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Chapter 15: Raising Capital 1. Explain the following terms: [12 points] (1) Red herring (2)Underwriters' spread (3) Best efforts underwriting (4) Green shoe provision (5) Shelf registration (6) Rights offering 2. Why are IPO shares typically underpriced? [ 8 points] 3. Right Choice Investment Holdings currently has 4,500,000 shares outstanding with a price of $73.49 per share. Now the company is offering rights for its current shareholders to buy another 400,000 shares for $65.48 per share. What is the value of one right? [ 10 points ] Chapter 16: Financial Leverage and Capital Structure Policy 4. How can companies change their capital structure (a.k.a., capital restructuring)? How will the increase in leverage impact ROE, EPS, and WACC, holding other factors constant, and why? [ 10 points] 5. Milestone Investments Inc. currently has 21,000,000 shares outstanding with a price of $32.19 per share. The company is considering raising debt capital to retire 10% of the shares outstanding at an annual interest rate of 6%. What is the break-even EBIT for this proposed capital restructure? [10 points] 6. The Pecking-order Theory states that companies prefer to issue debt rather than equity if internal financing is insufficient. Why? [10 points] Chapter 17: Dividend and Payout Policy 7. Explain the following terms: [12 points] (1) Dividend policy (2) Ex-dividend date (3) Declaration date (4) Stock splits (5) Reverse splits (6) Stock renurchase