Introduction to Corporate Finance What Companies Do, 3rd Edition By John Graham – Test Bank

Chapter 11—Raising Long-Term Financing

MULTIPLE CHOICE

1. Which law mandated the separation of investment and commercial banking?
a. Gramm-Leach-Bliley Act
b. McFadden Act
c. Glass-Steagall Act
d. none of the above

ANS: C PTS: 1 DIF: E
REF: 11.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates

2. A security offering that raises capital for firms is called a(n)
a. primary security offering
b. secondary security offering
c. securitization
d. all of the above

ANS: A PTS: 1 DIF: E
REF: 11.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates

3. A bond sold by foreign corporations to U.S. investors is called a(n)
a. Eurobond
b. foreign bond
c. Yankee bond
d. none of the above

ANS: C PTS: 1 DIF: E
REF: 11.1 The Basic Choices in Long-Term Financing NAT: Reflective thinking
LOC: understand stocks and bonds

4. A bank that helps firms to acquire external capital is called a
a. commercial bank
b. savings bank
c. investment bank
d. credit union

ANS: C PTS: 1 DIF: E
REF: 11.2 Investment Banking and the Public Sale of Securities
NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates

5. Which of the following is not considered an advantage of going public?
a. new capital for the company
b. listed stock for use as compensation
c. stock price emphasis
d. personal wealth and liquidity

ANS: C PTS: 1 DIF: M
REF: 11.3 The U.S. Market for IPOs NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates

6. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, what is the per share proceeds that Bavarian will receive?
a. $11.59
b. $10.67
c. $13.41
d. $12.50

ANS: A
$12.50(1-.0725) = $11.59

PTS: 1 DIF: E
REF: 11.2 Investment Banking and the Public Sale of Securities
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

7. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.25 per share. If the offering price of the stock is set at $12.50 per share, what is the percentage underwriting discount?
a. 8%
b. 9%
c. 10%
d. 11%

ANS: C
$1.25/$12.50 = .10

PTS: 1 DIF: E
REF: 11.2 Investment Banking and the Public Sale of Securities
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

8. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share and the company is planning on issuing 1 million shares, what are the total proceeds that Bavarian will receive?
a. $12,500,000
b. $11,593,750
c. $10,750,000
d. $13,275,500

ANS: B
12.50(1-.0725)1,000,000 = 11,593,750

PTS: 1 DIF: E
REF: 11.2 Investment Banking and the Public Sale of Securities
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

9. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is $1.25. If the offering price of the stock is set at $12.50 per share and the com-pany is planning on issuing 1 million shares, what are the total proceeds that Bavarian will receive?
a. 12,500,000
b. 11,250,000
c. 13,750,000
d. 10,875,000

ANS: B
(12.50-1.25)1,000,000 = 11,250,000

PTS: 1 DIF: E
REF: 11.2 Investment Banking and the Public Sale of Securities
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

10. Bavarian Brewhouse is planning on going public. Under the underwriting agreement the underwriting discount is 7.25%. If the offering price of the stock is set at $12.50 per share, how many shares does the company have to issue to raise $75 million?
a. 6,000,000
b. 6,469,003
c. 5,567,400
d. 5,000,000

ANS: B
75,000,000/(12.50)(1-.0725) = 6,469,003

PTS: 1 DIF: E
REF: 11.2 Investment Banking and the Public Sale of Securities
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates