Deck 14: Raising Capital

Question 1

Simone founded her company using $150,000 of her own money, issuing herself 300,000 shares. An angel investor bought an additional 200,000 shares for $100,000. She now sells another 500,000 shares to a venture capitalist for $2 million. What percentage of the firm does Simone now own?

A) 20%
B) 40%
C) 30%
D) 10%

Answer 1

30%

Question 2

Simone founded her company using $150,000 of her own money, issuing herself 300,000 shares. Anangel investor bought an additional 200,000 shares for $100,000. She now sells another 500,000 shares to a venture capitalist for $2 million. What is the post-money valuation of the company?

A) $2,000,000
B) $4,000,000
C) $2,250,000
D) $6,000,000

Answer 2

$4,000,000

Question 3

Parafoil Avionics sells 50 million shares in an SEO - 40 million being primary shares issued by the company and 10 million being secondary shares sold by investors in the company. At the time of the sale, Parafoil's shares were selling at $12.50 per share. If the underwriter charges 5% of the gross proceeds as a fee, how much money did existing investors in the company net from the sale?

A) $475 million
B) $125 million
C) $118.75 million
D) $500 million

Answer 3

$118.75 million

Question 4

Neutrino Industries shares trade at $48 per share and there are 120 million shares outstanding. The management would like to raise $400 million in an SEO. If the underwriter charges 6% of gross proceeds, how many shares must it sell?

A) 8.33 million
B) 8.87 million
C) 8.40 million
D) 8.68 million

Question 5

In Australia, AMP is a leading provider of retail and corporate superannuation and retirement income products. It has a large and diverse portfolio of investments, and as of 31 December 2012 it had net assets under management/advice of $110.6 billion. Which of the following best describes AMP?

A) an institutional investor
B) a family investor
C) a venture capitalist
D) an angel investor

Question 6

The founders and owners of a private company have funded it through the following rounds ofinvestment: $$\begin{array} { l l c c } \text { Round } & \text { Source } & \text { Price } & \text { Number of Shares } \\\hline\text { Class A } & \text { Self } & \$ 1.00 & 200,000 \\\text { Class B } & \text { Angel } & \$ 1.00 & 300,000 \\\text { Class C } & \text { Venture Capital } & \$ 1.25 & 400,000\end{array}$$ The owners decide to take the company public through an IPO, issuing 1 million new shares. Assuming that they successfully complete the IPO, the net income for the next year is estimated to be $5 million. The price of shares is set using average price-earnings ratios for similar businesses of 17.0. What will be the IPO price per share?

A) $12
B) $22
C) $45
D) $36

Question 7

David founds a company and goes through the investment rounds shown below: $$\begin{array} { l l c c } \text { Round } & \text { Source } & \text { Price } & \text { Number of Shares } \\\hline \text { Class A } & \text { Self } & \$ 0.50 & 400,000 \\\text { Class B } & \text { Angel } & \$ 1.00 & 500,000 \\\text { Class C } & \text { Venture Capital } & \$ 1.50 & 300,000 \\\text { Class D } & \text { Venture Capital } & \$ 2.25 & 400,000\end{array}$$ He decides to take the company public through an IPO, issuing 2 million new shares. Assuming that he successfully completes the IPO, the net income for the next year is estimated to be $8 million. His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses, which is 15.0. What will be the IPO price per share?

A) $60.00
B) $33.33
C) $3.40
D) $20.25

Question 8

Parafoil Avionics sells 50 million shares in an SEO - 40 million being primary shares issued by thecompany and 10 million being secondary shares sold by investors in the company. At the time of the sale, Parafoil's shares were selling at $12.50 per share. If the underwriter charges 5% of the gross proceeds as a fee, how much money was raised in the sale?

A) $475 million
B) $594 million
C) $625 million
D) $500 million

Question 9

Braynerd Chemicals sells 40 million shares in an SEO - 35 million being primary shares issued bythe company and 5 million being secondary shares sold by investors in the company. At the time of the sale, Braynerd's shares were selling at $22.50 per share. If the underwriter charges 6% of the gross proceeds as a fee, how much money was raised in the sale?

