Question 1

Which of the following have been offered as justification for IPO underpricing?
I.Young firms tend to be very risky.
II.The best IPOs are oversubscribed.
III.Underwriters like to avoid lawsuits.
IV.It benefits the existing shareholders.

Accepted Answer

I, II, and III are all valid justifications for IPO underpricing. Underwriters like to avoid lawsuits, young firms tend to be very risky, and the best IPOs are oversubscribed.

Question 2

Currently,you own 5.4 percent of the outstanding stock of Keiffer Industries.The firm has decided to issue additional shares of stock and has given you the first option to purchase 5.4 percent of those additional shares.Which one of the following will you be participating in if you opt to purchase the shares you have been offered?

Accepted Answer

The option given to purchase additional shares that corresponds to the percentage of outstanding stock that the investor currently owns is called a rights offer. Therefore, in this scenario, the investor will be participating in a rights offer. The other options listed are not applicable in this scenario. A red herring offer is an initial prospectus filed with the SEC by a company before proceeding with an IPO, a private placement is a sale of securities to a small number of selected individuals or institutions, an IPO is the first sale of stock by a private company to the public, and a general cash offer is a public offering of securities in which anybody can participate.

Question 3

Which of the following are true statements?
I.Venture capitalists tend to be long-term investors in a firm.
II.Venture capital is relatively easy to obtain for most new firms.
III.Venture capitalists generally have an exit strategy.
IV.Venture capitalists tend to specialize in one type of financing for a select type of firm.

Accepted Answer

Venture capitalists generally have an exit strategy and tend to specialize in one type of financing for a select type of firm. They are not typically long-term investors, and venture capital is not easy to obtain for most new firms.

Question 4

Assume the SEC approved the registration statement for a new securities issue this morning.Which one of the following statements must be true about this issue?

Accepted Answer

The approval of the registration statement means that the SEC has reviewed the disclosures in the registration statement and found them to be in compliance with the applicable rules and regulations governing the issuance of securities. Therefore, it can be inferred that the issuer is following all the required rules and regulations in regard to this issue. However, the SEC's approval does not mean that the issue will be a profitable investment for all purchases made at the offer price, nor does it imply that the red herrings can now be distributed. The waiting period actually starts before the SEC approves the registration statement and the delivery of final prospectuses is not a prerequisite for SEC approval.

Question 5

When issuing securities,which of the following can occur prior to receiving the approval by the SEC of a registration statement?
I.Oral offer to buy shares
II.Written offer to buy shares
III.Final determination of the offer price
IV.Distribution of a preliminary prospectus

Accepted Answer

Prior to receiving SEC approval of a registration statement, issuers are allowed to make oral offers to buy shares and distribute a preliminary prospectus (also known as a red herring) to potential investors. However, they cannot make a final determination of the offer price until after SEC approval is received. Written offers to buy shares are not permitted until after SEC approval is received.

Question 6

Which one of the following statements is correct?

Accepted Answer

The answer of Which one of the following statements is...

Question 7

Which of the following are important factors to consider when seeking a venture capitalist?
I.Exit strategy
II.Management style
III.Personal contacts
IV.Financial strength

Accepted Answer

All four factors mentioned - exit strategy, management style, personal contacts, and financial strength - are important to consider when seeking a venture capitalist. The choice of a venture capitalist can have a significant impact on the success and growth of a company, and considering these factors can help to ensure a good fit and long-term partnership.

Question 8

Who determines the offer price in a Dutch auction?

Accepted Answer

In a Dutch auction, the offer price is determined by the bidders. The auctioneer starts with a high asking price and gradually lowers it until a bid is accepted. The price at which the bids are accepted becomes the offer price.

Question 9

Which one of the following is probably the most effective means of increasing investors' interest in an IPO?

Accepted Answer

Underpricing the IPO is a common strategy for increasing investors' interest in an IPO. By offering the shares at a price below their market value, investors may be more likely to participate in the IPO, hoping to make a profit when the price increases. This can also generate positive buzz and media attention for the company, further increasing interest and demand for the shares. However, it is important for the company to find a balance between underpricing enough to generate interest, but not so much that they miss out on potential profits.

Question 10

Which one of the following is an intended result of a lockup agreement?

Accepted Answer

Lockup agreements are designed to prevent insiders from selling their shares immediately after an IPO, which would flood the market and potentially depress the share price. By temporarily restricting the supply of shares available for trading, lockup agreements can help support the market price of IPO shares.

Question 11

Which of the following duties belong to the underwriters of a firm commitment securities offer?
I.Duty to offer the Green Shoe provision to all investors who buy at the offer price
II.Duty to set the offer price
III.Duty to distribute the offered shares
IV.Duty to purchase any unsold shares

Accepted Answer

The underwriters of a firm commitment securities offer have the duty to set the offer price, distribute the offered shares, and purchase any unsold shares. They do not have the duty to offer the Green Shoe provision to all investors who buy at the offer price. Therefore, the correct answer is II, III, and IV only, which is C.

