Deck 15: How Corporations Issue Securities

Question 1

Arrange the following in the chronological order for a startup firm:
I. VC financing; II) Mezzanine financing;
III. Stage 1, 2, 3, 4 etc. financing; and
IV. IPO

A) I, II, III, and IV
B) I, III, II, and IV
C) IV, I, II, and III
D) III, I, II, and IV

Answer 1

I, III, II, and IV

Question 2

A business plan generally contains:
I. a description of the proposed products
II. a description of the potential market
III. a description of the underlying technology
IV. resources needed

A) I only
B) I and II only
C) II and III only
D) I, II, III, and IV

Answer 2

I, II, III, and IV

Question 3

According "Venture Economics" venture capital funds earn an average annual rate of return of:

A) about 32%
B) about 24%
C) about 17%
D) about 12%

Answer 3

about 17%

Question 4

Venture capital investment was highest in the year:

A) 1999
B) 2000
C) 2003
D) 2005

Question 5

Wealthy individuals who provide equity investment for new firms are called:
I. White knights
II. Red herrings
III. Angel investors

A) I only
B) I and II only
C) III only
D) II only

Question 6

Underwriters get compensated for their services in issuing new securities in the form of:

A) commissions
B) set fees
C) spread
D) none of the above

Question 7

Venture capitalists provide start-up companies:

A) all the money they will need up-front
B) enough money at each stage so that they can reach the next stage or major checkpoint
C) help the companies issue initial public offering (IPO)
D) none of the above

Question 8

The stock exchange that specializes in trading the shares of young and rapidly growing companies is:

A) Nasdaq
B) NYSE
C) London Stock Exchange
D) none of the above

Question 9

Generally, venture capital funds are organized as:
I. proprietorships
II. corporations
III. limited private partnerships

A) I only
B) II only
C) III only
D) I and II only

Question 10

Generally, underwriters may handle an issue on:
I. Best efforts basis.
II. Firm commitment basis.
III. All or none basis.

A) I only
B) II only
C) III only
D) I or II or III

Question 11

Generally, underwriters provide the following services to the issuing firm:
I. Provide advice
II. Buy new issue
III. Reselling the issue to the public

A) I only
B) I and II only
C) I, II, and III

Question 12

Registration statements are filed with the:

A) Federal Reserve Board (FED)
B) Office of the Comptroller of the Currency (OCC)
C) Securities and Exchange Commission (SEC)
D) Environmental Protection Agency (EPA)

Question 13

Equity investment in start-up private companies is called:

A) venture capital
B) mezzanine financing
C) initial public offering (IPO)
D) none of the above

Question 14

The market for venture capital refers to the:
I. Private financial marketplace for providing equity investment for small, startup firms
II. Bond market
III. Market for providing equity to well-established firms

A) I only
B) II only
C) II and III only
D) III only

Question 15

The main reason for recent migration of a large number of firms from public-to-private ownership is:

A) Blue-sky laws
B) Sarbanes-Oxley Act
C) International Accounting Standards (IAS)
D) None of the above

Question 16

According to evidence from survey of CFOs, the top-most motive for firms to go public is:

A) to broaden the base of ownership
B) to enhance the reputation of the firm
C) to establish a market price/value for our firm
D) to create public shares for use in future acquisitions

Question 17

Large technology firms like Intel, Johnson and Johnson, and Sun Microsystems which provide equity capital to new innovative companies are called:

A) Angel investors
B) Corporate venturers
C) White Knights
D) none of the above

Question 18

Which of the following statements is generally true of venture capital (VC) firms?

A) VCs are always silent partners in the startup company that they finance
B) VCs always have a majority of directors in the startup company
C) VCs generally provide management advice and contacts in addition to capital
D) All of the above statements are true of VCs

Question 19

State laws that regulate sales of securities within the state are called:

A) Red herring
B) Registration laws
C) Rule 415
D) Blue-sky laws

Question 20

The managing underwriter is also called the:

A) syndicate
B) bookrunner
C) specialist
D) none of the above

Question 21

In a uniform-price auction:

A) Winning bidders pay a price that they have bid
B) All winning bidders pay a price that is the highest bid
C) All winning bidders pay a price that is the lowest winning bid
D) None of the above

Question 22

The underwriter's spread is the highest for:

A) IPOs
B) Seasoned equity offerings
C) Convertible bonds
D) Straight bonds

Question 23

A general cash offer involves the following processes:
I. register the issue with the SEC
II. sell the securities to an underwriter or a syndicate of underwriters
III. underwriter builds up a book of likely demand for the securities
IV. price of the issue is fixed
V. sell the securities to the public

A) I, II and III only
B) I, II, and IV only
C) I, II, III, IV and V
D) II, III, IV and V only

Question 24

The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the value) is called:

A) Winner's curse
B) Dutch auction
C) English auction
D) None of the above

Question 25

Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds?

A) Initial public offerings (IPOs)
B) Seasoned equity offerings (SEOs)
C) Convertible bonds
D) Straight bonds

Question 26

Image Storage Corporation has #1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. If the current stock price is $50 and the subscription price is
$47/share, calculate the value of a right?