A) $846.00 million
B) $620.85 million
C) $553.00 million
D) $740.25 million

Question 10

Dusty Corporation is an Australian company issuing an IPO with an issue price of $15 per share that is expected to raise about $100 million. Which of the following is likely to be true?

A) The cost of the IPO to Dusty will be about $4 million.
B) The price of the share will be less than $15 at the close of the first trading day.
C) The share will perform very well in the three to five years after the issue.
D) None of the above is likely to happen.

Question 11

Which of the following is NOT a reason why an investor would choose to invest in new and growing firms as a limited partner in a venture capital firm rather than making those investments directly by themselves?

A) A venture capital firm generally has a wide range of expertise among its general partners.
B) The investor will have a direct say in how the companies that the venture capital firm funds will be run.
C) The investments of a venture capital firm are more diversified than the investments of a single individual.
D) Venture capital firms use their control of the companies they invest in to protect those investments.

Question 12

Chambers Industries has a market capitalisation of $800 million and 250 million shares outstanding. The management of this firm plans to raise further capital through a rights issue. Which of the following rights schemes will raise the most money, if all shareholders exercise their rights?

A) two rights to purchase one share at $1.60 per share
B) four rights to purchase three shares at $2.00 per share
C) three rights to purchase two shares at $1.80 per share
D) five rights to purchase two shares at $1.50 per share

Question 13

Which of the following best describes a limited partnership that specialises in raising money to invest in the private equity of young firms?

A) corporate investors
B) family investors
C) venture capital firms
D) institutional investors

Question 14

Which of the following statements is FALSE?

A) In Australia, most SEOs of new shares are rights offers.
B) Primary shares are new shares issued by the company.
C) In a cash offer, the firm offers the new shares to existing shareholders.
D) Rights offers protect existing shareholders from underpricing.

Question 15

The founder of a company issues 100,000 Class A preference shares for his own $250,000 investment. He then goes through three further rounds of investment, as shown below: $$\begin{array} { l c c } \text { Round } & \text { Price } & \text { Number of Shares } \\\hline \text { Class B } & \$ 2.50 & 200,000 \\\text { Class C } & \$ 2.75 & 300,000 \\\text { Class D } & \$ 2.80 & 200,000\end{array}$$ What is the post-money valuation for the Class D funding round?

A) $2.14 million
B) $2.43 million
C) $2.24 million
D) $1.96 million

Question 16

Which of the following statements is FALSE?

A) Several high profile corporate scandals during the early part of the twenty-first century prompted tougher regulations designed to address corporate abuses.
B) The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When investors diversify their holdings, the equity holders of the corporation become more concentrated.
C) Once a company goes public, it must satisfy all of the requirements of public companies.
D) Organisations such as the Australian Securities and Investments Commission (ASIC), the Australian Securities Exchanges (ASX), and other regulatory authorities adopted new standards that focused on more thorough financial disclosure, greater accountability, and more stringent requirements for the board of directors.

Question 17

Valiant Industries has 20 million shares outstanding at a price of $28 per share. The company wishes to raise more money and plans to do so through a rights issue. Every existing shareholder will receive one right for each share held. For every four rights held by the shareholder, they can buy one share at a price of $28. If all rights are exercised, how much money will be raised in this offer?

A) $70 million
B) $165 million
C) $120 million
D) $140 million

Question 18

What is the major reason that underwriters tend to offer shares in an IPO at a price that is belowthat which the market will pay?

A) to benefit from greenshoe provisions
B) to gain from the rise in value of any shares they hold after the IPO
C) to reduce their exposure to losses from unsold shares
D) to increase their spread

Question 19

Underpricing of an IPO would most likely be greatest in which of the following markets?

