Introduction to Corporate Finance

12: Raising Long-Term Financing

Kangaroo bonds, 439

mezzanine debt, 436

pre-emptive rights, 458

primary issues, 438

private placement, 458

prospectus, 440

reverse LBO (or second IPO), 455

rights offerings, 458

Rule 144A offering, 448

seasoned equity offerings

(SEOs), 438

secondary offerings, 438

securitisation, 438

seniority, 433

share issue privatisation (SIP),

451

spin-off, 455

tracking stocks, 455

underwriting spread, 440

Yankee bonds, 439

SELF-TEST PROBLEMS

Answers to Self-test problems and the Concept review questions throughout the chapter appear on
CourseMate with SmartFinance Tools at http://www.login. cengagebrain.com.

ST12-1 The Bloomington Company needs to raise $20 million of new equity capital. Its ordinary equity is
currently selling for $42 per share. The investment bankers require an underwriting spread of 7%
of the offering price, and the company’s legal, accounting and printing expenses associated with
the seasoned offering are estimated to be $450,000. How many new shares must the company
sell in order to net $20 million?

QUESTIONS

Q12-1 How should a corporation estimate the
amount of financing that must be raised
externally during a given year? Once that
amount is known, what other decision
must be made?

Q12-2 What is the dominant source of capital
funding in the United States? Given
this result, and the fact that most
corporations are net borrowers, what
decisions must most managers face in
order to address this financial deficit?

Q12-3 Define the term financial intermediary.
What role do financial intermediaries play
in US corporate finance? How does this
compare to the role of non-US financial
intermediaries?

Q12-4 What are the general trends regarding
public security issuance by US
corporations? Specifically, which security
type is most often sold to the public?
What is the split between initial and
seasoned equity offerings?

Q12-5 Distinguish between a Eurobond, a
foreign bond and a Yankee bond. Which
of these three represents the greatest
volume of security issuance?

Q12-6 What do you think are the most important

costs and benefits of becoming a publicly

traded firm? What questions would you

ask before advising whether or not an

entrepreneur’s firm should go public?

Q12-7 If you were an investment banker, how

would you determine the offering price of

an IPO?

Q12-8 Are the significantly positive short-run

returns earned by IPO shareholders

compatible with market efficiency? If not,

why not?

Q12-9 List and describe briefly the key services

that investment banks provide to firms

before, during and after a securities

offering.

Q12-10 Explain why the underwriting spread on

IPOs averages about 7% of the offering

price whereas the spread on a seasoned

offering of common stock averages less

than 5%?

Q12-11 Discuss the various issues that must be

considered in selecting an investment

banker for an IPO. Which type of

placement is usually preferred by the

issuing firm?