Question 1

An important aspect of insiders' commitment to continuing ownership is the ______, whereby insiders agree to hold their shares for a period (typically 180 days) after the IPO date.&#10;A)ownership commitment&#10;B)signaling agreement&#10;C)statue quo agreement&#10;D)lockup provision

Accepted Answer

The correct term is "lockup provision," which refers to the agreement insiders make to not sell their shares for a certain period following an Initial Public Offering (IPO), typically 180 days, to demonstrate their commitment to the company's future.

Question 2

What types of firms are most likely to go public via a unit IPO?&#10;A)larger, older, more established firms&#10;B)smaller, younger, more speculative firms

Accepted Answer

Smaller, younger, more speculative firms are more likely to go public via a unit IPO because they often need to attract investors by offering both shares and warrants together, which can make the investment more appealing due to the added potential upside from the warrants. This approach is less common for larger, more established firms, which can attract investors based on their track record and stability alone.

Question 3

Which of the following is NOT considered an advantage of going public?&#10;A)Sharing corporate control with outsiders.&#10;B)Better access to both equity and debt markets in the future&#10;C)Better liquidity for the firm's shares&#10;D)The firm's entrepreneurs have a chance to liquidate part of their investment and diversify.

Accepted Answer

Sharing corporate control with outsiders is generally not considered an advantage of going public. It is often viewed as a disadvantage because the original owners have to give up some control and decision-making power to external shareholders.

Question 4

What is a unit IPO?&#10;A)An IPO of a previous unit (or division) of a firm that is being spun off of its parent.&#10;B)A package that includes both common stock and warrants.&#10;C)An IPO of common shares that is sold in bulk (i.e., as a unit) to a single investor.

Accepted Answer

A unit IPO refers to an initial public offering where the securities offered are a package that includes both common stock and warrants, allowing investors to purchase more stock at a later date.

Question 5

Gompers (1996) argued that smaller, younger VCs often bring their firms public earlier in order to establish a reputation and therefore attract additional capital in the future.He refers to such self-serving behavior on the part of a VC as

A)grandstanding.
B)boasting.
C)reputation building.
D)repugnant.

Accepted Answer

Gompers (1996) uses the term "grandstanding" to describe the behavior of smaller, younger venture capitalists (VCs) who bring their firms public earlier than might be optimal in an effort to build their reputation and attract more capital in the future.

Question 6

Which of the following is NOT a theory that has been suggested to explain empirical evidence that IPOs are initially underpriced?&#10;A)litigation risk&#10;B)the winner's curse&#10;C)signaling (i.e., strategic underpricing)&#10;D)the IPO market is inefficient

Accepted Answer

The theories that have been suggested to explain the empirical evidence that IPOs are initially underpriced include litigation risk, the winner's curse, and signaling (i.e., strategic underpricing). The idea that the IPO market is inefficient is not typically offered as a theory to explain IPO underpricing. Instead, underpricing is often seen as a deliberate strategy for various reasons, such as attracting investors, mitigating litigation risk, or signaling company value, rather than a result of market inefficiency.

Question 7

Which of the following is NOT generally considered a cost of going public?&#10;A)Agency Costs of Managerial Discretion: Separating ownership and control leads to such costs, though they can be mitigated with monitoring, incentive contracting, etc.&#10;B)Information Asymmetry: Disclosure requirements may compromise the firm's strategic position in the industry.&#10;C)Taxes: Public firms face higher federal and state tax rates than private firms.&#10;D)Performance Pressures: Management will face pressure for performance from investors, the financial press, equity research analysts, and bond rating agencies.&#10;E)Distractions: Management is often distracted by time-consuming investor-relations tasks, such as press releases, personal visits from or to major shareholders, etc.

Accepted Answer

Taxes are not generally considered a cost of going public because both public and private firms are subject to federal and state tax rates based on their income, not their public or private status. The other options (A, B, D, E) are recognized costs or challenges associated with going public.

Question 8

Which of the following is NOT generally considered a cost of going public?&#10;A)Underpricing: IPOs appear to be substantially underpriced.&#10;B)Competition: Now that the firm is more visible, industry rivals will compete more intensively.&#10;C)Issuance Costs: The typical underwriter spread for an IPO is 7% of the offering proceeds.&#10;D)Management's time in preparing for the offering.&#10;E)Loss of Control: New equityholders may press the firm to change its investment, financing, or dividend policies, and may also attempt to replace the firm's original management team.

Accepted Answer

Competition is not typically considered a direct cost of going public. The primary costs associated with an IPO include underpricing, issuance costs, management's time, and potential loss of control, but not an increase in competition due to the firm's higher visibility.

Question 9

Over the years 1980-2000, most U.S.firms that have gone public have chosen the __as their listing market.&#10;A)NYSE&#10;B)AMEX&#10;C)NASDAQ/OTC&#10;D)Bulletin Board

Accepted Answer

Over the years 1980-2000, most U.S. firms that went public chose NASDAQ/OTC as their listing market due to its more flexible listing requirements and its appeal to technology and growth-oriented companies.

Question 10

In an IPO, the ___option allows the underwriter to sell additional shares if it is profitable to do so.&#10;A)overallotment&#10;B)offer extension&#10;C)continuance&#10;D)prolongation

Accepted Answer

The overallotment option, often referred to as the "greenshoe" option, allows the underwriter to sell additional shares in an initial public offering (IPO) if demand is higher than expected, thus providing a mechanism for stabilizing the stock price after the IPO.

Question 11

A well-documented anomaly associated with IPOs is evidence that IPOs ___other stocks in the aftermarket for up to 3 years.&#10;A)outperform&#10;B)underperform

Accepted Answer

The answer of A well-documented anomaly associated with IPOs is...

Deck 12: Initial Public Offerings of Stock