A) United States
B) Australia
C) Japan
D) China

Question 20

Use the information for the question(s) below.
Luther Industries is in the process of selling shares in an auction IPO. At the end of the bidding period, Luther's investment
bank has received the following bids:
$\begin{array} { l r } \hline \text { Price (\$) } & \begin{array} { c } \text { Number of } \\\text { Shares Bid }\end{array} \\\hline \$ 19.50 & 50,000 \\\hline \$ 19.25 & 25,000 \\\hline \$ 19.10 & 25,000 \\\hline \$ 19.00 & 100,000 \\\hline \$ 18.75 & 125,000 \\\hline \$ 18.50 & 75,000 \\\hline \$ 18.25 & 150,000 \\\hline \$ 18.00 & 240,000 \\\hline \$ 17.75 & 80,000 \\\hline \$ 17.50 & 125,000 \\\hline \$ 17.25 & 150,000 \\\hline \$ 17.00 & 100,000 \\\hline \$ 16.90 & 60,000 \\\hline \$ 16.75 & 80,000 \\\hline \$ 16.50 & 75,000 \\\hline \$ 16.25 & 200,000 \\\hline\end{array}$

-What will the offer price of these shares be if Luther is selling 1 million shares?

A) $17.50
B) $16.75
C) $17.25
D) $17.00

Question 21

Which of the following statements is FALSE?

A) Many IPOs, especially the larger offerings, are managed by a group of underwriters.
B) At an IPO, a firm offers a large block of shares for sale to the public for the first time.
C) After deciding to go public, managers of the company work with an underwriter, an investment banking firm that manages the offering and designs its structure.
D) The shares that are sold in the IPO may either be new shares that raise new capital, known as a secondary offering, or existing shares that are sold by current shareholders (as part of their exit strategy), known as a primary offering.

Question 22

$$\begin{array}{l}\text { Price (\$) }&\text{Number of Shares Bid }\\\hline5.00 & 600,000 \\5.25 & 700,000 \\5.50 & 850,000 \\5.75 & 800,000 \\6.00 & 650,000 \\6.25 & 400,000 \\6.50 & 150,000\end{array}$$ Felicity Industries is selling 2 million shares in an auction IPO. At the end of the bidding period they have received the bids shown above. Which of the following is closest to the price at which the shares will be offered?

A) $5.00
B) $5.25
C) $6.00
D) $5.75

Question 23

An equity issue that raises new funds for a publicly traded company is calle?

A) a secondary offering.
B) an underpriced offering.
C) an initial public offering.
D) a seasoned equity offering.

Question 24

The offer price of shares in an IPO is generally less than the price those shares sell for at the end of the first trading day. Which of the following parties suffer most from this situation?

A) the underwriters of the IPO
B) the lead underwriter of the IPO
C) the buyers of shares after the initial offering
D) the pre-IPO shareholders of the issuing firm

Question 25

The founder of a company issues 100,000 Class A preference shares for his own $250,000 investment. He then goes through three further rounds of investment, as shown below: $$\begin{array} { l c c } \text { Round } & \text { Price } & \text { Number of Shares } \\\hline \text { Class B } & \$ 2.50 & 200,000 \\\text { Class C } & \$ 2.75 & 300,000 \\\text { Class D } & \$ 2.80 & 200,000\end{array}$$ Which of the following is closest to the percentage of the company owned by the founder of the company?

A) 25.0%
B) 42%
C) 12.5%
D) 37.5%

Question 26

Nature's Bounty, an organic seed company, is seeking to grow from a small company selling seeds in local markets into a company that sells seeds across several states. The funding for this expansion comes from a wealthy individual who uses his considerable inherited wealth to fund a variety of eco-friendly businesses. Which of the following best describes this individual's relationship with Nature's Bounty?

A) a venture capitalist
B) an angel investor
C) an institutional investor
D) a corporate investor

Question 27

Which of the following statements is FALSE?

A) As with IPOs, evidence suggests that companies overperform following a seasoned offering.
B) The one advantage of a cash offer is that the underwriter takes on a larger role and, therefore, can credibly certify the issue's quality.
C) SEO underwriting fees average about 5% of the proceeds of the issue and, as with IPOs, the variation across issues of different sizes is relatively small.
D) Often the value destroyed by the price decline can be a significant fraction of the new money raised with a SEO.

