How do you think each of the following items would affect a company’sability to attract new capital and the flotation costs involved in doing so?a. A decision of a privately held company to go publicb. The increasing institutionalization of the “buy side” of the stock andbond marketsc. The trend toward financial conglomerates as opposed to stand-aloneinvestment banking housesd. Elimination of the preemptive righte. The introduction in 1981 of shelf registration of securities

How do you think each of the following items would affect a company’sability to attract new capital and the flotation costs involved in doing so?a. A decision of a privately held company to go publicb. The increasing institutionalization of the “buy side” of the stock andbond marketsc. The trend toward financial conglomerates as opposed to stand-aloneinvestment banking housesd. Elimination of the preemptive righte. The introduction in 1981 of shelf registration of securities

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation

Section: Chapter Questions

Problem 4Q

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Which of the following does not apply to secondary markets? Group of answer choices Many investors might be unwilling to provide resources to corporations if there is no available mechanism for the future sale of their stocks and bonds to others. Transactions help to establish market prices for additional shares that may be issued in the future. Transactions are important to the efficient allocation of resources in our economy. New resources are provided when shares of stock are sold by the corporation to the initial owners.
Which is false about long-term sources of a firm’s capital? a. Preferred shares are securities whose intrinsic value is based on prospective earnings b. Some types of bank loans may require collateral from potential debtors c. Retained earnings are internal sources of funding that can be utilized for expansion d. All types of corporations may issue equity securities to the public
Which of the following characteristics are not an advantage of being a publicly traded company? Group of answer choices A. Allows the firm to play the merger game, using marketable securities for the purchase of other firms. B. Prestige is helpful in bank negotiations, executive recruitment and the marketing of products. C. Tapping into the security markets for a greater amount of funds. D. Compliance costs because of various public disclosure requirements.
Which of the following events is most likely to encourage a firm to INCREASE the amount of debt in its capital structure with other things held constant? Group of answer choices: Management believes that the firm's stock has become overvalued. Its sales become more stable over time. Its degree of operating leverage increases. The costs that would be incurred in the event of bankruptcy increase. The corporate tax rate decreases.
Which of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.
Which of the following statements is NOT CORRECT? (A) Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares (B) Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. (C) When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public." and the market for such stock is called the new issue market (D) It is possible for a firm to go public and yet not raise any additional new capital (E) When a coporation';s shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closaly, or privately, held.
Which of the following is a disadvantage of a company going public? Going public mandates compliance with ongoing SEC disclosure requirements. The amount of equity capital that can be raised in the public equity markets is typically less than the amount that can be raised through private sources. A company can raise equity capital only once by going public. There are millions of investors in public stock markets, and it is not easier for firms to reach these investors through public markets.
Which of the following statements is NOT true about Initial Public Offerings? A. An IPO occurs when a private company sells stock to the public for the first timeB. IPOs are less risky than a typical stock market investment since they are typically smaller companiesC. When an IPO occurs, a company raises money from public investors that they use to grow their businessD. IPOs are risky investments since the company going public often has a limited track record of performance
Which of the following is correct a. In a leveraged recapitalization, a firm uses its excess cash to buyback shares b. In an LBO, a firm borrows and repurchases its shares thereby reducng the number of shares outstanding. c. In a leveraged recapitalization, a change of ownership occurs as the firm is sold d. In an LBO, debt is a major component of the financing and a change of control occurs. e. In an LBO, managers use excess cash to repurchase shares
Which one of the following statements is TRUE? a. Creditors have a claim on a firm's earning stream through the dividend payments they receive. b. One tool of corporate governance is a company's tax avoidance strategy. c. One tool of corporate governance is stock repurchases. d. One tool of corporate governance is how the company's charter affects the likelihood of a takeover. e. One tool of corporate governance is choosing a good investment banker.
Please answer the following follow up questions Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. d) The higher the proportion of equity in a company’s overall capital structure, thehigher return required by its debtholders. (Explain your reasoning – in yourexplanation, provide a numerical example supporting your answer.) e) In the presence of corporate taxes, a company would prefer to raise debt onlywhen the benefits of the tax shield fully offset the cost of debt. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.) f) In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain yourreasoning – in your explanation, provide a numerical example supporting youranswer.)
Asempa Private Company limited has made strides in business over the past 15 years. Management is deciding to penetrate other markets to increase the market share. However, the business requires more capital injection to enable it expand its business. The best option so far is for the company to go public, then only can the company issue financial instruments such as equity shares, preference shares, bonds and debentures etc. to raise additional capital. From the case above, examine the effect of issuing only equity shares on management control?