Questions:
Problem 1. Describe the various sources of capital funding available to new and small firms.
Problem 2. What process do banks use to evaluate bank loans to small versus mid-market business firms?
Problem 3. What is the difference between a spot loan and a loan commitment?
Problem 4. Why do banks charge up-front fees and back-end fees on loan commitments?
Problem 5. What is the difference between a fixed rate and a floating rate loan?
Problem 6. What types of programs does the Small Business Administration offer to new and small businesses? Under what conditions would a new or small firm use each program?
Problem 7. What is venture capital?
Problem 8. What are the different types of venture capital firms? How do institutional venture capital firms differ from angel venture capital firms?
Problem 9. What are the advantages and disadvantages to a new or small firm of getting capital funding from a venture capital firm?
Problem 10. As a new or small firm considers going public what must the owners consider?
Problem 11. Describe the various sources of capital funding available to public firms.
Problem 12. What is the difference between a direct and an indirect placement of commercial paper?
Problem 13. Can a public firm with a lower than prime credit rating issue commercial paper?
Problem 14. How does a best efforts underwriting differ from a firm commitment underwriting? If you operated a company issuing stock for the first time, which type of underwriting would you prefer? Why might you still choose the alternative?
Problem 15. How does a competitive sale of securities differ from a negotiated sale? Which type of underwriting would you prefer? Why might you still choose the alternative?
Problem 16. How does a public offering of debt or equity securities issued by a public firm differ from a private placement?
Problem 17. What are the net proceeds, gross proceeds and underwriter’s spread? How does each affect the funds received by a public firm when debt or equity securities are issued?
Problem 18. Why would an investment bank use a syndicate to assist in underwriting debt or equity securities?
Problem 19. What is the difference between a prospectus and a red herring prospectus?
Problem 20. What is a shelf registration? Why would a public firm want to issue securities using a shelf registration?
Questions:
Problem 1: Calculating Fees on a Loan Commitment You have approached your local bank for a start-up loan commitment for $250,000 needed to open a computer repair store. You have requested that the term of the loan be one-year. Your bank has offered you the following terms: size of loan commitment = $250,000, term = 1 year, up-front fee = 50 basis points, back-end fee = 75 basis points. If you take down 80 percent of the total loan commitment, calculate the total fees you have paid on this loan commitment.
Problem 2: Calculating Fees on a Loan Commitment Calculate the total fees a firm would have to pay when its bank offers the firm the following loan commitment: A loan commitment of $2,500,000 with an up-front fee of 75 basis points and a back-end fee of 25 basis points. The take down on the loan is 50%.
Problem 3: Calculating Costs of Issuing Stock Husker’s Tuxedo’s, Inc. needs to raise $250 million to finance its plan for nationwide expansion. In discussions with its investment bank, Husker’s learns that the bankers recommend an offer price (or gross price) of $35 per share and they will charge an underwriter’s spread of $1.75 per share. Calculate the net proceeds to Husker’s from the sale of stock. How many shares of stock will Husker’s need to sell in order to receive the $250 million they need?
Problem 4: Calculating Costs of Issuing Stock Don’s Captain Morgan, Inc. needs to raise $12.5 million to finance plant expansion. In discussions with its investment bank, Don’s learns that the bankers recommend an offer price (or gross proceeds) of $15 per share and Don’s will receive $14 per share. Calculate the underwriter’s spread on the issue. How many shares of stock will Don’s need to sell in order to receive the $250 million they need?
Problem 5: Calculating Costs of Issuing Debt Kelly Girl’s Golf Games, Inc., with the help of its investment bank recently issued $43.125 million of new debt. The offer price (and face value) on the debt was $1,000 per bond and the underwriter’s spread was 7 percent of the gross proceeds. Calculate the amount of capital funding Kelly Girl’s Golf Games, Inc. raised through this debt offering.
Problem 6: Calculating Costs of Issuing Debt Bailey’s Dog Pens, Inc., with the help of its investment bank recently issued $112,500,000 of new debt. The offer price on the debt was $1,000 per bond and the underwriter’s spread was 5 percent of the gross proceeds. Calculate the amount of capital funding Bailey’s Dog Pens, Inc. raised through this bond issue.