Question 28

Use the information for the question(s) below.
You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you
received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are
now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would
receive 2 million newly issued shares in return.
Suppose you sold the 1 million shares to the angel investor for $500,000. What was the post-money valuation of your shares immediately following the angel investor's investment?

A) $500,000
B) $2.5 million
C) $1.0 million
D) $2.0 million

Question 29

Jeremy founded a company. He issues 200,000 Class A preference shares for his own $100,000 investment. He then goes through three further rounds of investment, as shown below: $$\begin{array} { l c c } \text { Round } & \text { Price } & \text { Number of Shares } \\\hline \text { Class B } & \$ 1.00 & 500,000 \\\text { Class C } & \$ 1.50 & 300,000 \\\text { Class D } & \$ 2.25 & 400,000\end{array}$$ Which of the following is closest to the percentage of the company owned by the Class D investors?

A) 46%
B) 25%
C) 33%
D) 29%

Question 30

At what stage of the IPO process do senior management and the lead underwriters travel to promote the company and explain their rationale for the offer price to the underwriters' largest customers?

A) when filing with the SEC
B) when managing risk
C) when matching buyers to sellers of the stock
D) when valuing the firm

Question 31

Big Box retailing has a market capitalisation of $500 million and 20 million shares outstanding. In order to finance its growth, the management of Big Box plans to raise further capital through a rights issue. All shareholders will be issued ten rights to purchase a new share at a price of $1.50. What will the price of a share be after the SEO, if all shareholders exercise their rights?

A) $3.64
B) $2.50
C) $2.41
D) $2.32

Question 32

The founder of a company currently holds 12 million of the 15 million shares in that company. She considers an IPO where she sells a mix of primary shares and 2 million of her own secondary shares for $18 per share. If she wants to retain a 60% ownership of the company, how much money can she raise in this IPO?

A) $42 million
B) $66 million
C) $54 million
D) $30 million

Question 33

Which of the following is LEAST likely to be a possible source of funds to finance a growing business?

A) venture capital firms
B) angel investors
C) institutional investors
D) family investors

Question 34

Which of the following statements is FALSE?

A) Once the issue price (or offer price) is set, underwriters may invoke another mechanism to protect themselves against a loss-the over-allotment allocation.
B) A "road trip" is where senior management and the lead underwriters travel around the country (and sometimes around the world) promoting the company and explaining their rationale for the offer price to the underwriters' largest customers-mainly institutional investors such as mutual funds and pension funds.
C) Before an IPO, the company prepares the final registration statement and final prospectus containing all the details of the IPO, including the number of shares offered and the offer price.
D) Before the offer price is set, the underwriters work closely with the company to come up with a price range that they believe provides a reasonable valuation for the firm.

Question 35

Which of the following is NOT a common name for a corporation that invests in private companies?

A) venture partner
B) strategic investor
C) strategic partner
D) corporate partner

Question 36

Criswell Mining shares trade at $18 per share and there are 200 million shares outstanding. The management would like to raise $100 million in an SEO. If the underwriter charges 5% of gross proceeds, how many shares must it sell?

A) 5.85 million
B) 8.93 million
C) 11.11 million
D) 5.56 million

Question 37

Use the information for the question(s) below.
You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you
received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are
now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would
receive 2 million newly issued shares in return
After the venture capitalist's investment, what percentage of the firm will you own?

A) 25%
B) 50%
C) 40%
D) 33%

Question 38

Highlander Homes shares trade at $32 per share and there are 50 million shares outstanding. The management would like to raise $200 million in an SEO, and current investors would like to sell $50 million of their own shares. If the underwriter charges 5% of gross proceeds, how many shares must it sell in the total (primary and secondary) offering?

A) 6.05 million
B) 7.81 million
C) 6.58 million
D) 8.22 million

Question 39

An entrepreneur founded his company using $200,000 of his own money, issuing himself 200,000 shares. An angel investor bought an additional 100,000 shares for $200,000. The entrepreneur now sells another 400,000 shares to a venture capitalist for $1 million. What is the post-money valuation of the company?

