CH13-Primary-Markets-and-the-Underwriting-of-Secur

13-1ANSWERSTOQUESTIONSFORCHAPTER13(Questionsareinboldprintfollowedbyanswers.)1.a.Whatarethethreewaysinwhichaninvestmentbankingfirmmaybeinvolvedintheissuanceofanewsecurity?b.Whatismeantbytheunderwritingfunction?a.Aninvestment-bankingfirm(1)providesadviceontypeofissue,size,termsandtimingtotheissuer;(2)underwritestheissuebybuyingit(therebyacceptingthepriceriskinresellingit);and(3)distributessuchissuestotheinvestingpublic.b.Underwritingmeansacceptingtherisk.Ininvestmentbankingitspecificallyreferstothebuyingofanewissue,relievingtheissuerfromtheproblemsofsellingthesecurity.Butownershipbringspricerisk,anditistheunderwriter’sintentiontoretailthesecurityatahigherprice.Successthereindependsmuchupontheunderwriter’sassessmentofexpectedmarketconditionsandreceptionofthesecurity.2.Whatisthedifferencebetweenafirmcommitmentunderwritingarrangementandabesteffortsarrangement?Asexplainedinquestion1(b)underwritinginvolvesacapitalcommitmentonthepartoftheinvestmentbanker,apurchaseandresaleofthesecurity.Abesteffortsarrangementinvolvessellingthesecurityfortheissuerandgettinganagencyfee.3.a.Whatismeantbyaboughtdeal?b.Whydoboughtdealsexposeinvestmentbankingfirmstogreatercapitalriskthantraditionalunderwriting?a.Inaboughtdeal,theleadmanageroragroupofmanagersoffersapotentialissuerofdebtsecuritiesafirmbidtopurchaseaspecifiedamountofthesecuritieswithacertaininterestrateandmaturity.Theissuerisgivenashorttimeperiodtoacceptorrejectthebid.Ifthebidisaccepted,theinvestment-bankingfirmhasboughtthedeal.Itcan,inturn,sellthesecuritiestootherinvestmentbankingfirmsfordistributiontotheirclientsand/ordistributethesecuritiestoitsclients.b.Duetotheabsenceofanunderwritingsyndicate,allofthecapitalriskisbornebytheinvestment-bankingfirmthathasboughthedeal.Theriskmayseemgreat,buttypicallytheinvestmentbankingfirmwillhavepre-soldmostoftheissuetoitsinstitutionalclients.Second,hedgingtoolsareavailabletoreducetheriskofanadversepricemovement.4.Acorporationisissuingabondonacompetitivebiddingbasis.Thecorporationhasindicatedthatitwillissue$200millionofanissue.Thefollowingyieldbidsandthecorrespondingamountsweresubmitted:BidderAmount(inmillions)BidA$207.4%B407.5C107.513-2D507.5E407.6F207.6G107.7H107.7I207.8J257.9K287.9L208.0M188.1a.Whoarethewinningbidders?b.Howmuchofthesecuritywillbeallocatedtoeachwinningbidder?c.Ifthisauctionisasingle-priceauction,atwhatyieldwilleachwinningbidderbeawardedthesecurity?d.Ifthisauctionisamultiple-priceauction,atwhatyieldwilleachwinningbidderbeawardedthesecurity?a.BiddersAthroughHarethewinningbidders.b.Eachwinnerwillbeallocatedthefullamounthebidon.c.InaDutchauction,eachbidderwillpaythehighestwinningyieldbid(orlowestprice).Inthiscasethehighestbidis7.7%.d.Inamultiplepriceauction,eachwinningbidderwillpayadifferentpriceforthesecurity.Inthiscase,bidderAwillpayahigherpriceandthereforegetthelowestyieldof7.4%.5.a.Whatisapreemptiveright?b.Whatisapreemptiverightsoffering?c.IsapreemptiverightsofferingcommonintheUnitedStates?a.Apre-emptiverightistherightofacompany’scurrentshareholderstobuynewlyissuedstock.b.Inapreemptiverightsoffering,newsharesarefirstofferedtocurrentstockholders,oftenatadiscountfromthecurrentmarketprice.Stocksnotsoldinthismethodarethengiventoaninvestmentbankertosellonabesteffortsbasisorsoldtohisownaccount.c.Apre-emptiverightsofferingisnotcommonintheUnitedStates.6.ThemarketpriceofthestockoftheBernsteinCorporationis$50pershareandthereareonemillionsharesoutstanding.Supposethatthemanagementofthiscorporationisconsideringarightsofferinginconnectionwiththeissuanceof500,000newshares.Eachcurrentshareholderwouldreceiveonerightforeverytwosharesowned.Thetermsoftherightsofferingareasfollows:Fortworightsand$30(thesubscriptionprice),anewsharecanbeacquired.a.Whatwouldthesharepricebeaftertherightsoffering?b.Whatisthevalueofoneright?c.Demonstratetheeffectontheeconomicwellbeingoftheinitialshareholdersasaresultoftherightsoffering.13-3a.MarketpriceofBernsteinstockis$50.Thecapitalizationbeforerightsissueofthisfirmis$50million.Afterissuance,shareprice(ex-rights)is$50million+15million=$65milliondividedby1.5million=$43.33.Thus,thesharepriceaftertherightsofferingis$43.33.b.Valueofonerightis$6.67(50-43.33).c.Theresultofthisofferingontheeconomicwellbeingofinitialshareholdersisunchanged,aslongastheshareholdersexercisetheirright.Thisisbecauseadilutionisexactlycompensatedbytheincreaseinthevalueoftherights.7.Whatisaregistrationstatement?AregistrationstatementisastatementoffinancialinformationaboutasecuritiesissuerthatmustbefiledwiththeSEC(assumingtheissuemeetsSECqualificationsforfiling).8.Whatismeantbythewaitingperiod?ThewaitingperiodisthetimeneededbytheSECforreviewandapprovaloftheregistrationstatement,whichthenbecomestheprospectusforthesecuritiesissue.9.Anunderwriterisresponsibleforperformingduediligencebeforeofferingasecuritytoinvestors.Whatdoesduediligencemean?Byexercisingduediligenceanunderwriterascertainsthatfinancialinformationisaccuratelyrepresentedtotheinvestingpublic.10.ThefollowingstatementscomefromtheDecember24,1990,issueofCorporateFinancingWeek:Asinthepub