Question 1

Blue-sky laws exist in order to:

Accepted Answer

Blue-sky laws are state-level securities laws that aim to protect investors from fraudulent or deceptive investment practices. These laws typically require companies to register their securities offerings with state regulators, disclose certain information to potential investors, and adhere to anti-fraud provisions. Therefore, the most accurate choice is D - protect investors from deceptive firms.

Question 2

An underwriter sells 2 million shares of stock to the public at $40 per share.The issuing firm receives $73 million before non-underwriting costs.

Accepted Answer

Spread = $(80 − 73) / 80

Question 3

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 of issuing the securities?

Accepted Answer

Total cost = [($70 − 40) × 3m] + $1m = $91m

Question 4

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

Accepted Answer

When underwriters offer a firm commitment on a stock issue, they guarantee the net proceeds to the issuing firm. This means that the underwriters take on the risk of buying the entire stock issue from the issuing firm and then selling it to the public, providing a guarantee of a minimum amount of proceeds to the issuing firm.

Question 5

What 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?

Accepted Answer

Direct expense % = {$1m + [($43 − 40) × 3m]} / ($43 × 3m) = 0.0775, or 7.75%

Question 6

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?

Accepted Answer

Firm value = $3m / 0.5 = $6m

Question 7

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

Accepted Answer

Disbursing venture capital funds in installments enables venture capitalists to identify and cut losses early if they discover that a particular investment is not yielding the expected returns. This approach allows the venture capitalists to limit their exposure to loss while also providing the flexibility to adjust their investment strategy as new information becomes available.

Question 8

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?

Accepted Answer

Cost of underpricing = ($70 − 43) × 3m = $81m

Question 9

Second-stage financing occurs:

Accepted Answer

Second-stage financing typically occurs after the company has been established and before an initial public offering (IPO), to support growth and expansion.

Question 10

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

Accepted Answer

Under a firm commitment, the underwriter buys all the shares and resells them, so they bear the risk of loss if they can't sell them at a profit.

Question 11

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

Accepted Answer

The prospectus is a legal document that contains all the necessary information about a stock offering, including its potential risks, financial statements, management team, and other important details. It is provided to potential investors before they decide whether to invest in the stock.

Question 12

The direct expense of a stock issue includes the:

Accepted Answer

The direct expense of a stock issue includes the underwriting spread and other expenses, but not the cost of underpricing, which is considered an indirect cost.

Question 13

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

Accepted Answer

The winner's curse is a phenomenon where the winning bid in an auction exceeds the intrinsic value of the item being auctioned, resulting in overpayment. This can occur when bidders get caught up in the heat of the moment and bid above what the item is worth, leading to buyer's remorse later on.

Question 14

An underwriter enters into 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?

Accepted Answer

Proceeds to firm = ($20 − 2) × 1m = $18m

Question 15

Roadshows:

Accepted Answer

Roadshows provide underwriters and the company's management an opportunity to meet potential investors.

Question 16

In return for providing funds,venture capitalists generally require:

Accepted Answer

Venture capitalist typically require an equity position in exchange for providing funds, which means they will own a portion of the firm but not necessarily the entire firm. Collateral, first right to assets, and full ownership are not typical requirements for venture capitalists.

Question 17

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

Accepted Answer

Entrepreneurs contributing their personal funds to start-up projects are unlikely to repay debt held by the venture capitalist. This is because debt repayment is the responsibility of the firm and its cash flow, and not that of the entrepreneur's personal funds. The other options (A, C, and D) are more likely to explain why entrepreneurs contribute their personal funds. A) Personal funding acts as a signal to venture capitalists that the entrepreneur is committed to the project and has confidence in its potential success. C) Retaining a portion of the firm's equity allows the entrepreneur to retain control and potentially benefit from future profits. D) Contributing personal funds provides an incentive to expend effort and work hard to make the project successful.

Question 18

Stock underwriters are:

Accepted Answer

Stock underwriters are investment banking firms that manage security offerings. They help companies by pricing and issuing new stocks or bonds to the public. They also help with marketing and distribution of the securities.

Question 19

The Securities and Exchange Commission will not permit securities to be sold:

Accepted Answer

The Securities and Exchange Commission (SEC) requires a company to file a registration statement with them before selling securities to the public. The registration statement must include information about the company, its management, and its financial statements. The SEC reviews the registration statement to ensure that it contains all the required information and that it does not contain any false or misleading statements. The SEC will not permit securities to be sold until it has approved the registration statement. Therefore, choice B is the correct answer.

Question 20

One way to reduce the risk of marketing a stock is for the underwriter to:

Accepted Answer

The answer of One way to reduce the risk of...

Quiz 15: Venture Capital, IPOs, and Seasoned Offerings