Deck 15: How Companies Raise Capital

Question 1

The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the company's financial performance.

Answer 1

True

Question 2

To complete an IPO, a company will need the services of angel investors, who are experts in bringing new securities to market.

Answer 2

False

Question 3

Most businesses are started when an entrepreneur is given a vision for a new business or product by institutional investors.

Answer 3

False

Question 4

A significant number of venture capital companies focus on mature businesses.

Question 5

Traditional sources of funding work for new or emerging businesses, despite the presence of only intangible assets.

Question 6

To complete an IPO, a company will need the services of investment bankers, who are experts in bringing new securities to market.

Question 7

Privately held companies find it easier to attract top management talent and to better motivate current managers.

Question 8

A principal way for venture capitalists to exit is to sell part of the company's equity back to the entrepreneur.

Question 9

Venture capitalists are individuals or companies that help privately held businesses go public.

Question 10

The bootstrapping period usually lasts about five years.

Question 11

In stand-by underwriting, the investment banking company makes no guarantee to sell the securities at a particular price.

Question 12

In stand-by underwriting, the investment banker guarantees the issuer a fixed amount of money from the share sale.

Question 13

A significant number of venture capital companies focus on high-technology investments.

Question 14

The process by which many entrepreneurs raise 'seed' money and obtain other resources necessary to start their businesses is often called bootstrapping.

Question 15

Angel investors are investors who come to the rescue of companies threatened by takeovers.

Question 16

Underwriting is the risk-bearing part of investment banking.

Question 17

At the closing of a best-efforts offering, the issuing company delivers the security certificates to the underwriter and the underwriter delivers the payment for the securities, net of the underwriting fee, to the issuer.

Question 18

The amount of equity capital that can be raised in the public equity markets is typically smaller than the amount that can be raised through private sources.

Question 19

The initial 'seed' money usually comes from the entrepreneur or other founders.

Question 20

A venture capitalist may also exit an investment by selling ordinary shares in an initial public offering.

Question 21

An advantage of a private placement is that it can be arranged and finalised faster than an open public offer.

Question 22

Term loans are defined as business loans with maturities greater than one month but less than one year.

Question 23

The three principal ways in which venture capital companies exit venture-backed companies are:

A) selling to a strategic buyer, buying out the founder, and offering shares to the public.
B) selling to a strategic buyer, selling to a financial buyer, and buying out the founder.
C) selling to a strategic buyer, selling to a financial buyer, and offering shares to the public.
D) None of the above.

Question 24

The initial seed money comes from:

A) public investors.
B) investment banks.
C) the entrepreneur or other founders.
D) commercial banks.

Question 25

Bootstrapping and venture capital financing are part of the public market.

Question 26

Which one of the following statements is NOT true?

A) The cost of venture capital funding is very high
B) On average 1 in 10 business backed by venture capitalists prove successful.
C) A typical venture capital fund may generate annual returns of 10 to 20 per cent on its investment.
D) The sole function of a venture capitalist is to provide financing for new companies.

Question 27

A general cash offer is a sale of debt or equity, open to all investors, by a registered public company that has previously sold shares to the public.

Question 28

Tactics that venture capitalists use to reduce the risk of their investment include:

A) funding the ventures in stages, requiring entrepreneurs to make no personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialise.
B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialise.
C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialise.
D) None of the above.

Question 29

The major disadvantage of a private placement is that it will dilute the proportion of the ownership of existing shareholders.

Question 30

If the offer price is set too high, the issuing company will lose under a best-efforts agreement.

Question 31

Which ONE of the following statements is true?

A) The venture capital industry as we know it today emerged in the 1970s with the formation of the first venture capital limited partnerships.
B) Modern venture capital companies tend to specialise in a specific line of business, such as hospitality, food manufacturing, or medical devices.
C) A significant number of venture capital companies focus on high-technology investments.
D) All of the above are true statements.

Question 32

Underpricing is defined as offering new securities for sale at a price below their true value.

Question 33

Which ONE of the following statements is true?

