = 80 basis points. If you take down 95 percent of the total loan
commitment, calculate the total fees you have paid on this loan
commitment.
A. $1000
B. $1080
C. $1600
D. $2520

28. Calculating Fees on a Loan Commitment
Calculate the total fees a firm would have to pay when its bank offers the firm
the following loan commitment: A loan commitment of $5,000,000 with an up-front
fee of 50 basis points and a back-end fee of 20 basis points. The take-down on
the loan is 80%.
A. $10,000
B. $25,000
C. $27,000
D. $33,000

29. Calculating Fees on a Loan Commitment
Calculate the total fees a firm would have to pay when its bank offers the firm
the following loan commitment: A loan commitment of $7,500,000 with an up-front
fee of 80 basis points and a back-end fee of 50 basis points. The take-down on
the loan is 60%.
A. $37,500
B. $60,000
C. $61,500
D. $75,000

30. Calculating Costs of Issuing Stock WuShock,
Inc., needs to raise $500 million to finance its plan for nationwide expansion.
In discussions with its investment bank, WuShock learns that the bankers
recommend an offer price (or gross price) of $50 per share and they will charge
an underwriter’s spread of $2.00 per share. Calculate the net proceeds to
WuShock from the sale of stock. How many shares of stock will WuShock need to sell
in order to receive the $500 million they need?
A. 10,000,000
B. 10,416,667
C. 250,000,000
D. 500,000,000

31. Calculating Costs of Issuing Stock Wildcat,
Inc., needs to raise $750 million to finance its plan for nationwide expansion.
In discussions with its investment bank, Wildcat’s learns that the bankers
recommend an offer price (or gross price) of $25 per share and they will charge
an underwriter’s spread of $1.50 per share. Calculate the net proceeds to
Wildcat’s from the sale of stock. How many shares of stock will Wildcat’s need
to sell in order to receive the $750 million they need?
A. 30,000,000
B. 31,914,894
C. 500,000,000
D. 750,000,000

32. Calculating Costs of Issuing Stock Blue
Dragon, Inc., needs to raise $600 million to finance its plan for nationwide
expansion. In discussions with its investment bank, Blue Dragon’s learns that
the bankers recommend an offer price (or gross price) of $60 per share and they
will charge an underwriter’s spread of $3.00 per share. Calculate the net proceeds
to Blue Dragon’s from the sale of stock. How many shares of stock will Blue
Dragon’s need to sell in order to receive the $600 million they need?
A. 10,000,000
B. 10,526,316
C. 200,000,000
D. 600,000,000

33. Calculating Costs of Issuing Stock Paige’s
Purses, Inc., needs to raise $25 million to finance plant expansion. In
discussions with its investment bank, Paige’s learns that the bankers recommend
an offer price (or gross proceeds) of $50 per share and Paige’s will receive
$45 per share. What is the underwriter’s spread on the issue?
A. $5
B. $45
C. $50
D. $0

34. Calculating Costs of Issuing Stock Amy’s
Accessories, Inc., needs to raise $10 million to finance plant expansion. In
discussions with its investment bank, Amy’s learns that the bankers recommend
an offer price (or gross proceeds) of $25 per share and Amy’s will receive $23
per share. What is the underwriter’s spread on the issue?
A. $0
B. $2
C. $23
D. $25

35. Calculating Costs of Issuing Debt Tennis
Games, Inc., with the help of its investment bank recently issued $25 million
of new debt. The offer price (and face value) on the debt was $1,000 per bond
and the underwriter’s spread was 8 percent of the gross proceeds. What is the
amount of capital funding Tennis Games, Inc., raised through this debt
offering?
A. $1,000
B. $2 million
C. $23 million
D. $25 million

36. Calculating Costs of Issuing Debt Soccer
Games, Inc., with the help of its investment bank recently issued $10 million
of new debt. The offer price (and face value) on the debt was $1,000 per bond
and the underwriter’s spread was 5 percent of the gross proceeds. What is the
amount of capital funding Soccer Games, Inc., raised through this debt
offering?
A. $1,000
B. $0.5 million
C. $9.5 million
D. $10 million

37. Calculating Costs of Issuing Debt
Basketball Games, Inc., with the help of its investment bank recently issued $5
million of new debt. The offer price (and face value) on the debt was $1,000
per bond and the underwriter’s spread was 6 percent of the gross proceeds. What
is the amount of capital funding Basketball Games, Inc., raised through this
debt offering?
A. $1,000
B. $0.30 million
C. $4.7 million
D. $5 million

38. Calculating Costs of Issuing Debt Just Add
Water, Inc., with the help of its investment bank recently issued $200,000,000
of new debt. The offer price on the debt was $1,000 per bond and the
underwriter’s spread was 4 percent of the gross proceeds. What amount of
capital funding did Just Add Water, Inc., raise through this bond issue?
A. $1,000
B. $8,000,000
C. $192,000,000
D. $200,000,000

39. Calculating Fees on a Loan Commitment You
have approached your local bank for a start-up loan commitment for $1,000,000
needed to open a car repair store. You have requested that the term of the loan
be one-year. Your bank has offered you the following terms: size of loan
commitment = $1,000,000, term = 1 year, up-front fee = 20 basis points,
back-end fee = 50 basis points, and rate on the loan = 9%. If you immediately
take down $750,000 and no more during the year, what is the total interest and
fees you have paid on this loan commitment?
A. $70,250
B. $70,750
C. $74,500
D. $93,250

