Deck 15: Venture Capital, IPOs, and Seasoned Offerings

Question 1

Underwriters are commercial banking firms that act as financial midwives to a new issue.

Answer 1

False

Question 2

IPOs are generally overpriced in order to raise large amounts of cash.

Answer 2

False

Question 3

A prospectus certificate indicates equity ownership in a firm.

Answer 3

False

Question 4

A general cash offer is necessary when issuing a private placement.

Question 5

The evidence indicates that stock prices decrease by approximately 3%,on average,when new equity issues are announced.

Question 6

Underwriters are guaranteed to profit by at least the amount of the spread.

Question 7

Issue costs for debt are considerably lower than issue costs for equity securities.

Question 8

When securities are issued under a firm commitment,the underwriter bears the risk of low sales.

Question 9

The costs of underpricing an equity issue are borne mostly by the underwriter.

Question 10

Underwriters usually play a triple role-first providing the company with procedural and financial advice,then buying the stock,and finally reselling it to the public.

Question 11

Firms are attracted to the private placement of debt because of the lower average interest rates.

Question 12

A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.

Question 13

Bought deals are more common in the U.S.than in Canada.

Question 14

The winner's curse theory assumes that the informed investor receives the majority of the underpriced IPOs.

Question 15

Rights offerings are gaining in popularity in Canada although they are declining on a foreign basis.

Question 16

Economies of scale are apparent in the issuance of securities.

Question 17

Venture capital is traded for an equity interest rather than a debt interest in the new firm.

Question 18

Underwriters typically try to overprice the initial public offering.

Question 19

Privately placed securities may be difficult to remarket.

Question 20

Sometimes new issues are dramatically underpriced.

Question 21

How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally,the firm pays $600,000 in legal fees.

A) $8,400,000
B) $8,460,000
C) $8,490,000
D) $8,545,455

Question 22

What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm?

A) $4 million
B) $6 million
C) $7 million
D) $8 million

Question 23

An investor exercises her right to buy one additional share at $20 for every five shares held.How much should each share be worth after the rights issue if they previously sold for $50 each?

A) $35.00
B) $41.67
C) $45.00
D) $46.00

Question 24

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.What is the cost of underpricing?

A) 81 million
B) 91 million
C) 101 million
D) 111 million

Question 25

An underwriter issues a firm commitment to sell 1 million shares at $20 each,including a $2 spread.How much does the issuing firm receive if only 500,000 shares are sold?

A) $9 million
B) $10 million
C) $18 million
D) $20 million

Question 26

What would you expect to be the market price of stock after a sold-out rights issue if each existing shareholder purchases one new share at $60 for each three that they currently hold and the current share price is $100?

A) $75.00
B) $80.00
C) $85.00
D) $90.00

Question 27

Private placement contracts may be custom tailored for each individual investor.

Question 28

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.What is the total cost (direct expenses plus underpricing cost)?

A) 81 million
B) 91 million
C) 101 million
D) 111 million

Question 29

When issuing new stock,a firm received $50 million while the underwriting spread was $4 million and total direct expenses were $6 million.The %age of the proceeds absorbed by direct expenses was:

A) 7.14%.
B) 8.00%.
C) 10.71%.
D) 12.00%.

Question 30

What %age of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

A) 6.98%
B) 7.19%
C) 7.75%
D) 8.33%

Question 31

If an investor can earn 20% on underpriced IPOs,but will lose 10% on overpriced IPOs in which he was awarded $2,000 worth of the overpriced issue,how much of the underpriced issue must he be awarded in order to gain $500?

A) $1,500
B) $2,500
C) $3,500
D) $10,000

Question 32

A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own.What should be the stock price after the rights issue if the stock sells for $80 per share before the issue?

A) $56.67
B) $60.00
C) $70.00
D) $71.33

Question 33

One advantage to private placements is the low cost associated with its issue.

Question 34

What was the market price of a share of stock before a rights issue if one share of new stock could be purchased at $100 for every four shares that were previously owned? The stock price after the successful rights issue was $200.

A) $150
B) $225
C) $241
D) $250

Question 35

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $34 each to an underwriter and the underwriter sells the shares at $40 each?

A) 6.98%
B) 15.83%
C) 7.75%
D) 8.33%

Question 36

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.In %age terms,how much market value is absorbed by the total cost (direct expenses plus underpricing cost)?

A) 13.33%
B) 23.33%
C) 33.33%
D) 43.33%

Question 37

Typical firms that engage in private placements usually have a low degree of risk.

Question 38

If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share,the spread per share is:

A) $1.00.
B) $2.00.
C) $38.00.
D) $40.00.