A) A typical venture capital fund may generate annual returns of 10 to 20 per cent on the money that it invests, compared with an average annual return for the S&P/ASX 300 of about 12 per cent.
B) A typical venture capital fund may generate annual returns of 12 per cent on the money that it invests, compared with an average annual return for the S&P/ASX 300 of about 20 per cent.
C) A typical venture capital fund may generate annual returns of 10 to 12 per cent on the money that it invests, compared with an average annual return for the S&P/ASX 300 of about 20 per cent.
D) None of the above

Question 34

Bootstrapping is the process by which:

A) entrepreneurs raise 'seed' money and obtain other resources necessary to start their businesses.
B) entrepreneurs flesh out their ideas and make them operational.
C) governments foster new business development.
D) entrepreneurs determine whether they have a viable business concept.

Question 35

Which one of the following statements is NOT true?

A) Venture capitalists often require an entrepreneur to make a substantial personal investment in the business.
B) Syndication occurs when the originating venture capitalist buys off other venture capitalists involved in the venture.
C) Venture capitalist's in-depth knowledge of the industry and technology reduces risk.
D) The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the company's financial performance.

Question 36

Which one of the following statements is NOT true?

A) The process by which many entrepreneurs raise 'seed' money and obtain other resources necessary to start their businesses is often called bootstrapping.
B) Most businesses are started by an entrepreneur who has a vision for a new business or product and a passionate belief in the concept's viability.
C) The initial 'seed' money usually comes from the entrepreneur or other founders.
D) The seed money is spent on developing an initial public offering.

Question 37

In a best-efforts offering, the underwriters will suffer a financial loss if the offer price is set too high.

Question 38

Private placement occurs when a company sells securities directly to investors such as insurance companies, commercial banks, or wealthy individuals.

Question 39

Provisions that are part of venture capital agreements include:

A) timing of exit, number of board positions after exit, and what price is acceptable.
B) timing of exit, the method of exit, and what price is acceptable.
C) the method of exit, number of board positions after exit, and what price is acceptable.
D) None of the above.

Question 40

The biggest drawback of private placements involves restrictions on the resale of the securities.

Question 41

IPO pricing: InfoNeed Ltd issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $270,000. The company's share price increases 18 per cent on the first day. What is the underpricing cost of issuing the securities to the company?

A) $13.6 million
B) $20.5 million
C) $6.95 million
D) $4.5 million

Question 42

IPO pricing: InfoNeed, Ltd., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $270,000. The company's share price increases 18 per cent on the first day. What is the underwriting cost?

A) $13.6 million
B) $20.6 million
C) $6.95 million
D) $4.5 million

Question 43

IPO pricing: Black Stump, Ltd., a technology company in St Kilda, Melbourne, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $350,000. The company's share price increases 15 per cent on the first day. What is the underpricing on this issue?

A) $9,900,000
B) $24,900,000
C) $15,000,000
D) $8,000,000

Question 44

Data from the marketplace show that the shares sold in an Australia IPO are typically:

A) priced between 2 and 5 per cent below the price at which they close at the end of first day of trading.
B) priced between 10 and 15 per cent above the price at which they close at the end of first day of trading.
C) priced between 15 and 20 per cent below the price at which they close at the end of first day of trading.
D) priced between 2 and 5 per cent above the price at which they close at the end of first day of trading.

Question 45

All of the below statements are advantages of going public EXCEPT:

A) Larger amounts of capital can be raised this way than the amount that can be raised through private sources.
B) Publicly traded companies find it harder to attract top management talent.
C) Going public can enable an entrepreneur to fund a growing business without giving up control.
D) Additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost.

Question 46

IPO: Birdsville Biosys issues an IPO sold on a best-effort basis. The company's investment bank demands a spread of 18 per cent of the offer price, which is set at $25 per share. Four million shares are issued. However, the bank was overly optimistic and eventually is able to sell the shares for only $23 per share. What are the proceeds for the issuer?

A) $74 million
B) $92 million
C) $100 million
D) $82 million

Question 47

IPO pricing: InfoNeed, Ltd., issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $270,000. The company's share price increases 18 per cent on the first day. What is the total cost of issuing the securities to the company?

A) $13.6 million
B) $20.82 million
C) $20.6 million
D) $6.95 million

Question 48

IPO: White Pharma issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 16 per cent of the selling price. The offer price is set at $32 per share. Three million shares are issued. However, the bank was able to see the shares at $26.25 per share. What are the proceeds for the issuer?