40. Calculating Fees on a Loan Commitment You
have approached your local bank for a start-up loan commitment for $500,000
needed to open a furniture repair store. You have requested that the term of
the loan be one-year. Your bank has offered you the following terms: size of
loan commitment = $500,000, term = 1 year, up-front fee = 30 basis points,
back-end fee = 60 basis points, and rate on the loan = 10%. If you immediately
take down $250,000 and no more during the year, what is the total interest and
fees you have paid on this loan commitment?
A. $27,250
B. $28,000
C. $29,500
D. $53,000

41. Calculating Fees on a Loan Commitment Starr
Co. has been approved for a $100,000 loan commitment from its local bank. The
bank has offered the following terms: term = 1 year, up-front fee = 75 basis
points, back-end fee = 25 basis points, and rate on the loan = 8.00%. Starr
expects to immediately take down $80,000 and no more during the year unless
there is some unforeseen need. What is the total interest and fees Starr can
expect to pay on this loan commitment?
A. $7050
B. $7175
C. $7200
D. $7400

42. Calculating Costs of Issuing Debt Home
Improvement, Inc., needs to raise $2 million to finance plant expansion. In
discussions with its investment bank, Home Improvement learns that the bankers
recommend a debt issue with gross proceeds of $1,000 per bond and they will
charge an underwriter’s spread of 7 percent of the gross proceeds. How many
bonds will Home Improvement need to sell in order to receive the $2 million
they need?
A. 2,140
B. 2,151
C. 2,150,537
D. 2,140,000

43. Calculating Costs of Issuing Debt American
Movers, Inc., needs to raise $5 million to finance an expansion. In discussions
with its investment bank, American learns that the bankers recommend a debt
issue with gross proceeds of $1,000 per bond and they will charge an
underwriter’s spread of 5 percent of the gross proceeds. How many bonds will
Home Improvement need to sell in order to receive the $5 million they
need?
A. 4,750
B. 5,000
C. 5,250
D. 5,264

44. Calculating Costs of Issuing Debt Roy’s
Bar, Inc., needs to raise $25 million to finance firm expansion. In discussions
with its investment bank, Roy’s learns that the bankers recommend a debt issue
with an offer price of $1,000 per bond and they will charge an underwriter’s
spread of 6 percent of the gross price. How many bonds will Roy’s need to sell
in order to receive the $25 million they need?
A. 23,500
B. 25,000
C. 26,500
D. 26,596

45. Calculating Costs of Issuing Debt R&D,
Inc., needs to raise $200 million to finance firm expansion. In discussions
with its investment bank, R&D’s learns that the bankers recommend a debt
issue with an offer price of $1,000 per bond and they will charge an
underwriter’s spread of 3 percent of the gross price. How many bonds will
R&D need to sell in order to receive the $200 million they need?
A. 194,000
B. 200,000
C. 206,000
D. 206,186

46. Calculating Costs of Issuing Stock Video
Games, Inc., with the help of its investment bank recently issued 10 million
shares of new stock. The offer price on the stock was $47.50 per share and
Video’s received a total of $446,500,000 through this stock offering. Calculate
the net proceeds and the underwriter’s spread on the stock offering. What
percentage of the gross price is the investment bank charging Video’s for
underwriting the stock issue?
A. 3%
B. 30%
C. 6%
D. 9%

47. Calculating Costs of Issuing Stock
Volleyball Gear, Inc., with the help of its investment bank recently issued 1.5
million shares of new stock. The offer price on the stock was $18.50 per share
and Volleyball’s received a total of $26,917,500 through this stock offering.
Calculate the net proceeds and the underwriter’s spread on the stock offering.
What percentage of the gross price is the investment bank charging Volleyball’s
for underwriting the stock issue?
A. 3%
B. 4.5%
C. 6%
D. 9%

48. Calculating Costs of Issuing Stock Polly’s
Ponies, Inc., with the help of its investment bank recently issued 7.5 million
shares of new stock. The offer price on the stock was $15.00 per share and
Polly’s received a total of $105.75 million from the stock offering. Calculate
the net proceeds and the underwriter’s spread charged by the underwriter to
Polly’s. What percentage of the gross proceeds is the investment bank charging
Polly’s for underwriting the stock issue?
A. 3%
B. 6%
C. 9%
D. 94%

49. Calculating Costs of Issuing Stock Saddles
and Bridles, Inc., with the help of its investment bank recently issued 3
million shares of new stock. The offer price on the stock was $23.50 per share
and Saddles received a total of $68.385 million from the stock offering.
Calculate the net proceeds and the underwriter’s spread charged by the
underwriter to Saddles. What percentage of the gross proceeds is the investment
bank charging Saddles for underwriting the stock issue?
A. 3%
B. 6%
C. 9%
D. 97%

50. Calculating Costs of Issuing Stock Turbo
Technology Corp. recently went public with an initial public offering of 3
million shares of stock. The underwriter used a firm commitment offering in
which the net proceeds was $7.50 per share and the underwriter’s spread was 9
percent of the gross proceeds. Turbo also paid legal and other administrative
costs of $200,000 for the IPO. Calculate the gross proceeds per share received
by Turbo from the sale of the 3 million shares of stock.
A. $7.50
B. $7.57
C. $8.24
D. $8.32