FINE342 - Assignment

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McGill University *

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342

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Finance

Date

Jan 9, 2024

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pdf

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Uploaded by SuperHumanFogSandpiper21

Assignment 1 Fill-in Questions: 1. The_ _______________ is the written agreement between the corporation and the lender. 2. If the pledged asset for a secured bond are securities, then these securities are called the _____________ . 3. An unsecured bond is called a __________ 4. A bond indenture (debt contract) contains _____________ that limits the frim's activities. 5. A ________________ is an account managed by the bond trustee for the purpose of repaying bonds prior to maturity. 6. Equity investment in young private companies is generally known as _____________ 7. A _______________ gives a call option to the firm to buy back an entire issue at a stated price. 8. Replacing all or part of an outstanding bond issue prior to maturity is called Bond ________________ 9. The highest bond rating is _______________ 10. The maximum number of shares that a company can issue is known as ___________________ Problems 1 . Gonzales Food Stores, GFS, a family-owned grocery store chain headquartered in Kelowna, British Columbia, has grown to the point at which it would like to expand its operations throughout the West. The proposed expansion would require GFS to raise $10 million in additional capital. Because GFS currently has a debt ratio of 50 percent and because the family members already have all their funds tied up in the business, the owners are willing to consider selling shares to the public. However, they want to ensure that they retain control of the company. This would be GFS’s first share sale, and the owners are not sure just what would be involved. Therefore, they have asked you to research the process and to help them decide exactly how to raise the needed capital. In doing so, you should answer the following questions: a. Are the GFS shares currently publicly held or privately owned? If the firm sells shares to the public, will it then be publicly held or privately owned? b. What is meant by classified shares? Would GFS find any advantages in designating the shares currently outstanding as “founders’ shares?” What type of common shares should GFS sell to the public to allow the family to retain control over the operations of the business? c. What is meant when a firm is said to be “going public? d. What does it mean for shares to be “listed?” Do you think that GFS’s shares would be listed as soon as it goes public? e. What is a “red herring” prospectus? Why do provincial securities commissions require firms to file registration statements and distribute prospectuses to prospective shareholders before selling shares? What steps does the securities commission take to ensure that the information in the prospectus presents a fair and accurate portrayal of the issuing firm’s financial position? f. If the firm goes public and sells 1.5 million shares to the public buys at a price of $10 per share, what will be the approximate percentage cost, including both underwriting and other costs? Would the costs be higher or lower if the company were already publicly owned? Suppose that GFS need to elect seven new directors. How many shares do you need to own to be certain that you can elect at least one director under: a) straight voting? b) cumulative voting? g. Would you recommend that the firm have the issue underwritten or sold on a best-efforts basis? Why? What is the difference in costs between the two procedures? h. Suppose some of the Gonzales family members want to sell some of their own shares to diversify their holdings at the same time the company is selling new shares to raise expansion capital. Would this be feasible? i. Would it be a good idea to use rights offering for the issue? Why or why not? 1

2. The following material represents the cover page and the summary of the prospectus for the IPO of the Pest Investigation Control Corporation (PICC), which is going public tomorrow with a firm commitment initial public offering managed by the investment banking Erlanger and Ritter. 200,000 shares PEST INVESTIGATION CONTROL CORPORATION Of the shares being offered hereby, all 200,000 are being sold by the Pest Investigation Control Corporation, Inc. ("the Company"). Before the offering there has been no public market far the shares of PICC, and no guarantee can be given that any such market will develop. These securities have not been approved or disapproved by the OSC nor has the commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary, is a criminal offense. Price to Underwriting Proceeds to Public Discount Company* Per share $11.00 $1.10 $9.9 Total $2,200,000 $220,000 $1,980,00 *Before deducting expenses estimated at $27,000 and payable by the Company. This is an initial public offering. The common shares are being offered, subject to prior sale, when, as, and if delivered to and accepted by the Underwriters and subject to approval of certain legal matters by their Counsel and by Counsel for the company. The underwriters reserve the right to withdraw, cancel, or modify such offer and to reject offers in whole or in part. Erlanger and Ritter, Investment Bankers July 12,2019 Prospectus Summary The Company The Pest Investigation Control Corporation (PIGCI breeds and markets toads and tree frogs as ecologically safe insect-control mechanism. This Offering 200,000 shares of common stock, no par value. Listing The Company will seek listing on Nasdaq and will trade over the counter. Shares Outstanding As of Junes 30, 2019, 400,000 shares of Common stock were outstanding. After the offering, 600,000 shares of common stock will be outstanding. Use of the Proceeds To finance expansion of inventory and receivables and general working capital, and to pay for country club membership for certain finance professors. Selected Financial Information (Amounts in thousands except per-share data) Fiscal Year Ended June 30 2017 2018 2019 Revenues $60 $120 $240 Net earnings 3.80 15.90 36.10 Earnings per share 0.01 0.04 0.09 2

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