Deck 18: Investment Banking and Venture Capital

Question 1

Commercial lenders take fees for arranging mergers or security offerings and move to the next deal.

Answer 1

False

Question 2

Venture capital recipients are often called business angels.

Answer 2

False

Question 3

Most investment banks' liabilities are in the form of short-term securities issued into the capital markets,while their assets are loans to the business sector only.

Answer 3

False

Question 4

An investment bank specialises in corporate loans.

Question 5

Because investment banks do not accept retail deposits,they can do as they please.

Question 6

Seed financing is the first stage of venture capital financing.

Question 7

Investment banks that operate as locally incorporated banks (ADIs)are regulated as though they were retail banks because they can accept retail deposits.

Question 8

If a company has never before offered securities to the public,the primary offering is called an initial public offering which is also referred to as a seasoned offering.

Question 9

An investment bank specialises in:

A)accepting deposits and making commercial loans.
B)call loans from commercial banks.
C)helping businesses and governments sell their new security issues (debt or equity)in the primary markets to finance capital expenditures.
D)derivative products.

Question 10

A distinctive difference between commercial banks and an investment bank is the requirement to hold reserves against deposits and the mandatory capital requirements by commercial banks.

Question 11

With competitive bidding an issuer of securities directly negotiates with a single investment banker.

Question 12

An underwritten issue is the distribution of securities in a process in which the investment banker promises only to make its best sales effort.

Question 13

A best efforts sale of securities is likely to generate more revenue for the investment banker than an equivalent underwriting of securities.

Question 14

To decrease the price risk of any one primary issue,underwriters form underwriting syndicates with other commercial banks.

Question 15

Beside international capital markets,investment banks rely on a large deposit base to fund their operations.

Question 16

In an underwritten offer,the risk of selling the issue at a price lower than that promised to the issuer is borne by the investment bank.

Question 17

If securities are to be sold publicly,regulatory laws in Australia require that a document must be lodged with the Reserve Bank of Australia before the securities are sold to raise funds.

Question 18

A universal bank is an institution that can accept deposits,make loans,underwrite securities,engage in brokerage activities and sell and manufacture other financial services such as insurance.

Question 19

The relationship between investment and commercial banks is largely determined by the regulations of the specific country that they are operating in.

Question 20

Discount brokers are brokers who offer discounts to large corporate investors.

Question 21

Investment bankers tend to reduce their risk of underwriting by:

A)using futures contracts to hedge their price risk.
B)underpricing a new issue.
C)reducing the size of the selling group in the underwriting.
D)reducing the number of investment banking firms in the underwriting.

Question 22

A universal bank is:

A)a retail bank with a commercial division.
B)a global retail bank that has market presence in greater than 100 countries
C)an institution that can accept deposits and make loans
D)an institution that can accept deposits and make loans,underwrite securities,engage in brokerage activities,and sell and manufacture other financial services such as insurance.

Question 23

A private placement is:

A)a method of issuing securities in which the issuer sells the securities directly to the ultimate investors.
B)a method of issuing securities in which the issuer sells the securities to investment banks.
C)a method of issuing securities in which the issuer sells the securities the ultimate shareholders.
D)none of the above.

Question 24

Underwriting is the process in which:

A)the investment banker does not guarantees to buy the new securities.
B)the investment banker guarantees to buy the new securities for a fixed price.
C)the investment banker guarantees to buy only 50% of the new securities.
D)the investment banker guarantees to buy the leftover new securities

Question 25

Securitisation is a process in which:

A)non-liquid assets are converted into securities and sold to investors.
B)non-liquid assets are converted into cash.
C)non-liquid assets are used as collateral for borrowing.
D)non-liquid assets are sold to investors.

Question 26

A leveraged buyout is:

A)an acquisition strategy that involves buying a company using IPO to fund the purchase cost of the target company.
B)an acquisition strategy that involves buying a company using a large amount of debt to fund the purchase cost of the target company.
C)an acquisition strategy that involves buying a company using loans to fund the purchase cost of the target company.
D)none of the above.

