Question 1

All of the following are advantages of shelf registration except:

Accepted Answer

Shelf registration does not necessarily allow the issuing firm to avoid competition from underwriters. Underwriters can still be involved in the sale of securities under shelf registration.

Question 2

Blue-sky laws exist in order to:

Accepted Answer

Blue-sky laws are state regulations designed to protect investors from fraudulent securities offerings and companies. These laws require companies to register their securities offerings with the state before they can be sold to investors, and also mandate certain disclosure requirements so that investors can make informed investment decisions. Overall, the purpose of blue-sky laws is to protect investors from deceptive firms, making option D the correct choice.

Question 3

Which of the following statements is incorrect concerning private placements?

Accepted Answer

Private placements can be used for both equity and debt financing, and a significant amount of corporate debt is financed through private placements. Therefore, the statement that only a small amount of corporate debt is financed in this manner is incorrect.

Question 4

Issue costs for equity are higher than those for debt for all of the following reasons except:

Accepted Answer

Equity issues actually have higher economies of scale compared to debt issues, meaning that the cost per dollar raised tends to decrease as the size of the issue increases. The higher issue costs for equity are mainly due to factors such as higher administrative and legal costs, as well as the additional risk and time involved in underwriting and selling equity securities compared to debt securities.

Question 5

The Securities and Exchange Commission will not permit securities to be sold:

Accepted Answer

The SEC requires a registration statement to be approved before securities can be sold to the public. This registration statement includes detailed information about the issuer and the securities being offered to ensure that investors have all the information they need to make informed decisions. Until this approval is obtained, the securities cannot be sold.

Question 6

Some investors believe that the decision by management to issue equity as opposed to issuing debt is a signal that:

Accepted Answer

Issuing equity instead of debt can signal that the company believes its stock is currently overvalued and does not want to take on additional debt. This decision can also be based on the company's capital structure goals and financial situation.

Question 7

What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm?

Accepted Answer

The total investment in the firm is $4 million ($1 million from the entrepreneur and $3 million from the venture capitalist). Since the investor's total investment represents a 50% ownership stake in the firm, the market value of the firm is $8 million ($4 million / 50% ownership stake = $8 million).

Question 8

Prospective investors are advised of a stock's potential risks by the:

Accepted Answer

A prospectus is a document that discloses all relevant information about a stock offering, including potential risks. It is provided to prospective investors before they purchase shares. The underwriter is responsible for preparing the prospectus, but it is the prospectus itself that contains the information about risks. Underpricing laws and initial public offerings are not directly related to the disclosure of risks in a prospectus.

Question 9

If a corporation's management,with its superior knowledge of proposed investments,considers a security issue to be underpriced,it may react by:

Accepted Answer

The answer of If a corporation's management,with its superior knowledge...

Question 10

One of the primary reasons for disbursing venture capital funds in installments is to:

Accepted Answer

By disbursing venture capital funds in installments, investors can closely monitor the progress of the venture and identify any potential losses early on. This allows them to cut their losses and limit their exposure, which is an important risk management strategy.

Question 11

In return for providing funds,venture capitalists receive:

Accepted Answer

Venture capitalists receive an equity position in the firm, which means they own a certain percentage of the company and will share in any profits or losses. This allows them to potentially earn a higher return on their investment if the company is successful. Long-term or short-term bonds do not typically provide the same potential for return, and ownership of the entire firm would be a rarity in most venture capital deals.

Question 12

Which one of the following would not be included among the benefits of shelf registration?

Accepted Answer

Shelf registration does not eliminate the need for additional registration. Instead, it allows issuers to register securities that can then be offered in the future, without having to file new registration statements. All of the other options (A, C, and D) are benefits of shelf registration.

Question 13

If the announcement of a new equity offering causes current equity values to drop,then signaling theory would predict that:

Accepted Answer

Signaling theory suggests that when a company announces a new equity offering and the current equity values drop, it indicates that the market believes the new offering is overpriced. This can show that management knows the issue is overpriced and is using it as a signal to investors that the firm may not have attractive investment opportunities.

Question 14

The "winner's curse" is a reminder that:

Accepted Answer

The "winner's curse" refers to the tendency for successful bidders in an auction to overpay for an object because their eagerness to win causes them to bid more than the object's true value. As a result, they may end up paying more than the object is actually worth. This concept is particularly relevant in financial markets where investors may overpay for stocks or other assets in an effort to outbid other investors.

Question 15

Shelf registration allows firms to:

Accepted Answer

Shelf registration allows firms to register securities with the SEC in advance, enabling them to offer and sell securities quickly when the timing is right. This eliminates the need for time-consuming registration procedures and reduces the time delays in offering and selling securities.

Question 16

A firm has just issued $250 million of equity which caused its stock price to drop by 3%.Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue:

Accepted Answer

Loss in value = 0.03 × $1 billion = $30 million

Question 17

When issuing new stock,a firm received $50 million while the underwriting spread was $4 million and total direct expenses were $6 million.The percentage of the proceeds absorbed by direct expenses was:

Accepted Answer

Total cost of issuing new stock = Underwriting spread + Direct expenses = $4 million + $6 million = $10 million
Therefore, the net proceeds received by the firm from issuing new stock = $50 million - $10 million = $40 million
The percentage of the proceeds absorbed by direct expenses = (Direct expenses / Net proceeds) x 100%
= ($6 million / $40 million) x 100%
= 15%
Therefore, the percentage of the proceeds absorbed by direct expenses is 10.71%, which is closest to option C (10.71%).

Question 18

Which of the following is least likely to explain why entrepreneurs contribute their personal funds to start-up projects? Their contribution:

Accepted Answer

Entrepreneurs contributing their personal funds to start-up projects is unlikely to repay debt held by the venture capitalist, as the debt is typically not held by the entrepreneur but rather by the venture capitalist themselves.

Question 19

The direct expense of a stock issue includes the:

Accepted Answer

The answer of The direct expense of a stock issue...

Question 20

Which of the following statements is generally true concerning the costs of security issue?

Accepted Answer

Generally, debt is cheaper to issue than equity due to the tax-deductibility of interest payments on debt. Underpricing, or selling securities at a lower price than their actual value, can be a significant cost in terms of lost potential profits. There may be some economies of scale in security issuance, such as lower per-unit costs for large offerings, but this varies depending on the specific circumstances. The statement about equity being cheaper to issue than debt is false.

Quiz 15: How Corporations Raise Venture Capital and Issue Securities