Deck 18: Investment Banking

Question 1

The Banking Act of 1933, known as the Glass-Steagall Act, effectively kept commercial banks out of the commercial lending area for 50 years.

Answer 1

False

Question 2

Venture capital recipients are often called angels.

Answer 2

False

Question 3

Venture capital firms compete with commercial banks for new business loans.

Answer 3

False

Question 4

The Glass-Steagall Act of 1933 allowed firms engaged in investment banking to simultaneously engage in commercial banking.

Question 5

A dealer earns a commission for bringing buyers and sellers together.

Question 6

Venture capital financing usually entails some managerial involvement and equity ownership.

Question 7

Pure discount brokers offer investment advice at prices below full-service security brokerage houses.

Question 8

From 1933 to 1999 commercial banks were prohibited from engage in any underwriting activities.

Question 9

Only about half of venture capital investments end in a successful IPO or buyout.

Question 10

Investment banks are the most important intermediary in the direct financial market whereas commercial banks are the most important intermediary in the indirect financial market.

Question 11

Most securities owned by the public are held in street name today.

Question 12

A security underwriting takes place in the primary market; subsequent trading in the security takes place in the secondary market.

Question 13

An underwriter's selling group assumes underwriter risk.

Question 14

SEC Regulation D permits investors in private placements the opportunity to trade their obligations.

Question 15

Investment banking firms provide both financing and investment services for borrowers and lenders, respectively.

Question 16

A best efforts sale of securities is likely to generate more revenue for the investment banker than an equivalent underwriting of securities.

Question 17

The primary day to day regulator of securities market activity is the Financial Industry Regulatory Authority or FINRA.

Question 18

If the margin requirement is 40% then the buyer of a security must provide at least 60% of the funds necessary to cover the transaction, borrowing the remaining 40%.

Question 19

Before the Financial Services Modernization Act of 1999, in 1988 the Supreme Court of the U.S. provided commercial banks permission to underwrite commercial paper and municipal revenue bonds but not equities.

Question 20

Seed financing is venture capital financing provided at the idea stage of a new business.

Question 21

Universal banks are financial institutions that are allowed to do only commercial banking activities.

Question 22

Underpricing refers to the bid-ask spread investment bankers charge in an underwritten offering.

Question 23

Name and discuss the important procedures involved in bringing a new security issue to market by an investment banking firm.

Question 24

Why have investment banks and commercial banks sought to move into each other's business?

Question 25

You work for Venture's r Us and you have been asked to evaluate investing in a startup firm that makes smart road technology to warn cars of upcoming road hazards. The startup is seeking $4.5 million in venture capital financing. Your analysis reveals that there are three possible scenarios- pessimistic, expected, and optimistic-representing different profitability, growth, and valuation expectations. Given the riskiness of this young company, assume that you decide the required rate of return is 24 percent. Given the following information and an expected sale of the firm in 7 years, determine whether your fund should invest in the startup:
What is the NPV of the investment?

Question 26

The Financial Services Modernization Act of 1999 limited investment banks' ability to engage in any commercial banking activities.

Question 27

What are the advantages and disadvantages of private placements versus public offerings?

Question 28

What are the major services of a full-service investment banking/brokerage firm?

Question 29

YR Megan Chaze, an investment banker, agrees to a firm commitment offering of 1.2 million shares of Formosan Tech stock. The offer price is set at $25.50 and the spread is 30 cents per share. If there are no other fees or expenses, the stock is actually sold to the public at $26.00. What is the amount of funds Formosan Tech receives?

Question 30

Venture capitalists provide a unique service to developing businesses. Discuss their services and the organizational structures used by venture capital firms. What are the main stages of financing?

Question 31

Explain the differences between underwritten offers and best-effort arrangements for IPOs.

Question 32

How might SEC Rule 144A enhance the liquidity and lower the financing costs in private placements?

Question 33

What are the potential conflicts of interest of allowing commercial banks to offer full investment banking services? Why is the proprietary trading business now more tightly regulated than before?

Question 34

Providing financing to institutional clients for investment purchases, clearing transactions, lending securities and providing cash management services is called prime brokerage.

Question 35

The process of validating all the important information the bank and issuing firm provide to potential buyers of an underwritten offering is termed due diligence.

Question 36

In an underwritten offer, the risk of selling the issue at a price lower than that promised to the issuer is borne by the investment bank.