Question 27

Venture capitalists are compensated in two ways:

A)a management fee and a carried interest in the fund.
B)a management fee and a percentage of the firm's profit.
C)a management fee and a percentage of the company's shares.
D)a management fee and bonus.

Question 28

The basic services provided by a full-service brokerage firm is/are:

A)storage of securities.
B)execution of trades.
C)margin credit.
D)all of the above.

Question 29

During the origination of a new security issue,the investment banker can help the issuer:

A)analyse the feasibility of the project and determine the amount of money to raise.
B)decide on the type of financing needed.
C)design the characteristics of securities to be issued.
D)all of the above.

Question 30

In competitive bidding:

A)the investment banker makes a guarantee to sell all the securities.
B)the issuer publicly announces a desire to sell securities and solicits offers from several private firms.
C)the issuer publicly announces a desire to sell securities and solicits offers from several investment banking firms.
D)the issuer directly negotiates with a single investment banker.

Question 31

If investment banks wish to engage in commercial banking operations in Australia then they have to be an ADI under:

A)the APRA Financial Regulations Act 2008.
B)the Banking Act 1959
C)the Financial Sector Act 2001
D)the Reserve Bank of Australia Accepted Depositors Act 2010

Question 32

Equity financing provided to young businesses by investors who then play an active role in advising the management of the business is called:

A)project finance.
B)commercial loans.
C)initial public offering.
D)venture capital.

Question 33

In a best efforts underwriting offer,

A)the investment bank is compensated based on the number of securities sold.
B)the risk of the securities not selling or not selling at a desired price is borne by the issuing firm,not the investment bank.
C)typically,the smaller and more risky issues are forced to use this type of offering.
D)all of the above are true

Question 34

Mezzanine (bridge)financing is:

A)capital provided as bridge loans.
B)funds provided to rescue a company from financial distress.
C)capital provided for a company that expects to go public within a year or so.
D)capital provided to fund major expansion such as plant expansion,product improvement or marketing.

Question 35

Discount brokers compete against full-service brokerage firms by offering:

A)discounted new issues to investors.
B)offering fewer brokerage services and passing the savings on to the investors.
C)cash management services to investors.
D)margin credit to investors' accounts.

Question 36

The primary factors changing the relationship between commercial and investment banking were:

A)the interaction between economic and technological forces and regulatory constraints.
B)the interaction between commercial banks and regulatory constraints.
C)the interaction between economic and central banks and regulatory constraints. D. the interaction between economic and private investors and regulatory constraints.

Question 37

A public-private partnership is:

A)a contract between a public sector authority and a private party where the investment bank assumes substantial financial,technical and operational risk in the project.
B)a contract between a public sector authority and a private party where the private party assumes substantial financial,technical and operational risk in the project.
C)a contract between a public sector authority and a private party where the public sector assumes substantial financial,technical and operational risk in the project.
D)a contract between a public sector authority and a private party where the commercial bank assumes substantial financial,technical and operational risk in the project.

Question 38

Venture capital investments are characterised by all of the following except:

A)substantial control over management decisions.
B)no protection against downside risk
C)a share of capital appreciation.
D)serves as intermediate financing between founders' capital and the IPO.

Question 39

The best example of an effort to manage inventory risk is:

A)the formation of a selling group.
B)the formation of an underwriting syndicate.
C)allotting shares of the issue to participating brokers.
D)paying a high price to the issuing firm.

Question 40

First-stage financing is:

A)capital provided to a company at the idea stage.
B)capital provided to initiate manufacturing and sales.
C)capital used for initial expansion of a company that has already been producing and selling a product.
D)capital provided for a company that expects to go public within a year or so.

Question 41

What are venture capitalists and when do they provide venture capital financing?

Question 42

What are business angels?

Question 43

For many businesses,the sale of securities to the public is not feasible,so these firms may choose a private placement in order to receive the highest possible price for the securities after transaction costs.Explain the advantage and disadvantage of private placements.

Question 44

Discuss some of the decisions that must be made by a corporation wishing to issue an underwritten security.

Question 45

Explain what services a full-service brokerage firm provides.