If any parts of the question use values from earlier parts, use the EXACT values from earlier parts.

QUESTION START

a) Describe two ways in which venture capital firms structure their funding to reduce risk. (2 marks)

The following information applies for parts b), c) and d). Fidget Spinners Inc. makes an initial public offering of shares to raise $260 million, at an offer price of $3.25 per share. The issue is underwritten at $3.10. The costs of preparing the prospectus, legal fees, ASIC registration and other administrative costs add up to $750,000. The firms share price closes at $3.90 on its first day of trade.

Two years later, Fidget Spinners Inc.wants to raise another $26.9 million to finance a new investment project through a seasoned equity offering at $65 per share, and the underwriter charges a 8.5% spread.

b) Calculate the IPO underwriting spread. (1 mark)

c) Calculate the IPO underpricing. (1 mark)

d) How many shares have to be issued through the SEO? (2 marks)

The following information applies for parts e) and f). Fidget Spinners Inc. now decides to raise money through the issue of bonds. The company needs to raise $35 million to set up a new division to manufacture their products out of a new material.

They plan on issuing 18-year $1000 annual coupon bonds with a coupon rate of 6.4%. From market research, investors for comparable bonds expect a return of 5.5% p.a. compounding quarterly.

e) Draw a cash flow diagram for the purchase of a single such bond, then determine the price an investor would be willing to pay for this bond. (2 marks)

f) Despite the calculations done in part e), Fidget Spinners Inc. has decided to issue the bonds described above at a price of $960. The bond issue will incur a cost equal to 4% of the total money raised. How many bonds must be issued to raise a total of $32 million after costs? (2 marks)