Financial Management

Exercises Chapter 1
An Overview of Corporate Financing

PART II - Homework

1. An investment bank acquired 5M shares of company ABC in its initial offering

for 20M euros, and it sold them to the public for a price of 5 euros per share. At
the end of the first day of trading, those shares were listed at 10 euros per share.
The company did not pay the insurance bank any other costs.
a. Determine the margin made by the bank per each share
b. Determine the underpricing (in value and in percentage)
c. Determine the total costs of this issue as a function of the market value
of shares.

2. The company XYZ wants to issue some shares with subscription rights. Are the
following sentences true or false?
a) With this form of issue, the company is not sure to obtain the funds that it
needs to invest.
b) With this form of issue, the company is able to guarantee that its investors
will not suffer from dilution.
c) A shareholder may acquire a higher percentage of shares outstanding if she
acquires the rights of other shareholders that do not want to exercise those
rights.

3. TED TALK Inc. has issued 400.000 common shares and is going to issue an
additional 100.000 shares via subscription rights. Each shareholder will receive
a subscription right per share. Suppose that Mr. Spam has 40.000 common
shares.
a) What percentage of a new share can the existing shareholders purchase for
every subscription right?
b) How many subscription rights are needed in order to purchase a new share?
c) How many new shares can Mr. Spam purchase?
 d) What is the ownership of Mr. Spam after he has acquired the new shares?
e) Have the ownership rights of Mr. Spam varied after he has exercised the new
shares? ¿What would have happened if he had not exercised his subscription
rights?

4. A company entirely financed with equity has 1,800,000 shares outstanding and
decides to issue new shares with subscription rights. The price of shares before the
issuance was 42 euro, and the price at which the shares are issued is 38 euro. If the price
after the share issuance is going to be 40 euro, determine the number of subscription
rights that a shareholder needs to buy one new share in the issuance with subscription
rights.
A. 21 rights
B. 2 rights
C. 1 rights
D. None of the alternatives