A) $96.00 million
B) $78.75 million
C) $66.15 million
D) $82.35 million

Question 49

All of the below statements are disadvantages of going public EXCEPT:

A) Managers' tendency to focus on long-term profits.
B) The high cost of the IPO itself.
C) The costs of complying with ongoing regulatory disclosure requirements.
D) The transparency that results from this compliance can be costly for some companies.

Question 50

All of the following statements about stand-by underwriting are true EXCEPT:

A) The investment banker guarantees the issuer a fixed amount of money from the share sale.
B) The investment banker actually buys the shares from the company.
C) The issuer bears the risk that the resale price might be lower than the price the underwriter pays.
D) The underwriter bears the risk that the resale price might be lower than the price the underwriter pays.

Question 51

Which one of the following statements is NOT true?

A) Investment bankers provide three basic services when bringing securities to market-origination, underwriting, and distribution.
B) During the origination phase, the investment banker helps the company determine whether it is ready for an IPO.
C) Origination is the risk-bearing part of investment banking.
D) Origination includes giving the company financial advice and getting the issue ready to sell.

Question 52

IPO pricing: Black Stump, Ltd., a technology company in St Kilda, Melbourne, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $350,000. The company's share price increases 15 per cent on the first day. What is the underpricing spread?

A) $51 million
B) $15 million
C) $66 million
D) $8 million

Question 53

Basic services investment bankers provide when bringing securities to market include:

A) origination
B) underwriting
C) distribution.
D) All of the above.

Question 54

With best-effort underwriting:

A) the investment banking company makes no guarantee to sell the securities at a particular price.
B) the investment banker does not bear the price risk associated with underwriting the issue.
C) compensation is based on the actual number of shares sold.
D) All of the above.

Question 55

IPO: Lucky Fortune Hotels issues an IPO sold on a best-efforts basis. The company's investment bank demands a spread of 20 per cent. Five million shares are issued. However, the bank was overly optimistic and could not sell at the offer price of $31. If the net proceeds to the issuer is $110 million, how much did the investment bank receive?

A) $22.0 million
B) $27.5 million
C) $31.0 million
D) None of the above

Question 56

IPO pricing: Black Stump, Ltd., a technology company in St Kilda, Melbourne, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The company's legal fees, ASIC registration fees, and other administrative costs are $350,000. The company's share price increases 15 per cent on the first day. What is the company's total cost of issuing the securities?

A) $24.9 million
B) $15.35 million
C) $25.25 million
D) $8 million

Question 57

Which one of the following statements is NOT true?

A) In best-effort offering, the underwriters will suffer a financial loss if the offer price is set too high.
B) In best-effort agreement, the issuing company will lose if the offer price is set too high.
C) If the underpricing is significant, the investment banking company will suffer a loss of reputation for failing to price the new issue correctly and raising less money for its client than it could have.
D) Underpricing is defined as offering new securities for sale at a price below their true value.

Question 58

The three basic costs associated with issuing shares in an IPO are:

A) price premium, out-of-pocket expenses, and underpricing.
B) underwriting spread, out-of-pocket expenses, and underpricing.
C) underwriting spread, price premium, and underpricing.
D) price premium, underwriting spread, and out-of-pocket expenses.

Question 59

IPO: Lucky Fortune Hotels issues an IPO sold on a best-effort basis. The company's investment bank demands a spread of 20 per cent. Five million shares are issued. However, the bank was overly optimistic and could not sell at the offer price of $31. If the net proceeds to the issuer were $110 million, what was the per share price at which the shares were sold?

A) $27.50
B) $22
C) $31
D) None of the above

Question 60

All of the following are costs of an IPO EXCEPT:

A) Liquidity.
B) Underwriting spread.
C) Out-of-Pocket expenses.
D) Underpricing.

Question 61

What are the advantages and disadvantages of going public?

Question 62

IPO underpricing: When AusGeo Company went public in September 2008, the offer price was $19.00 per share and the closing price at the end of the first day was $24.70. The company issued 4 million shares. What was the loss to the company due to underpricing?

A) $13.6 million
B) $20.83 million
C) $20.6 million
D) $22.8 million

Question 63

What are private placements and how do they help companies raise capital?

Question 64

Which one of the following statements is NOT true?