A) $0.40/right
B) $5.00/right
C) $2.50/right
D) $1.00/right

Question 27

The very first public equity issue that is made by a company is referred to as:

A) A rights issue
B) American depositing receipts (ADRs)
C) An initial public offering (IPO)
D) A seasoned equity offering (SEO)

Question 28

Generally initial public offerings (IPOs) are:

A) Overpriced
B) Correctly priced
C) Under priced

Question 29

An equity issue sold to the firm's existing stockholders is called:

A) A rights offer
B) A general cash offer
C) A private placement
D) A discriminatory-price auction

Question 30

Which of the following statements describes shelf registration best?

A) The issuance of securities to qualified institutional investors.
B) Blue-sky laws.
C) The provision that allows large companies to file a single registration statement covering financing plans up to two years into the future.
D) None of the above.

Question 31

A new public equity issue from a company with public equity previously outstanding is called:

A) An initial public offering (IPO)
B) American depositing receipts (ADRs)
C) A seasoned equity offering (SEO)
D) A private placement

Question 32

The following are advantages of shelf registration except:

A) Securities can be issued in dribs and drabs without incurring excessive transaction costs
B) Securities can be issued in short notice
C) Security issues can be timed to take advantage of market conditions
D) All of the above are advantages

Question 33

Suppose a government wishes to auction 5 million bonds and three would-be buyers submit bids. In an uniform-price auction:

A) Buyer A pays $1,110 and Buyer B pays $1,000
B) Buyer A pays $1,000 and Buyer B pays $1,000
C) Buyer A pays $990 and Buyer B pays $990
D) Buyer A pays $1,000 and Buyer C Pays $990

Question 34

A rights issue is also called:

A) A private placement
B) Shelf registration
C) Initial public offering (IPO)
D) A privileged subscription

Question 35

The average initial returns from investing in IPOs is the highest in:

A) India
B) China
C) Korea
D) U.S.A.

Question 36

New Image Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. How many rights are needed to buy one new share?

A) 1 right/share
B) 2 rights/share
C) 3 rights/share
D) 4 rights/share

Question 37

Winner's curse is reduced in a (an):

A) discriminatory auction
B) uniform-price auction
C) English auction
D) none of the above

Question 38

Generally, there is a drop in the price of equity subsequent to the announcement of a new issue. This is attributed to:

A) An increase in the supply of shares
B) Information effect
C) Both a and b
D) None of the above

Question 39

For example: a government wishes to auction 5 million bonds (quantity) and three potential buyers submit bids. In a discriminatory auction:

A) Buyer A pays $1,110 and Buyer B pays $1,000
B) Buyer A pays $1,000 and Buyer B pays $1,000
C) Buyer A pays $990 and Buyer B pays $990
D) Buyer A pays $1,000 and Buyer C Pays $990

Question 40

Shelf registration is more often used for:

A) the issue of common stock
B) the issue of convertible securities
C) issue of corporate bonds
D) None of the above

Question 41

Generally, IPOs are overpriced and are subject to winner's curse.

Question 42

An underwriter may work with a CEO to spin a hot new issue so that the CEO can personally benefit and the underwriter may get future business from the CEO's firm.

Question 43

The most important motive for IPO issue is to create public shares for use in future acquisitions.

Question 44

Rule 144A allows large financial institutions to trade unregistered securities among themselves.

Question 45

Most public issues must be registered with the SEC, and the company may not sell securities until the SEC has approved its registration statement.

Question 46

Underpricing is a technique used by underwriters to ensure the success of an issue.

Question 47

Mezzanine financing must come in the third stage.

Question 48

The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called

A) Rule 144A
B) Rule 415
C) Sarbanes-Oxley Act
D) None of the above

Question 49

When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds etc., it is called

A) A rights offering
B) A general art offering
C) A private placement
D) An unseasoned issue

Question 50

What cost in an IPO generally exceeds all other costs?

A) Commission
B) Issues fees
C) Spread
D) Underpricing

Question 51

The underwriting spread for debt is generally less than that for equity.

Question 52

What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue?

A) SOX compliance
B) Spinning
C) Conflict of interest
D) None of the above

Question 53

Recently, most venture capital funds come from pension funds.

Question 54

SEC registration is not required when a company makes:

A) A private placement of securities
B) A public offering of securities issue of value less than $5 million and maturity less than 9 months
C) A public offering of securities issue of value greater than $5 million
D) A and B above

Question 55

The first public issue by a firm is known as a seasoned issue.

Question 56

Under pricing is not a serious problem for most initial public offerings (IPOs).

Question 57

If a shareholder or an investor wants to acquire a new share of stock under a rights issue, he/she must:

A) Buy call options on the stock
B) Acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent
C) Acquire the correct number of rights per share and submit them to the subscription agent
D) Any of the above

Question 58

If the old stock price is $50/share and ex-rights price is $49/share then the value of a right is:

A) $50/right
B) $49/right
C) $1/right
D) Cannot be determined

Question 59

Shelf registration allows the firm to file a registration statement with the SEC to cover a series of subsequent issues.

Question 60

The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price of $27/share, calculate the value of a right.

A) $1/right
B) $2/right
C) $3/right
D) None of the above

Question 61

Discuss the advantages of shelf registration.

Question 62

Explain the need for a firewall between underwriters and analysts.

Question 63

Briefly explain the term venture capital.

Question 64

Briefly discuss SEC rule 144A.

Question 65

Briefly explain the role of the underwriters.

Question 66

Explain the term "winner's curse."

Question 67

Briefly explain the term "Initial public offering (IPO)."

Question 68

What are some of the costs associated with issuing new securities?

Question 69

Briefly explain the basic procedure for a new issue.

Question 70

Briefly explain the term "private placement."