Question 1

What is the group of underwriters called who share both the risks and the marketing responsibilities for a securities offering?

Accepted Answer

This group of underwriters is known as a syndicate. They work together to underwrite and distribute securities, sharing both the risks and the marketing responsibilities.

Question 2

Sydney Securities assists issuers by pricing and selling new securities to the general public.Which one of the following terms best fits the role that Sydney Securities is playing?

Accepted Answer

Sydney Securities is acting as an underwriter by helping the issuer price and sell new securities to the public.

Question 3

The legal document provided to prospective investors which describes details of the issuer and the proposed securities offering is called a:

Accepted Answer

A prospectus is a legal document provided by the issuer to prospective investors that describes details of the issuer and the proposed securities offering. It includes information about the terms of the security, risks associated with the investment, financial statements, and other details that can help investors make informed decisions. A prospectus is required by law for most security offerings.

Question 4

Which of the following functions are performed by underwriters?
I.selling and distributing new securities
II.determining the method used to issue the securities
III.guaranteeing the payment of the offering price to the issuer if the underwriting is done on a best efforts basis
IV.setting the offering price

Accepted Answer

Underwriters perform the functions of determining the method used to issue the securities, selling and distributing new securities, and setting the offering price. The guarantee of payment to the issuer is only applicable if the underwriting is done on a firm commitment basis, which is not always the case. Therefore, option I is not entirely accurate.

Question 5

Angelina and Joe founded New Tech three years ago.Two years ago,Angelina and Joe incorporated the business and issued themselves 50 000 shares each.Last year,they took their company public in an initial public offering (IPO)by issuing an additional 100 000 shares.The offer price was $21 a share,the spread was 8 per cent,and the lock-up period was six months.The shares closed at $36 a share at the end of the first day of trading.During the first six months of trading,the shares sold in a price range of $19 to $38 a share.During the second six months of trading,the shares sold between $15 and $24 a share.Given this,which one of the following statements is correct? Ignore transaction and administrative costs.

Accepted Answer

According to the given information, the shares sold in a price range of $15 to $24 a share during the second six months of trading. Therefore, Joe could have sold some of his shares for $23 a share, which is within this price range. The statement regarding the maximum profit that an investor could have earned is incorrect as the shares closed at $36 on the first day of trading and sold for as high as $38 during the first six months of trading. The information about underwriters' spread and profit is not relevant to the question.

Question 6

The spread is the difference between the underwriter's purchase price and:

Accepted Answer

The spread is the difference between the offer price (the price at which the underwriter purchases the securities from the issuer) and the public offering price (the price at which the securities are sold to the public). Therefore, the best choice is E, as it refers to the offer price. The other options are either irrelevant or incorrect.

Question 7

Richardson Marina has 18 000 ordinary shares outstanding that were sold to the general public last year.The firm has just decided to issue an additional 6000 ordinary shares and has also decided to make the shares available to the firm's current shareholders before making any offer of these shares to the general public.Which one of the following terms best applies to this offer?

Accepted Answer

The offer described in the scenario is a rights offer, as the company is making the new shares available to its current shareholders before offering them to the general public. This type of offer is also known as a rights issue or rights offering.

Question 8

Venture capital is most apt to be the source of funding for which one of the following?

Accepted Answer

Venture capital is typically used as a source of funding for new, high-risk ventures that have the potential for significant growth and profitability, but also involve a substantial level of risk. Venture capital firms provide funding in exchange for an equity stake in the company, and are generally looking for opportunities with high growth potential that can generate substantial returns on investment. Global expansion for an established firm or daily operations for a profitable firm are more likely to be funded through other sources such as bank loans or internal cash flows. Bankruptcy reorganization and seasonal production are also not typically areas that venture capital firms would focus on.

Question 9

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 have all been offered as justifications for IPO underpricing. Young firms are often considered risky investments, so underwriters may price the IPO lower to compensate for this perceived risk. The best IPOs are often oversubscribed, meaning there is more demand for shares than there are shares available, so underpricing can help manage this excess demand. Underwriters also want to minimize the risk of lawsuits, so they may underprice to minimize the chance of unhappy investors suing the company. Existing shareholders may benefit from underpricing if the stock price quickly rises after the IPO, increasing their wealth. However, option IV alone does not invalidate the rest of the choices, so the correct answer is A: I, II, and III only.

