Deck 15: Venture Capital, Ipos, and Seasoned Offerings

Question 1

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

Answer 1

Buy the issue of securities from the firm and resell to the public

Question 2

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

Answer 2

$45.00

Question 3

The most likely reason that underpricing of new issues occurs more frequently than overpricing is the:

A)Underwriters' desire to reduce the risk of a firm commitment
B)Demand for a new issue is typically too high
C)Underwriters earn low rates of return
D)Issuing firms demand that equity be underpriced

Answer 3

Underwriters' desire to reduce the risk of a firm commitment

Question 4

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 5

Studies have shown that, on average, new security issues are:

A)subject to flotation costs of approximately 32%
B)Overpriced by the amount of the spread
C)Underpriced
D)Overpriced to reward venture capitalists

Question 6

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 4x + 100 = $200 x 5
4x/4 = 900/4

Question 7

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 8

When securities are issued under a rights issue:

A)Existing shareholders have the opportunity to expand their holdings
B)Shares are offered to the public at a discount
C)The existing shares will increase in price
D)Current shareholders have the right to resell their stock to the issuer

Question 9

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 10

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 11

When a public company offers shares to the general public, it does so under a(n):

A)Rights issue
B)Initial public offering
C)Shelf registration
D)General cash offer

Question 12

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 13

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 14

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 15

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 16

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 Cost to public = $40
Net to issuer = $40/1.10 = $36.36
Therefore, the spread was $3.64 per share.

Question 17

When underwriters are unsure of the demand for a new offering, they:

A)Reduce their spread
B)Undertake the issue on a firm commitment basis
C)Undertake the issue on a best efforts basis
D)Provide shelf registration for the issue

Question 18

Major international commercial 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 19

A secondary offering IPO occurs when:

A)New shares are sold to provide the company with additional funds
B)The second public issue of equity becomes available
C)The company's founders or venture capitalists market a portion of their shares
D)Not all of the shares in a primary IPO were sold

Question 20

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 21

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 22

Which of the following is correct for stock issued under a firm commitment where the underwriter is to receive an 8% spread?

A)The underwriter's profits are guaranteed to be 8%
B)The underwriter must sell at least 92% of the shares
C)The underwriter receives 8% of all shares
D)The underwriter may suffer a loss on the issue

Question 23

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 24

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 25

If the announcement of a new equity offering causes current equity values to drop, then signaling theory would predict that:

A)Supply of equity will outstrip demand
B)Management knows the issue to be overpriced
C)The firm has no attractive investment opportunities
D)Underwriters charge too high a spread

Question 26

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.

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

Question 27

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 28

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 29

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 30

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 31

Which one of the following would not be included among the 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 32

Shelf registration in the U.S.was enacted to allow:

A)The Department of Justice to prosecute those guilty of insider trading
B)The prospectus to be distributed after the sale of securities begins
C)Underwriters to join together in syndication
D)Single registration of limited future financing plans

Question 33

Stock underwriters are:

A)Investors seeking low prices
B)Regulatory agencies that evaluate equity offerings
C)The firm's founders who guarantee a stock's performance
D)Investment banking firms that coordinate equity offerings

Question 34

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 35

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 proceeds to firm + (price to public - underwriting spread) x number of shares committed
= ($20 - $2) x 1 million

Question 36

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 issued in an IPO
D)Shares may be repurposed by the underwriter in a secondary offering

Question 37

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 38

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 39

Which of the following statements is incorrect concerning private placements?

A)Terms of the financing can be custom-tailored
B)The securities are not made available to the public
C)The securities are often less marketable
D)Only a small amount of corporate debt is financed in this manner

Question 40

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 41

Securities exchanges will not permit securities to be sold:

A)If they have been overpriced
B)prior to approval of the registration statements
C)Unless the issuer guarantees their value
D)Until a shelf registration exists

Question 42

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 $34 each to an underwriter and the underwriter sells the shares at $40 each?

A)6.98%
B)7.19%
C)7.75%
D)8.33% underwriting spread 3 million x $3 = $9 million

Question 43

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 underwriting spread: 3 million x $3 = $9 million

Question 44

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 underwriting spread: 3 million x $3 = $9 million

Question 45

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 46

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

A)Bonds
B)Convertibles
C)Seasoned equity offerings
D)IPOs

Question 47

The POP system allows firms to:

A)Purchase securities for up to two years without registration
B)Incur only short time delays in selling securities
C)Wait for two years before paying for securities
D)Offer rights issues to non-existing shareholders

Question 48

Which of the following is correct if an underwriter is selling stock to the public at $40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold, and the issuing firm receives $111 million from the underwriter?

A)The underwriter's spread was greater than $3
B)The issue appreciated in price immediately
C)The issue included 3 million shares
D)The stock was issued on a best efforts basis

Question 49

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

A)underwriter
B)Underpricing laws
C)Prospectus
D)Initial public offering

Question 50

The "winner's curse" is a reminder that:

A)Successful bidders may often overpay for an object
B)Underwriters charge excessive fees
C)Stocks are much riskier than bonds
D)Underpricing an issue is a cost to existing owners

Question 51

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 Post right - issue price =

Question 52

Some investors believe that the decision by management to issue equity as opposed to issuing debt is a signal that:

A)The stock is currently undervalued
B)The stock is currently overvalued
C)The firm will avoid dilution of stock value
D)A shelf registration of securities will occur

Question 53

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 54

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 55

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% underwriting spread: 3 million x $3 = $9 million

Question 56

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% underwriting spread: 3 million x $3 = $9 million

Question 57

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 58

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 59

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 60

The direct expense of a stock issue includes the:

A)Cost of underpricing the stock
B)Underwriting spread and other expenses
C)Underwriting spread, other expenses, and cost of underpricing
D)Underwriting spread

Question 61

Those subject to the winner's curse are:

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

Question 62

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

Question 63

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

Question 64

Currently, M & S Inc.has 2 million shares outstanding selling at $70 a share.A rights issue will be made that allows 1 share to be purchased for every 5 shares currently held by stockholders for $40 each.Which of the following is true?

A)The number of shares outstanding will fall to 1.6 million
B)The firm will raise $13.33 million
C)The stock price will fall to $65
D)The total value of the firm will equal $124 million Number of shares issued (2 million/5) = 400,000
Number of shares outstanding 2 million + 0.4 million = 2.4 million
Firm will raise $40 x 400,000 = $16 million
Total value of firm will increase from $140 million to $156 million

Question 65

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 66

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

Question 67

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

Question 68

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 69

Firms go public to:

A)Raise additional capital
B)Diversify public debt holders' risk
C)Avoid second stage financing
D)Increase their leverage

Question 70

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

Question 71

Private placement of securities involves:

A)Selling only to the firm's current investors
B)Non-disclosure of the issuing firm's name until after the sale
C)The exchange of convertible bonds for equity
D)Non-public sale of securities to a limited number of investors

Question 72

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)$10,000 500 = (0.20 x Value of shares) - (0.10 x 2,000)

Question 73

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 74

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 75

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 76

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 77

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 78

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 79

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 80

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