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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Raising Capital

Quick Quiz 1

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1	From the viewpoint of the borrower, one advantage of issuing private debt rather than public debt is that __________.
		A)	private debt is likely to have more restrictive covenants
		B)	private debt typically has lower distribution costs
		C)	private debt incurs the costs of OSC registration
		D)	in the event of default, it is harder to renegotiate the terms of private debt
		E)	the interest rate for privately placed debt is usually higher than for public debt


2	Which of the following is/are true of long term debt issues? I. The OSFI inspects all term loans to ensure compliance with regulations. II. Direct placements are more likely to have restrictive covenants. III. Flotation costs are lower with debt issues than with equity issues.
		A)	I only.
		B)	II only.
		C)	III only.
		D)	I, II, and III only.
		E)	II and III only.


3	You own 7.5% of the stock in IBME Corporation. IBME is planning to issue new shares of stock in the near future via a rights offering. From your background in corporate finance you realize that you will experience a(n) as a result of the issue if you sell your rights.
		A)	loss of wealth
		B)	dilution of book value
		C)	increase in shares
		D)	dilution of relative purchasing power
		E)	dilution of percentage ownership


4	To finance an expansion, Air Canada sells 1,000,000 shares of common stock to investors at large. This is an example of a(n) __________.
		A)	private placement
		B)	rights offer
		C)	seasoned new issue
		D)	Regulation A offering
		E)	initial public offering


5	A firm faces direct costs of 8.0% of the amount of cash raised for new security sales. How much capital needs to be raised if initial project outlays total $6 million?
		A)	$6.522 million
		B)	$6.480 million
		C)	$5.520 million
		D)	$6.750 million
		E)	$6.640 million


6	TOYSrYOU needs to raise $5 million in a rights offering. If the subscription price is $10 per share, the stock price is $12.50 per share, and there are 4 million shares outstanding, what is the value of a right?
		A)	$0.14
		B)	$2.50
		C)	$1.04
		D)	$0.28
		E)	$5.00


7	The BangBang Drum Company recently raised several million dollars in an initial public offering. BangBang received $22.00 per share from the underwriter, the offering price was $25.00 per share, and the market price rose to $28.00 on the first day of trading. The initial return investors earned on the stock was __________.
		A)	24.0%
		B)	13.6%
		C)	12.0%
		D)	27.3%
		E)	30.0%


8	The BB Drum Co. recently raised several million dollars in an initial public offering. BB received $22.00 per share from the underwriter, the offering price was $25.00 per share, and the market price rose to $28.00 on the first day of trading. The spread paid by BB was __________.
		A)	13.6%
		B)	12.0%
		C)	24.0%
		D)	28.0%
		E)	27.3%


9	Which of the following is/are important in choosing a venture capitalist? I. The financial strength of the venture capitalist. II. References regarding how successful the venture capitalist has been in the past. III. The venture capitalist's exit strategy.
		A)	I only
		B)	I, II and III
		C)	I and II only
		D)	II and III only
		E)	I and III only


10	Which of the following is false regarding venture capital?
		A)	Venture capital firms specialize in pooling funds from various sources and investing it in start-up enterprises.
		B)	Mezzanine level financing refers to the funds needed to get a prototype of a product built and a manufacturing plan completed.
		C)	Venture capitalists often participate in the management and oversight of the firms they invest in.
		D)	Second-stage financing could be the major investment needed to actually begin manufacturing, marketing and distribution.
		E)	Venture capital firms often specialize in financing different stages of the development of a firm.

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