402 Part Four Financing Decisions and Market Efficiency
bre44380_ch15_379-409.indd 402 09/11/15 07:56 AM
- Underwriting costs For each of the following pairs of issues, which is likely to involve the
lower proportionate underwriting and administrative costs?
a. A large issue/a small issue
b. A bond issue/a common stock issue
c. Initial public offering/subsequent issue of stock
d. A small private placement of bonds/a small general cash offer of bonds - Stock issues True or false?
a. Venture capitalists typically provide first-stage financing sufficient to cover all develop-
ment expenses. Second-stage financing is provided by stock issued in an IPO.
b. Underpricing in an IPO is only a problem when the original investors are selling part of
their holdings.
c. Stock price generally falls when the company announces a new issue of shares. This is
attributable to the information released by the decision to issue. - Private placements You need to choose between making a public offering and arranging a
private placement. In each case the issue involves $10 million face value of 10-year debt. You
have the following data for each:
∙ A public issue: The interest rate on the debt would be 8.5%, and the debt would be issued
at face value. The underwriting spread would be 1.5%, and other expenses would be
$80,000.
∙ A private placement: The interest rate on the private placement would be 9%, but the total
issuing expenses would be only $30,000.
a. What is the difference in the proceeds to the company net of expenses?
b. Other things being equal, which is the better deal?
c. What other factors beyond the interest rate and issue costs would you wish to consider
before deciding between the two offers? - Rights issues Associated Breweries is planning to market alcohol-free beer. To finance the
venture it proposes to make a rights issue at $10 of one new share for each two shares held.
(The company currently has outstanding 100,000 shares priced at $40 a share.) Assuming
that the new money is invested to earn a fair return, give values for the following:
a. Number of new shares.
b. Amount of new investment.
c. Total value of company after issue.
d. Total number of shares after issue.
e. Stock price after the issue.
f. The rights issue will give the shareholder the opportunity to buy one new share for less
than the market price. What is the value of this opportunity?
INTERMEDIATE- Definitions Here is a further vocabulary quiz. Briefly explain each of the following:
a. Zero-stage vs. first- or second-stage financing
b. Carried interest
c. Rights issue
d. Road show
e. Best-efforts offer