Question 12

Which one of the following projects is most apt to be financed with venture capital?

Accepted Answer

Venture capital firms typically invest in early-stage businesses with high growth potential and innovative products or services. The prototype for a newly patented hand tool by an individual inventor fits this criterion. The other options are less likely to attract venture capital funding, as they are either established businesses with less need for outside investment (A, D, E) or a new product for an existing company which may be funded through their own resources (B).

Question 13

Lunar Excursions wants to do an IPO but is very uncertain that underwriters will set the most optimal offer price for the securities.Which one of the following might the firm consider to address this uncertainty?

Accepted Answer

Lunar Excursions should consider Dutch auction underwriting. This method involves allowing investors to bid for the securities and the underwriter setting the price based on the highest bids received. This allows for market demand to set the price and can potentially result in a more optimal offer price for the securities.

Question 14

Which one of the following statements concerning underwriting is correct?

Accepted Answer

Underwriters may receive warrants as part of their compensation. The other statements are incorrect. A) The Green Shoe option is exercised when the market price of an IPO increases, not declines. B) In a best efforts underwriting, the underwriter does not guarantee the number of shares to be sold. C) Negotiated underwriting is generally more expensive than competitive underwriting. D) The majority of equity underwritings in the U.S. are negotiated underwritings.

Question 15

You own 100 of the 15,000 outstanding shares of Delta Movers stock.The firm just announced that it will be issuing an additional 5,000 shares to the general public in a cash offer at $22 per share.What type of event are you participating in if you opt to purchase 100 of these additional shares?

Accepted Answer

A seasoned equity offering is when a company, that already has shares trading in the public market, issues additional shares to the public. In this case, Delta Movers is issuing 5,000 additional shares to the general public at a price of $22 per share. As a current shareholder, if you opt to purchase 100 of these additional shares, you will be participating in the seasoned equity offering.

Question 16

What is the primary purpose of a lockup agreement?

Accepted Answer

The primary purpose of a lockup agreement is to ensure that company insiders, such as executives and directors, maintain an economic interest in the issuer of an IPO for a minimum period of time, typically 180 days. This is done to prevent insiders from selling their shares immediately after the IPO and flooding the market with additional shares, which could depress the price of the stock. The lockup period also provides an opportunity for the market to absorb the new shares and for the company to establish a track record as a public company before insiders are allowed to sell their shares.

Question 17

Which one of the following is an aftermarket function performed by the underwriters of a securities issue?

Accepted Answer

Exercising the Green Shoe option is an aftermarket function performed by underwriters. The Green Shoe option is an over-allotment option that allows the underwriters to purchase additional shares from the issuer at the offering price in the event of strong demand from investors, allowing the underwriters to cover any short position they may have taken during the initial offering. Choices A, B, and C are pre-offering functions performed by underwriters, while choice E is determined by market forces rather than the underwriters.

Question 18

Which one of the following statements related to IPO underpricing is correct?

Accepted Answer

Some of the greatest IPO underpricing has occurred in China. While there is evidence that larger-sized IPO firms are more likely to be underpriced in certain markets such as Japan, the overall trend is inconclusive. IPO underpricing also occurs in markets outside of the U.S. and the percentage of underpricing can vary over time depending on market conditions. However, during the tech bubble of 1999-2000, there were many cases of IPO underpricing in the U.S. that resulted in first day returns of 50 percent or more.

Question 19

The quiet period is designed to do which one of the following?

Accepted Answer

The quiet period is designed to ensure that all potential investors have fair access to identical information by prohibiting companies from making public statements about the company during the time period leading up to the initial public offering (IPO). This prevents companies from selectively disclosing information to certain investors and ensures a level playing field for all potential investors.

Question 20

Phil and Terry started a new business three years ago.Two years ago,they incorporated the business and issued themselves each 20,000 shares of stock.Last year,they took the company public in an IPO and issued an additional 100,000 shares of stock at that time.The offer price was $14 a share,the spread was 8 percent,and the lockup period was six months.The stock closed at $17 a share at the end of the first day of trading.During the first six months of trading,the stock had a price range of $13 to $23 per share.During the second six months of trading,the stock sold between $15 and $21 per share.Both Tracie and Amy purchased 100 shares at the offer price.Given this,which one of the following statements is correct? Ignore trading costs and taxes.

Accepted Answer

The lockup period prevented Phil and Terry from selling their shares during the first six months, so the maximum price Terry could have sold shares at after the lockup period was $21.

Quiz 15: Raising Capital

Which of the following have been offered as justification for IPO underpricing? I.Young firms tend to be very risky. II.The best IPOs are oversubscribed. III.Underwriters like to avoid lawsuits. IV.It benefits the existing shareholders.