A) $1,140,000
B) $1,000,000
C) $1,750,000
D) $2,000,000

Question 40

Convex Incorporated sells 10 million shares in an SEO - 6 million being primary shares issued by the company and 4 million being secondary shares sold by investors in the company. At the time of the sale, Convex's shares were selling at $8.00 per share. If the underwriter charges 6% of the gross proceeds as a fee, how much money was raised in the sale?

A) $45.12 million
B) $36.25 million
C) $48.00 million
D) $75.20 million

Question 41

What are the advantages of a rights offer over a cash offer when issuing new shares?

A) It enables a firm to attract new investors from outside its current owners.
B) It enables a firm to access new sources of capital to fund its growth.
C) It enables a firm to attract new investors by offering them a windfall from the difference between the price of the issued shares and the price of shares after the offering.
D) It enables a firm to issue equity without imposing a loss on current shareholders.

Question 42

Big Box retailing has a market capitalisation of $500 million and 2 million shares outstanding. In order to finance its growth, the management of Big Box plans to raise further capital through a rights issue. All shareholders will be issued ten rights to purchase ten shares at a price of $1.50 per share. How much money will this raise, if all shareholders exercise their rights?

A) $60 million
B) $30 million
C) $15 million
D) $45 million

Question 43

Which of the following best describes those shares sold when a company goes public which raise new capital?

A) preliminary offering
B) secondary offering
C) tertiary offering
D) primary offering

Question 44

Which of the following statements is FALSE?

A) In recent years, the US investment banking firm of W.R. Hambrecht and Company has attempted to change the IPO process by selling new issues directly to the public using an online auction IPO mechanism called Open IPO.
B) Because of the potential conflict of interest, the underwriter will not make a market in the share after the issue.
C) ASIC requires that companies prepare a prospectus, a document that provides financial and other information about the company to investors, prior to an IPO. Company managers work closely with the underwriters to prepare the prospectus.
D) The lead underwriter is the primary banking firm responsible for managing the deal. The lead underwriter provides most of the advice and arranges for a group of other underwriters, called the syndicate, to help market and sell the issue.

Question 45

Which of the following statements is FALSE?

A) The initial capital that is required to start a business is usually provided by the entrepreneur herself and her immediate family.
B) Individual investors who buy equity in small private firms are called angel investors.
C) A venture capital firm is a limited partnership that specialises in raising money to invest in the private equity of young firms.
D) Venture capitalists typically control about three-quarters of the seats on a start-up's board of directors, and often represent the single largest voting block on the board.

Question 46

Which of the following is a notable puzzle in IPOs?

A) The number of IPOs is highly seasonal.
B) The number of IPOs is highly underestimated.
C) The number of IPOs is highly cyclical.
D) The number of IPOs is almost the same every year.

Question 47

$$\begin{array}{l}\begin{array} { l r } \text { Price (\$}&\text {) Number of Shares Bid }\\\hline3.00 & 100,000 \\3.25 & 100,000 \\3.50 & 150,000 \\3.75 & 100,000 \\4.00 & 40,000 \\4.25 & 80,000 \\4.50 & 150,000 \\4.75 & 65,000\end{array}\end{array}$$ Bejeweled, a chain of crafting shops, is selling 500,000 shares in an auction IPO. At the end of the bidding period they have received the bids shown above. Which of the following is closest to the price at which the shares will be offered?

A) $3.50
B) $4.75
C) $4.25
D) $3.75

Question 48

Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists?

A) The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs.
B) On average, IPOs appear to be underpriced.
C) The number of issues is highly cyclical.
D) The long-run performance of a newly public company (three to five years from the date of issue) is superior to the overall market return.

Question 49

Which of the following is NOT a reason why an IPO is attractive to the managers of a private company?