Problem 7: Calculating Fees on a Loan Commitment You have approached your local bank for a start-up loan commitment for $250,000 needed to open a computer repair store. You have requested that the term of the loan be one-year. Your bank has offered you the following terms: size of loan commitment = $250,000, term = 1 year, up-front fee = 50 basis points, back-end fee = 75 basis points, and rate on the loan = 8%. If you immediately take down $150,000 and no more during the year, calculate the total interest and fees you have paid on this loan commitment.
Problem 8: Calculating Fees on a Loan Commitment Casey’s One Stop has been approved for a $75,000 loan commitment from its local bank. The bank has offered the following terms: term = 1 year, up-front fee = 85 basis points, back-end fee = 35 basis points, and rate on the loan = 7.75%. Casey’s expects to immediately take down $70,000 and no more during the year unless there is some unforeseen need. Calculate the total interest and fees Casey’s One Stop can expect to pay on this loan commitment.
Problem 9: Calculating Costs of Issuing Debt Sipe’s Paint and Wallpaper, Inc. needs to raise $1 million to finance plant expansion. In discussions with its investment bank, Sipe’s learns that the bankers recommend a debt issue with a gross proceeds of $1,000 per bond and they will charge an underwriter’s spread of 6.5 percent of the gross proceeds. How many bonds will Sipe’s Paint and Wallpaper need to sell in order to receive the $1 million they need?
Problem 10: Calculating Costs of Issuing Debt Renee’s Boutique, Inc. needs to raise $100 million to finance firm expansion. In discussions with its investment bank, Renee’s learns that the bankers recommend a debt issue with an offer price of $1,000 per bond and they will charge an underwriter’s spread of 5 percent of the gross price. Calculate the net proceeds to Renee’s from the sale of the debt. How many bonds will Renee’s Boutique need to sell in order to receive the $100 million they need?
Problem 11: Calculating Costs of Issuing Stock Kelly Girl’s Golf Games, Inc., with the help of its investment bank recently issued 2.5 million shares of new stock. The offer price on the stock was $20.50 per share and Kelly Girl’s received a total of $48,687,500 through this stock offering. Calculate the net proceeds and the underwriter’s spread on the stock offering. What percentage of the gross price is the investment bank charging Kelly Girl for underwriting the stock issue?
Problem 12: Calculating Costs of Issuing Stock Bailey’s Dog Pens, Inc., with the help of its investment bank recently issued 5 million shares of new stock. The offer price on the stock was $12.50 per share and Bailey’s received a total of $57.5 million from the stock offering. Calculate the net proceeds and the underwriter’s spread charged by the underwriter to Bailey’s Dog Pens, Inc. What percentage of the gross proceeds is the investment bank charging Bailey’s Dog Pens for underwriting the stock issue?
Problem 13: Calculating Costs of Issuing Stock Zimba Technology Corp. recently went public with an initial public offering of 2.5 million shares of stock. The underwriter used a firm commitment offering in which the net proceeds was $8.05 per share and the underwriter’s spread was 8 percent of the gross proceeds. Zimba also paid legal and other administrative costs of $250,000 for the IPO. Calculate the gross proceeds and the total funds received by Zimba from the sale of the 2.5 million shares of stock.
Problem 14: Calculating Costs of Issuing Stock Howett Pockett, Inc. plans to issue 10 million new shares of its stock. In discussions with its investment bank, Howett Pocket learns that the bankers recommend a net proceed of $19.90 per share and they will charge an underwriter’s spread of 5.5 percent of the gross proceeds. In addition, Howett Pockett must pay $2 million in legal and other administrative expenses for the seasoned stock offering. Calculate the gross proceeds and the total funds received by Howett Pockett from the sale of the 10 million shares of stock.
Problem 15: Calculating Fees on a Loan Commitment During the last year you have had a loan commitment from your bank to fund inventory purchases for your small business. The total line available was $500,000, of which you took down $400,000. It is now the end of the loan commitment period and your bank had you pay the back-end fees. You have misplaced the paperwork that listed the terms of the commitment, but you know you paid total fees (this does not include any interest paid to borrow the $400,000) of $3,250 on this loan commitment. You remember that the up-front fee was 50 basis points, calculate the back-end fee on this loan commitment.
