Question 1

An agreement with an investment bank that involves the purchase and distribution of new securities is known as:

Accepted Answer

A firm commitment is an agreement where the investment bank purchases the entire issue of new securities from the issuer and resells them to the public, assuming the risk of selling the securities.

Question 2

In an outright sale of a venture, the venture can be sold to:

Accepted Answer

An outright sale of a venture can be made to any of the listed groups: family members, managers, employees, or outside buyers.

Question 3

Shares registered with the Securities and Exchange Commission and state securities regulators and sold to the public are known as:

Accepted Answer

Shares registered with the Securities and Exchange Commission and state securities regulators and sold to the public for the first time are known as an initial public offering (IPO).

Question 4

A venture is expected to have an exit value of $10,000,000 five years from now. If venture investors invest $1,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?

Accepted Answer

To find the portion of the exit value needed, calculate the future value of the investment using the formula: Future Value = Present Value * (1 + rate)^n. Here, Future Value = $1,000,000 * (1 + 0.20)^5 = $2,488,320. Then, divide this by the exit value: $2,488,320 / $10,000,000 = 0.248832, or approximately 24.9%.

Question 5

Based on the following information, estimate the percentage appreciation on stock bought by the founders: founders' purchase price $1.00; venture investors' purchase price $2.00; current stock price $10.00; founders holding period = 5 years; venture investors holding period = 3 years.

Accepted Answer

The founders' purchase price was $1.00, and the current stock price is $10.00. The appreciation is calculated as (($10.00 - $1.00) / $1.00) * 100% = 900%.

Question 6

Which of the following describes when a syndicate's offering price is less than the market price immediately following the offering?

Accepted Answer

IPO underpricing occurs when the offering price set by the syndicate is lower than the market price immediately after the offering, often leading to a first-day price jump.

Question 7

In the aftermarket trading for the venture's securities, an order that converts to a market order once a certain price is achieved is known as a:

Accepted Answer

The order described is a stop order, which becomes a market order once a certain price (the stop price) is reached. A put order refers to an options contract and is not applicable in this context. A market order is an order to buy or sell immediately at the best available price, regardless of the price. A limit order is an order to buy or sell at a specific price or better.

Question 8

The arrangement where an underwriter has the option of selling additional shares when the issue is heavily oversubscribed is known as

Accepted Answer

The "green shoe" option allows underwriters to sell additional shares, typically up to 15% more, if the initial offering is oversubscribed, providing price stability and meeting excess demand.

Question 9

A venture is expected to have an exit value of $10,000,000 two years from now. If venture investors invest $2,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?

Accepted Answer

To find the portion of the exit value needed, calculate the future value of the investment: $2,000,000 * (1 + 0.20)^2 = $2,880,000. The portion needed is $2,880,000 / $10,000,000 = 28.8%.

Question 10

The investment banks process of ascertaining, to the extent possible, an issuing firm's financial condition and investment intent is known as:

Accepted Answer

Due diligence is the process of ascertaining, to the extent possible, an issuing firm's financial condition and investment intent.

Question 11

Assume that a venture is expected to have an EBITDA of $1,500,000 at the end of five years from now. If the venture's value is expected to be $12,000,000, what "valuation multiple" was being assumed?

Accepted Answer

The valuation multiple is calculated by dividing the venture's value by its EBITDA. Here, $12,000,000 / $1,500,000 = 8 times.

Question 12

The sale of new securities is known as:

Accepted Answer

The sale of new securities is known as a primary offering, where the securities are sold directly by the issuing company to investors.

Question 13

In the aftermarket trading for the venture's securities, an order that is to be executed as soon as possible at the prevailing market price is known as a:

Accepted Answer

A market order is an order to buy or sell a security at the prevailing market price. It is executed as soon as possible, regardless of the price. This is different from a limit order, which sets a specific price at which the order should be executed, or a stop order, which becomes a market order once a certain price is reached. A put order is not a type of order in the stock market.

Question 14

Based on the following information, estimate the percentage appreciation on stock bought by the venture investors: founders' purchase price $.50; venture investors' purchase price $2.00; current stock price $10.00; founders holding period = 5 years; venture investors holding period = 3 years.

Accepted Answer

The venture investors' percentage appreciation is calculated as follows:((Current stock price - Venture investors' purchase price) / Venture investors' purchase price) * 100= ((10.00 - 2.00) / 2.00) * 100= (8.00 / 2.00) * 100= 400%

Question 15

The NYSE participates in:

Accepted Answer

The answer of The NYSE participates in:
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Question 16

If venture investors invest $1,000,000 now, will receive 25% of the exit value, and expect a 20% compounded rate of return on their investment, what is the approximate expected exit value at the end of five years?

Accepted Answer

The answer of If venture investors invest $1,000,000 now, will...

Question 17

If venture investors invest $1,000,000 now, will receive 50% of the exit value, and expect a 20% compounded rate of return on their investment, what will be the amount of the exit value at the end of two years?

Accepted Answer

To achieve a 20% compounded rate of return over two years, the investment must grow to $1,000,000 * (1 + 0.20)^2 = $1,440,000. Since this represents 50% of the exit value, the total exit value must be $1,440,000 / 0.5 = $2,880,000.

Question 18

In the investment banking process, which of the following is a duty of the investment bank?

Accepted Answer

Investment banks primarily help firms raise capital by finding buyers for their securities, such as stocks or bonds. They do not typically act as investors themselves or provide traditional banking services like checking accounts.

Question 19

A type of agreement with an investment bank employing only marketing and distribution efforts without the actual transfer of securities ownership to the investment banking syndicate is called:

Accepted Answer

In a "best efforts" agreement, the investment bank does not take ownership of the securities but instead agrees to use its best efforts to sell as much of the offering as possible.

Question 20

The sale of used shares is known as:

Accepted Answer

A secondary offering refers to the sale of shares that have already been issued and are being sold by existing shareholders, not the issuing company.

Quiz 15: Harvesting the Business Venture Investment