Question 10

The Bud Wise Co.needs to raise $125 million to expand their operations into Asia.The company will sell new shares via a general cash offering to raise the necessary funds.The underwriters charge a 7.5 per cent fee and the administrative costs are $600 000.How many shares of stock must be sold at the offer price of $31?

Accepted Answer

The total cost of raising $125 million is:

$125,000,000 + ($125,000,000 x 7.5%) + $600,000 = $135,937,500

To determine the number of shares needed to reach this amount, we divide the total cost by the offer price:

$135,937,500 ÷ $31 = 4,380,645.16

Therefore, the company needs to sell approximately 4,380,122 shares of stock to raise $125 million after accounting for the underwriters' fee and administrative costs. The closest answer choice is B.

Question 11

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 specialise in one type of financing for a select type of firm.

Accepted Answer

Venture capitalists generally have an exit strategy, such as an IPO or acquisition, to realize returns on their investment. They also tend to specialize in specific industries or stages of company development to leverage their expertise.

Question 12

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

Accepted Answer

Venture capital is typically used to fund early-stage startups that are developing a new product or service, such as building a prototype of a new invention. Building a new factory overseas or expanding an existing production line are more likely to be funded through traditional bank loans or other forms of debt financing. Raising capital to purchase a competitor or raise equity to reduce debt would typically be handled through other forms of financing as well.

Question 13

The Pegasus Company is considering a share issue to finance a new production facility.A feasibility study shows that a total of $25 million in new equity is needed to acquire new equipment.The direct costs of issue are estimated at 5% of the amount raised.How large does the issue need to be?

Accepted Answer

The direct costs of issue are estimated at 5% of the amount raised, so the issue needs to be 105% of the amount needed to acquire new equipment. Therefore, the issue needs to be $25 million / 0.95 = $26.32 million.

Question 14

Which one of the following best describes an initial public offering?

Accepted Answer

An initial public offering (IPO) is the first sale of equity shares to the general public. This is when a private company becomes a public company by offering its shares to outside investors.

Question 15

If an offer of issued securities is made only to institutional investors,such as life insurance offices and superannuation funds,the method is called:

Accepted Answer

Private placement is when securities are offered only to a small group of institutional investors, rather than the general public or a larger group of investors. This allows for more targeted distribution of securities and can sometimes result in lower costs for the issuer.

Question 16

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 listed factors are important: exit strategy for alignment on future goals, management style for compatibility, personal contacts for networking, and financial strength for funding capability.

Question 17

You own 100 of the 15 000 outstanding shares of Delta Movers stock.The firm just announced that it will be issuing an additional 5000 shares to the general public in a cash offer of $22 per share.What type of event are you participating in if you opt to purchase 100 of these additional shares?

Accepted Answer

Since the additional shares are being offered to the general public, the event is a general public offer. Choosing to purchase 100 of these additional shares would mean participating in the general public offer.

Question 18

The founders of a new firm generally receive:

Accepted Answer

Generally, during the early stages of venture capital financing, founders receive minimal salaries as the focus is on using the funding to develop the business. Seed money refers to the initial capital contributed to a business to start operations, but it is not the compensation received by the founders. A sizeable salary may come later in the financing stages, but it is not guaranteed. Founders do not receive a fixed percentage of all venture capital raised and the funding is not typically used to pay off their personal obligations.

Question 19

A public issue of securities which are first offered to existing shareholders is best defined as a(n):

Accepted Answer

A rights offer is when a company offers new shares to its existing shareholders before offering them to the general public. This is different from a general cash offer or general offer where the securities are offered to the public without first being offered to existing shareholders. An IPO, or initial public offering, is when a company goes public for the first time by offering shares to the public. A private placement is when securities are sold to a small group of investors, typically institutions, without being offered to the public. Therefore, the correct choice is B.

Question 20

The investment firms which act as intermediaries between the issuer of securities and the general public are called:

Accepted Answer

Underwriters are the investment firms that act as intermediaries between the issuer of securities and the general public. They help in determining the price, deciding the amount of securities to be issued and selling them to the public.

Quiz 15: Raising Capital