Problem 16: Calculating Fees on a Loan Commitment During the last year you have had a loan commitment from your bank to fund working capital for your business. The total line available was $10,000,000, of which you took down $8,000,000. It is now the end of the loan commitment period and your bank had you pay the back-end fees. You have misplaced the paperwork that listed the terms of the commitment, but you know you paid total fees (this does not include any interest paid to borrow the $8,000,000) of $42,650 on this loan commitment. You remember that the back-end fee was 75 basis points, calculate the front-end fee on this loan commitment.
Problem 17: Calculating Costs of Issuing Stock Sipe’s Paint and Wallpaper, Inc. needs to raise $1 million to finance plant expansion. In discussions with its investment bank, Sipe’s learns that the bankers recommend a gross price of $25 per share and that 45,000 shares of stock be sold. If the net proceeds on the stock sale leaves Sipe’s with $1 million, calculate the underwriter’s spread on the stock issue.
Problem 18: Calculating Costs of Issuing Stock Renee’s Boutique, Inc. needs to raise $99.75 million to finance firm expansion. In discussions with its investment bank, Renee’s learns that the bankers recommend an offer price of $35 per share and that 3 million shares of stock be sold. If the net proceeds on the stock sale leaves Renee’s with $99.75 million, calculate the underwriter’s spread on the stock issue.
Problem 19: Calculating Costs of Issuing Stock Hughes Technology Corp. recently went public with an initial public offering in which they received a total of $60 million in new capital funding. The underwriter used a firm commitment offering in which the offer price was $10 and the underwriter’s spread was $0.75. Hughes also paid legal and other administrative costs of $1,050,000 for the IPO. Calculate the number of shares issued through this IPO.
Problem 20: Calculating Costs of Issuing Stock Howett Pockett, Inc. needs to raise $20 million in new capital funding from a seasoned equity offering. In discussions with its investment bank, Howett Pocket learns that the bankers recommend a gross price of $15.50 per share and they will charge an underwriter’s spread of $1.50 percent of the gross price. In addition, Howett Pockett must pay $1 million in legal and other administrative expenses for the seasoned stock offering. Calculate the number of shares of stock that Howett Pockett will need to sell to raise the $20 million.
Research It!
Underwriters:
Go to the Thomson Financial—Investment Banking and Capital Markets Group Web site at
https://www.thomsonreuters.com/busines_units/financial/league_tables
and find the latest information available for debt and equity securities underwriting. Go to the first date (the most recent information) listed under Debt and Equity and click on “Equity Capital Markets Review.” This will download a file onto your computer that will contain the most recent information on top underwriters for equity securities. Go back and repeat the last step, clicking on “Debt Capital Markets Review.” What is the most recent dollar value of global debt and equity underwritten by investment banks? Who are the top underwriters of debt and equity? How have the top writers’ market shares changed in the last year?
Integrated Mini Case: Capital Funding in a Public Firm
Nuran Security Systems, Inc. needs to raise $150,000,000 for asset expansion. As it raises the capital funding, Nuran wants to maintain its current debt ratio of 60 percent. Nuran has been approved for a loan commitment from its bank local bank. The bank has offered the following terms: term = 1 year, up-front fee = 60 basis points, back-end fee = 90 basis points. Nuran expects it will take down 90 percent of the loan commitment.
Nuran’s will also issue new shares of stock to support this asset growth. Nuran’s investment bank will use a firm commitment offering in which the net proceeds are $23.875 per share and the underwriter’s spread was 7 percent of the gross proceeds. Nuran Security Systsms’ will also pay legal and other administrative costs of $750,000 for the stock issue.
Calculate the amount of debt and equity funding Nuran Security Systems will need to keep its current debt ratio constant and the number of shares of stock the firm must issue to raise the needed stock. What can Nuran Security Systems, Inc. expect to pay for fees on this loan commitment and stock issue?