A) It gives their private equity investors the opportunity to diversify.
B) It reduces the complexity of requirements regulating the company's management.
C) It gives access to large amounts of capital in the IPO.
D) It gives access to much larger amounts of capital through the public markets in subsequent offerings.

Question 50

How does the total cost of issuing shares for the first time compare to the costs of other securities?

A) about the same as the cost for most other securities
B) substantially less than the costs for most other securities
C) substantially less than the cost for a few other securities
D) substantially larger than the costs for most other securities

Question 51

Which of the following statements regarding firm commitment IPOs is FALSE?

A) The underwriter guarantees that it will sell all of the issue at the offer price.
B) It is the most common underwriting arrangement.
C) The underwriter purchases the entire issue (at the offer price) and then resells it at a slightly higher price to interested investors.
D) If the entire issue does not sell out, the remaining shares must be sold at a lower price and the underwriter must take the loss.

Question 52

David founds a company and goes through the investment rounds shown below: $$\begin{array} { l l c c } \text { Round } & \text { Source } & \text { Price } & \text { Number of Shares } \\\hline \text { Class A } & \text { Self } & \$ 0.50 & 400,000 \\\text { Class B } & \text { Angel } & \$ 1.00 & 500,000 \\\text { Class C } & \text { Venture Capital } & \$ 1.50 & 300,000 \\\text { Class D } & \text { Venture Capital } & \$ 2.25 & 400,000\end{array}$$ He decides to take the company public through an IPO, issuing 2 million new shares. Assuming that he successfully completes the IPO, the net income for the next year is estimated to be $8 million. His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses, which is 15.0. What share of the company will David own after the IPO?

A) 16%
B) 22%
C) 11%
D) 14%

Question 53

Which of the following statements is FALSE?

A) Although not as costly as IPOs, seasoned offerings are still expensive.
B) The decision to raise financing externally usually implies that a firm plans to pursue an investment opportunity.
C) Researchers have found that, on average, the market greets the news of an SEO with a price increase.
D) SEO rights offers have lower costs than cash offers.

Question 54

Which of the following statements regarding best efforts IPOs is FALSE?

A) Often these arrangements have an all-or-none clause: either all of the shares are sold in the IPO, or the deal is called off.
B) If the entire issue does not sell out, the underwriter is on the hook.
C) For smaller IPOs, the underwriter commonly accepts the deal on this basis.
D) The underwriter does not guarantee that the issue will be sold, but instead tries to sell the issue for the best possible price.

Question 55

Convex Incorporated sells 10 million shares in an SEO - 6 million being primary shares issued by the company and 4 million being secondary shares sold by investors in the company. At the time of the sale, Convex's shares were selling at $8.00. If the underwriter charges 6% of the gross proceeds as a fee, how much money was raised in the sale?

A) $75.20 million
B) $80.00 million
C) $45.12 million
D) $48.00 million

Question 56

Moon Company plans to issue 10 million shares in a seasoned equity offering. The owner, Ken Moon, plans to sell 4 million shares as part of the offering. Which of the following is true regarding the seasoned equity issue?

A) Some shares are primary shares and some shares are secondary shares.
B) It is a primary offering.
C) It is a secondary offering.
D) None of the above is true regarding this seasoned equity offering.

Question 57

Highlander Homes shares trade at $32 per share and there are 50 million shares outstanding. The management would like to issue a total of 8 million (primary and secondary) shares in an SEO. If the underwriter charges 5% of gross proceeds, 75% of the shares are primary shares sold to new investors, and 25% of the shares are secondary shares sold to new investors, what percentage of the company will be owned by the new investors?

A) 14.29%
B) 10.34%
C) 10.71%
D) 13.79%

Question 58

The cost of issuing an IPO in Australia is higher than most other security issuance fees. A typical spread is

A) 4%.
B) 5%.
C) 6%.
D) 7%.

