CHAPTER 15
How Corporations Issue Securities
Answers to Problem Sets
1. a. Further sale of an already publicly traded stock
b. U.S. bond issue by foreign corporation
c. Bond issue by industrial company
d. Bond issue by large industrial company.
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2. a. B
b. A
c. D
d. C
3. a. Financing of start-up companies.
b. Underwriters gather non-binding indications of demand for a new issue.
c. The difference between the price at which the underwriter buys the
curity from the company and re-lls it to investors.
d.一百年 Description of a curity offering filed with the SEC.
e. Winning bidders for a new issue tend to
overpay.
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4. a. A large issue
b. A bond issue
c. Subquent issue of stock
d. A small private placement of bonds.
5. a. Fal
b. Fal
c. True
6. a. Net proceeds of public issue = 10,000,000 - 150,000 - 80,000 =
$9,770,000; net proceeds of private placement = $9,970,000.
b. PV of extra interest on private placement =
数学趣味小故事 i.e., extra cost of higher interest on private placement more than outweighs saving in issue costs.
N.b. We ignore taxes.
c. Private placement debt can be custom-tailored and the terms more easily
renegotiated.
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7. a. Number of new shares, 50,000
b.促销组合 Amount of new investment, $500,000
c. Total value of company after issue, $4,500,000
d安全施工标语. Total number of shares after issue, 150,000
e. Stock price after issue, $4,500,000/150,000 = $30
f. The opportunity to buy one share is worth $20.
8. a. Zero-stage financing reprents the savings and personal loans the company’s principals rai to start a firm. First-stage and cond-stage financing comes from funds provided by others (often venture capitalists) to supplement the founders’ investment.
b. Carried interest is the name for the investment profits paid to a private equity or venture capitalist partnership
c. A rights issue is a sale of additional curities to existing investors; it can be contrasted with an at large issuance (which is made to all interested investors).
d. A road show is a prentation about the firm given to potential investors in order to gauge their reactions to a stock issue and to estimate the demand for the new shares.
e. A best efforts offer is an underwriter’s promi to ll as much as possible of a curity issue.erp专员
f. A qualified institutional buyer is a large financial institution which, under SEC Rule 144A, is allowed to trade unregistered curities with other qualified institutional buyers.
g. Blue-sky laws are state laws governing the sale of curities within the state.
h. A greenshoe option in an underwriting agreement gives the underwriter the option to increa the number of shares the underwriter buys from the issuing company.
9. a. Management’s willingness to invest in Marvin’s equity was a credible signal becau the management team stood to lo everything if the new venture failed, and thus they signaled their riousness. By accepting only part of the venture capital that would be needed, management was increasing its own risk and reducing that of First Meriam. This decision would be costly and foolish if Marvin’s management team lacked confidence that the project would get past the first stage.
b. Marvin’s management agreed not to accept lavish salaries. The cost of management perks comes out of the shareholders’ pockets. In Marvin’s ca, the managers are the shareholders.
10. If he is bidding on under-priced stocks, he will receive only a portion of the shares he applies for. If he bids on under-subscribed stocks, he will receive his full allotment of shares, which no one el is willing to buy. Hence, on average, the stocks may be under-priced but once the weighting of all stocks is considered, it may not be profitable.
11. There are veral possible reasons why the issue costs for debt are lower than tho of equity, among them:
▪ The cost of complying with government regulations may be lower for debt.
▪
The risk of the curity is less for debt and hence the price is less volatile. This decreas the probability that the issue will be mis-priced and therefore decreas the underwriter’s risk.
12. a. Inelastic demand implies that a large price reduction is needed in order to ll additional shares. This would be the ca only if investors believe that a stock has no clo substitutes (i.e., they value the stock for its unique properties).