Question 39

Plasti-tech Inc.has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share.The underwriter then sold them to the public for $22 each.Plasti-tech also encountered $0.5 million in administrative fees.Soon after the issue,the stock price rose to $25.Find Plasti-tech Inc.'s total cost of this issue.

A) $4.5 million.
B) $9.5 million.
C) $10.5 million.
D) $14.5 million.

Question 40

A firm has just issued $250 million of equity,which caused its stock price to drop by 3%.Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue.(Use value in millions)

A) $7.5 million
B) $30.0 million
C) $33.3 million
D) $37.5 million

Question 41

Which of the following methods may be particularly cost effective to smaller issuers of securities?

A) seasoned offerings
B) private placement
C) general cash offer
D) best efforts underwriting

Question 42

Those subject to the winner's curse are:

A) underwriters.
B) uninformed investors.
C) firms issuing IPOs.
D) venture capitalists.

Question 43

A firm's first offering of stock to the general public is known as:

A) first-stage financing.
B) an IPO.
C) a general cash offer.
D) a seasoned offering.

Question 44

In regards to new issues of common stock,economists have found that the announcement of a new issue:

A) results in the stock price falling.
B) causes the stock price to rise.
C) has no effect on the stock price.
D) increases the market value of the stock temporarily.

Question 45

Underwriters are used for all of the following except:

A) selling securities to the public.
B) making initial public offerings.
C) assisting a company in raising cash.
D) providing equity capital for young businesses.

Question 46

POP System allows for:

A) access to a broad source of funds.
B) access to a cheaper source of funds.
C) allows a reduction in the cost of acquiring additional funds.
D) slows the acquisition of additional funds.

Question 47

Which of the following statements is generally true concerning the costs of security issue?

A) underpricing is rarely a significant cost.
B) equity is cheaper to issue than debt.
C) debt is cheaper to issue than equity.
D) there are no economies of scale in security issuance.

Question 48

In return for providing funds,venture capitalists receive:

A) long-term bonds of the firm.
B) short-term bonds of the firm.
C) an equity position in the firm.
D) ownership of the entire firm.

Question 49

When underwriters issue securities on a best efforts basis,they:

A) sell as much of the stock as possible, but with no guarantee.
B) submit a bid for purchase, which the issuer compares to other bids.
C) buy the entire issue from the firm.
D) guarantee that the issuer will receive the spread.

Question 50

The allowance of POP registration in Canada is likely to have increased:

A) the cost of issuing new securities.
B) the profits of venture capitalists.
C) competition among underwriters.
D) the underpricing of securities.

Question 51

Provincial securities regulations exist in order to:

A) protect stock underwriters from fraudulent firms.
B) restrict the amount of profit from IPOs.
C) control the amount of stock owned by one investor.
D) protect investors from deceptive firms.

Question 52

When underwriters offer a firm commitment on a stock issue,they:

A) employ their best efforts in selling the stock.
B) guarantee the proceeds to the issuing firm.
C) agree to purchase the venture capitalists' shares.
D) assure purchasers that the stock will appreciate.

Question 53

A major purpose of the prospectus is to:

A) inform investors of the security's rate of return.
B) advise investors of the security's potential risk.
C) distribute stock warrants to prospective investors.
D) list the security's dividend payment dates.

Question 54

Before a stock can be sold in Canada it must:

A) be approved by the Federal Government.
B) be approved by the Federal Securities Commission.
C) be Approved by the applicable Provincial Commission.
D) be approved by shareholders only.

Question 55

Firms go public to:

A) raise additional capital.
B) diversify public debt holders' risk.
C) avoid second stage financing.
D) increase their leverage.

Question 56

Issue costs for equity are higher than those for debt for all of the following reasons except:

A) equity issues have higher administrative costs.
B) underwriting stock is riskier than underwriting bonds.
C) equity issues involve significantly more time to sell.
D) equity issues have lower economies of scale.

Question 57

Second-stage financing occurs:

A) prior to the initial public offering.
B) when company founders sell a portion of their shares.
C) after the best efforts of the underwriters.
D) when the IPO does not raise sufficient cash.

Question 58

The difference between an IPO and a secondary offering is that:

A) the secondary offering does not incur direct costs.
B) venture capitalists fund the secondary offering.
C) additional, non-outstanding shares are sold to new investors from the early investors.
D) shares may be repurposed by the underwriter in a secondary offering.

Question 59

Companies making smaller security issues may prefer to issue them through:

A) a private placement because lower rates of return can be offered.
B) a private placement because it is cheaper than a public issue.
C) a public issue because it is cheaper than a private placement.
D) a public issue because more exposure will be achieved.

