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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

What cost of capital is generally used in evaluating a bond refunding decision? Why?

Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The \(30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

a. First compute the price of the old bonds in the open market. Use the valuation procedures for a bond that were discussed in Chapter 10 (use annual analysis). Determine the price of a single \)1,000 par value bond.

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:

In \( millions

In \) millions

Current assets

\(70

Current liabilities

\)30

Fixed assets

\(70

Long-term liabilities

\)30

Total liabilities

\(60

Stockholder’s equity

\)80

Total assets

\(140

Total stockholder’s equity and liabilities

\)140

The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.

f. Comment on management’s perception of market efficiency (the viewpoint of the financial officer).

Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process.

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.

a. How many shares of stock must be sold to net $21,120,000? (Note: No out-of-pocket costs must be considered in this problem.)
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