1. Gus Games stock currently sells for $50 per share. There are 4 million shares currently outstanding. The company announces plans to raise $5 million by offering shares to the public at a price of $45 per share.

a.) If the underwriring spread is 4%, how many shares will the company need to issue in order to be left with the net proceeds of $5 million?

b.)If other adminstrative costs are $90,000, what is the dollar value of the total direct costs of the issue?

2. The three possible outcomes of an investment are listed below. All outcomes are equally likely. Calculate the average profit, variation and the standard deviation of this investment. (12 points)

Profit

Best Case +$400

Most Likely +$150

Worst Case -$300

3. Multiple Choice question

1. Which of the following would be considered an advantage of the sole proprietorship form of organization?
A. Wide access to capital markets
B. Unlimited liability
C. A pool of expertise
D. Profits taxed at only one level

2. The term “capital structure” refers to:
A. the manner in which a firm obtains its long-term sources of funding.
B. the length of time needed to repay debt.
C. whether the firm invests in capital budgeting projects.
D. which specific assets the firm should invest in.

3. A bond differs from a share of stock in that:
A. a bond represents a claim on the firm.
B. a bond has less risk.
C. a bond has guaranteed returns.
D. a bond has a maturity date.

4. The financial ratios of a firm can best be compared to:
A. ratios of firms in the same city.
B. ratios of firms having the same capital structure.
C. ratios of firms in the same industry.
D. ratios of firms having the same return on equity.

5. A stream of equal cash payments lasting forever is termed:
A. an annuity.
B. an annuity due.
C. an installment plan.
D. a perpetuity.

6. A stock’s beta measures the:
A. average return on the stock.
B. variability in the stock’s returns compared to that of the market portfolio.
C. difference between the return on the stock and return on the market portfolio.
D. market risk premium on the stock.

7. Capital structure decisions refer to the:
A. dividend yield of the firm’s stock.
B. blend of equity and debt used by the firm.
C. capital gains available on the firm’s stock.
D. maturity date for the firm’s securities.

8. The purpose of a sinking fund is to:
A. reduce the par value of stock over time.
B. take advantage of the tax break on preferred stock.
C. periodically pay off a portion of the outstanding debt prior to maturity.
D. allow risky corporations to avoid bankruptcy.

9. A company’s board of directors is primarily an agent of the company’s:
A. management.
B. employees.
C. shareholders.
D. management and employees.

10. A firm’s first offering of stock to the general public is known as:
A. first-stage financing.
B. an Initial Public Offering (IPO).
C. a general cash offer.
D. a seasoned offering.