A) Private placement occurs when a company sells unregistered securities directly to investors such as insurance companies, commercial banks, or wealthy individuals.
B) All corporate debt is sold through the private placement market.
C) About half of all corporate debt is sold through the private placement market.
D) Investment banks and money centre banks often assist companies with private placements.

Question 65

Why do traditional sources of funding not work for new or emerging businesses?

Question 66

Bank lending: Marigold Company wants to borrow money from Howard Bank for a period of five years. The company's credit standing calls for a premium of 1.5 per cent over the prime rate. The current prime rate is 6.5 per cent, the 30-year Treasury bond yield is 5.375 per cent, the three-month Treasury bill yield is 3.525 per cent, and the 5-year Treasury note yield is 4.25 per cent. What is the appropriate loan rate for this customer?

A) 8.725%
B) 7.225%
C) 6.500%
D) 5.375%

Question 67

Which ONE of the following statements is true?

A) A private placement occurs when a company sells securities directly to investors such as superannuation funds, commercial banks and wealthy individuals.
B) Most private placements involve the sale of equity issues.
C) A private placement is arranged and finalised slower than an open public offer.
D) The offer price in a private placement is likely to be less than that of an open offer.

Question 68

Bank lending: Suppose two companies want to borrow money from a bank for a period of 10 years. Company A has excellent credit and can borrow at the prime rate, whereas Company B's credit standing is prime + 2. The current prime rate is 5.75 per cent, the 30-year Treasury bond yield is 4.35 per cent, the three-month Treasury bill yield is 3.54 per cent, and the 10-year Treasury note yield is 4.24 per cent. What are the appropriate loan rates for each customer?

A) 6.45%, 7.75%
B) 6.45%, 8.45%
C) 5.75%, 8.45%
D) 5.75%, 7.75%

Question 69

Which one of the following statements is NOT true?

A) The need for funding does not end when a company goes public.
B) Approval is obtained from the board of directors to issue securities.
C) The lowest-cost source of external funds is often an open offer to the public.
D) The investment bank decides how much money the company needs to raise and what type of security - such as debt, ordinary shares or preference shares - to issue.

Question 70

Advantages of private placements include:

A) Cost of funds may be lower.
B) Private lenders are more willing to negotiate changes to a bond contract.
C) The speed of private placement deals and flexibility in issue size.
D) All of the above.

Question 71

Private equity companies improve the performance of companies in which they invest by:

A) making sure that the companies have the best possible management teams.
B) closely monitoring each company's performance and providing advice and counsel to the company's management team.
C) facilitating mergers and acquisitions that help improve the competitive positions of the companies in which they invest.
D) All of the above.

Question 72

Bank lending: White Azalea Ltd is looking for a five-year term loan of $3 million. Its bank is willing to make the loan. The company will have to pay a premium of 1.5 per cent for default risk and another 0.75 per cent for maturity risk. The current prime rate is 7.5 per cent. What is the loan rate on this bank loan?

A) 9%
B) 8.25%
C) 9.75%
D) 7.5%

Question 73

Which one of the following statements is NOT true?

A) For many smaller companies and companies of lower credit standing that have limited access, or no access, to the public markets, the cheapest source of external funding are often private markets.
B) Bootstrapping and venture capital financing are not part of the private market.
C) Bootstrapping and venture capital financing are part of the private market.
D) Many private companies that are owned by entrepreneurs, families, or family foundations and are sizeable companies of high credit quality prefer to sell their securities in the private markets.

Question 74

General cash offering: Dragon Company, an auto fuel cell maker, is planning a new plant and needs to raise $30 million to finance it. The company plans to raise the money through a general cash offering priced at $23.50 a share. Star's underwriters charge a 6 per cent spread. How many shares does the company have to sell to achieve its goal?

A) 1,358,081 shares
B) 1,276,596 shares
C) 1,200,000 shares
D) 1,412,042 shares

Question 75

Which one of the following statements is NOT true?

A) Private equity companies pool money from wealthy investors, pension funds, insurance companies, and other sources to make investments.
B) Private equity companies invest in more mature companies.
C) Private equity companies invest in new companies.
D) Private equity investors focus on companies that have stable cash flows because they use a lot of debt to finance their acquisitions.