Question 60

Private placement of debt securities occurs more frequently in:

A) smaller-sized firms.
B) larger-sized firms.
C) firms that are using venture capitalists.
D) combination with convertible bonds.

Question 61

Money that is offered to finance a new business is known as:

A) a general cash offer.
B) venture capital.
C) private placement.
D) a rights issue.

Question 62

The most important function of an underwriter is to:

A) assess the firm's capital needs.
B) approve the prospectus before distribution to the public.
C) provide private placement of the firm's debt.
D) buy the issue of securities from the firm and resell to the public.

Question 63

The consent of a corporation's shareholders must be received prior to any:

A) issue of new securities.
B) selection of an underwriter.
C) increase in authorized capital.
D) private placement of securities.

Question 64

Which of the following is least likely to explain why entrepreneurs contribute their personal funds to start-up projects? Their contribution:

A) acts as a signal to venture capitalists.
B) repays debt held by the venture capitalist.
C) retains a portion of the firm's equity.
D) provides incentive to expend efforts.

Question 65

In a firm commitment,the underwriter:

A) encounters virtually no risk because the spread is fixed.
B) is allowed to sell the shares at any price they choose.
C) is protected against being stuck with unsold shares.
D) is allowed to sell the shares at a price slightly higher than the price they paid to the company.

Question 66

Studies show that recent returns on venture capital investments have been:

A) negative, on average.
B) zero, on average.
C) nearly 20%, on average.
D) at least 50%, on average.

Question 67

Second-stage financing:

A) involves a substantial increase in leverage.
B) immediately precedes first-stage financing for every new business.
C) involves issuing more stock.
D) occurs when the company is in danger of bankruptcy.

Question 68

Which of the following would not be included among benefits of shelf registration?

A) reduction of lead time for security issuance
B) no additional registration necessary for five years
C) issuer can take advantage of favourable conditions
D) issuer can search for best underwriting terms

Question 69

One strategy that appears to be used by certain underwriters to reduce the risk of marketing a stock is to:

A) offer a firm commitment on the issue.
B) set the initial stock price below its true value.
C) sell the securities in foreign countries.
D) offer price rebates on the stock purchases.

Question 70

A private placement avoids which of the following costs?

A) depression in the stock price
B) administration costs
C) registration with the SEC
D) fixed costs

Question 71

The primary reason for an underwriters' syndication is to:

A) monitor the actions of the different underwriters.
B) reduce the risk of selling a large issue.
C) increase the size of the spread.
D) avoid the scrutiny of the Securities and Exchange Commission.

Question 72

Stock that is sold through a rights issue:

A) is offered for cash to the general investing public.
B) will not affect the market price of the shares.
C) is limited for sale to existing shareholders.
D) must be sold on a firm commitment basis.

Question 73

What is the primary reason for a reduction in share value after a successful rights issue? The new shares:

A) have higher underwriting expense.
B) are offered at attractive prices.
C) reduce the firm's return on equity.
D) do not include voting rights.

Question 74

All of the following are advantages of shelf registration except:

A) the issuing firm can avoid competition from underwriters.
B) securities can be issued with short notice.
C) securities can be issued in small amounts without excessive costs.
D) it allows the firm to take advantage of market conditions.

Question 75

One of the primary reasons for disbursing venture-capital funds in installments is to:

A) avoid tax liability.
B) identify and cut losses early.
C) increase the importance of the venture capitalist.
D) take advantage of the time value of money.

Question 76

To be successful,a start-up business will require:

A) taking a big risk, even if the payoff is only mediocre.
B) funds from a venture capitalist.
C) large amounts of debt financing.
D) an initial public offering.

Question 77

Major international banks are:

A) responsible for most underwriting in the U.S.
B) not allowed to engage in any form of underwriting.
C) not able to compete with U.S. investment banks.
D) engaged in underwriting a significant portion of securities.

Question 78

Which of the following security issues might have the lowest direct costs?

A) bonds
B) convertibles
C) seasoned equity offerings
D) IPOs

Question 79

If a corporation's management,with its superior knowledge of proposed investments,considers a security issue to be underpriced,it may react by:

A) withdrawing the issue.
B) lowering the price of the existing shares to equal the new shares.
C) increasing the number of shares to be sold.
D) adopting POP registration, which automatically raises the issue price.

Question 80

Prospective investors are advised of a stock's potential risks by the:

A) underwriter.
B) underpricing laws.
C) prospectus.
D) initial public offering.