Question 59

$$\begin{array} { c c } \text { Price (\$) } & \text { Number of Shares Bid } \\\hline 6.00 & 100,000 \\6.25 & 200,000 \\6.50 & 450,000 \\6.75 & 200,000 \\7.00 & 350,000 \\7.25 & 200,000 \\7.50 & 250,000\end{array}$$ Harrison Products is selling 1 million shares in an auction IPO. At the end of the bidding period they have received the bids shown above. Which of the following is closest to the price at which the shares will be offered?

A) $6.60
B) $6.75
C) $7.00
D) $6.25

Question 60

Which of the following is an activity typically taken by an underwriter during an IPO of a company?

A) marketing the IPO
B) determining the offer price
C) helping the company with all necessary filings
D) all of the above

Question 61

Which of the following statements is FALSE?

A) If the company runs into financial difficulties, the preference shareholders have a senior claim on the assets of the firm relative to any ordinary shareholders.
B) The preference shares issued by young companies usually give the owner an option to convert them to ordinary shares on some future date, so they are often called callable preference shares.
C) Preference shares issued by mature companies such as banks usually have a preferential dividend and seniority in any liquidation and sometimes special voting rights.
D) The preference shares issued by young companies typically do not pay regular cash dividends.

Question 62

A firm's founder sells equity to outside investors for the first time in the form of preference shares. In what way are their preference shares most likely to differ from the preference shares issued by an established public firm?

A) They will most likely not pay cash dividends.
B) They will give the holder seniority in any liquidation of the company.
C) They cannot be converted into common stock.
D) They will have a larger dividend.

Question 63

The founders and owners of a private company have funded it through the following rounds of investment: $$\begin{array} { l l l c } \text { Kound } & \text { Source } & \text { Price } & \text { Number of Shares } \\\text { Class A } & \text { Self } & \$ 1.00 & 200,000 \\\text { Class B } & \text { Angel } & \$ 1.00 & 300,000 \\\text { Class C } & \text { Venture Capital } & \$ 1.25 & 400,000\end{array}$$ The owners decide to take the company public through an IPO, issuing 1 million new shares. Assuming that they successfully complete the IPO, the net income for the next year is estimated to be $5 million. The price of shares is set using average price-earnings ratios for similar businesses of 17.0. What portion of the company will be owned by the angel investor after the IPO?

A) 22%
B) 12%
C) 16%
D) 30%

Question 64

Why do most people launching a start-up company acquire their funds through the venture capital industry rather than through angel investors?

A) Most entrepreneurs are not willing to relinquish the control of their business demanded by angel investors.
B) Most entrepreneurs do not want the fees associated with investment by an angel investor.
C) Most entrepreneurs do not have any relationships with individuals with substantial capital to invest.
D) Most entrepreneurs do not need the expertise brought to a young firm by an angel investor.

Question 65

A large publishing firm specialising in college textbooks wishes to expand into online delivery of its materials. In order to facilitate this, it invests in a number of small start-up companies that deliver college courses online and uses these companies to start diversifying the delivery of its content. Which of the following best describes the role of the publishing firm as described above?

A) a family investor
B) a venture capitalist
C) a corporate investor
D) an institutional investor

Question 66

Which of the following statements is FALSE?

A) Secondary shares are shares sold by existing shareholders, including the company's founder.
B) If a firm's management is concerned that its equity may be underpriced in the market, by using a rights offering the firm can continue to issue equity without imposing a loss on its current shareholders.
C) In Australia, most SEOs are cash offers.
D) In a rights offer, the firm offers the new shares only to existing shareholders.

Question 67

Use the information for the question(s) below.
You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you
received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are
now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would
receive 2 million newly issued shares in return.
After the venture capitalist's investment, the post-money valuation of your shares is closest to?

A) $4.0 million
B) $5.0 million
C) $12.5 million
D) $2.5 million

Question 68

Highlander Homes shares trade at $32 per share and there are 50 million shares outstanding. The management would like to raise $200 million in an SEO. If the underwriter charges 5% of gross proceeds, how many shares must it sell?

A) 6.58 million
B) 6.05 million
C) 5.875 million
D) 6.25 million

Question 69

Which of the following statements is FALSE?

