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Chapter 5: 5DQ (page 493)

What is shelf registration? How does it differ from the traditional requirements for security offerings?

Short Answer

Expert verified

In shelf registration, the issuing company publishes a comprehensive statement containing the firm's plans associated with long-term financing.

The major difference between shelf registration and traditional security offerings is the invention of Securities and Exchange Commission.

Step by step solution

01

Traditional offerings

Traditional offerings are the process of collecting funds from outsiders. It is usually initiated byInitial Public Offering(IPO).

A company issues IPO to raise capital from external sources for the first time.

02

Shelf registration

Shelf registration refers to issuing a comprehensive statement by the issuing company in which it states the firm's long-term plans for the coming two years.

03

Difference in traditional requirements and shelf registration

In case of shelf registration, the company must file reports quarterly and annually with the Securities and Exchange Commission.

On the other hand, in traditional security offerings, a company must take approval from the Securities and Exchange Commission every time before offering its securities.

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Most popular questions from this chapter

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

c. What are the earnings per share (EPS) and the price-earnings ratio before the issue (based on a stock price of $48)? What will be the price per share immediately after the sale of stock if the P/E stays constant?

Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of 7.8 percent. What should the price to the public be?

The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders鈥� claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder鈥檚 claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder鈥檚 claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder鈥檚 claims

\)900,000

Total liabilities and stockholder鈥檚 claims

$8,500,000

d. After the machinery and equipment are sold to partially cover the first lien secured claim, how much will be available from the remaining asset liquidation values to cover unsatisfied secured claims and unsecured debt?

Louisiana Timber Company currently has 5 million shares of stock outstanding and will report earnings of \(9 million in the current year. The company is considering the issuance of 1 million additional shares that will net \)40 per share to the corporation.

a. What is the immediate dilution potential for this new stock issue?

b. Assume the Louisiana Timber Company can earn 11 percent on the proceeds of the stock issue in time to include it in the current year鈥檚 results. Should the new issue be undertaken based on earnings per share?

Midland Corporation has a net income of \(19 million and 4 million shares outstanding. Its common stock is currently selling for \)48 per share. Midland plans to sell common stock to set up a major new production facility with a net cost of \(21,120,000. The production facility will not produce a profit for one year, and then it is expected to earn a 13 percent return on the investment. Stanley Morgan and Co., an investment banking firm, plans to sell the issue to the public for \)44 per share with a spread of 4 percent.

e. Are the shareholders better off because of the sale of stock and the resultant investment? What other financing strategy could the company have tried to increase earnings per share?
See all solutions

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