A) Public companies typically have access to much larger amounts of capital through the public markets.
B) The two advantages of going public are greater liquidity and better access to capital.
C) The process of selling shares to the public for the first time is called a seasoned equity offering.
D) By going public, companies give their private equity investors the ability to diversify.

Question 70

In its IPO, Jillian's Imprints, a small publishing house, offered shares at a price of $8.00 per share. The underwriters of this IPO had a spread of 6.5% per share. If 2 million shares were sold, what funds did Jillian's Imprints receive from the IPO?

A) $17.04 million
B) $14.96 million
C) $16.00 million
D) $5.21 million

Question 71

Which of the following best describes a firm commitment IPO?

A) The underwriter sells new issues directly to the public in an online auction.
B) The underwriter solicits bids from investors and chooses the highest price at which there is sufficient demand to sell the entire issue.
C) The underwriter purchases the entire issue at a small discount and then resells it at the offer price.
D) The underwriter tries to sell the issue for the best possible price but does not guarantee that all shares will be sold.

Question 72

Jeremy founded a company. He issues 200,000 Class A preference shares for his own $100,000 investment. He then goes through three further rounds of investment, as shown below: Round Price Number of Shares Class B $1.00 500,000 Class C $1.50 300,000 Class D $2.25 400,000 What is the post-money valuation for the Class D funding round?

A) $3.15 million
B) $1.95 million
C) $2.025 million
D) $2.85 million

Question 73

Which of the following statements is NOT true regarding angel investors?

A) These investors are frequently friends or acquaintances of the entrepreneur.
B) For many start-ups, the first round of outside private equity financing is often obtained from them.
C) Because their capital investment is often large relative to the amount of capital already in place at the firm, they typically receive a sizeable equity share in the business in return for their funds.
D) They are typically arranged as limited partnerships.

Question 74

Highlander Homes shares trade at $32 per share and there are 50 million shares outstanding. The management would like to raise $200 million in an SEO. If the underwriter charges 5% of gross proceeds, and all the shares are primary shares sold to new investors, what percentage of the company will be owned by the new investors?

A) 11.63%
B) 11.11%
C) 10.79%
D) 10.51%

Question 75

Which of the following statements is NOT true regarding venture capitalists?

A) They use their control to protect their investments, so they may therefore perform a key nurturing and monitoring role for the firm.
B) They might invest for strategic objectives in addition to the desire for investment returns.
C) They can provide substantial capital for young companies.
D) The firms offer limited partners a number of advantages over investing directly in start-ups themselves as angel investors.

Question 76

Luther Industries currently has 100 million shares outstanding at a price of $25 per share. The company would like to raise money and has announced a rights issue. Every existing shareholder will be sent one right per share that he or she owns. The company plans to require twenty rights to purchase one share at a price of $20 per share. The amount of money that Luther will raise through its rights offering is closest to

A) $100 million.
B) $125 million.
C) $400 million.
D) $500 million.

Question 77

Which of the following statements concerning the volume and number of IPOs issued over time is most correct?

A) They tend to rise over time.
B) They are cyclical.
C) They tend to fall over time.
D) They remain approximately the same over time.

Question 78

What is a seasoned equity offering?

A) the issuing of shares to the public in a proven private company
B) the raising of capital through retained earnings
C) the sale of shares by the owners of a company
D) the issuing of shares by a company at a time after its IPO

Question 79

Which of the following is an advantage of a cash offer over a rights offer?

A) There is no loss imposed on current shareholders.
B) There are lower underwriting fees.
C) The underwriter can credibly attest to the issue's quality.
D) The overall costs are lower.

Question 80

How does the size of an issue affect the fees charged by underwriters?

A) Large issues generally have a similar spread to small issues and thus attract much greater fees.
B) Large issues have a reduced spread, which means that the total fees are generally the same as for smaller issues.
C) Large issues have substantially larger direct costs and, thus, must charge a larger spread in order to be profitable for the underwriter.
D) Although large issues generally have a smaller spread, the large number of shares released means that the total fees are somewhat larger than for smaller issues.