Deck 15: How Corporations Raise Venture Capital and Issue Securities

Question 1

SEC has insisted that the security should be sold to no more than one hundred or so knowledgeable investors in a private placement.

Answer 1

False

Question 2

Economies of scale are apparent in the issuance of securities.

Answer 2

True

Question 3

A consequence of the Sarbanes-Oxley Act has been a decreased reporting burden on small public companies and a decrease in the number of companies reverting to private ownership.

Answer 3

False

Question 4

In a rights offering,the shares are priced at a substantial discount to current market value,which ensures that the shareholders will either exercise the rights themselves or sell them to other investors.

Question 5

A prospectus certificate indicates equity ownership in a firm.

Question 6

Issue costs for debt are considerably lower than issue costs for equity securities.

Question 7

The winner's curse theory assumes that the informed investor receives the majority of the underpriced IPOs.

Question 8

Shelf registration is a procedure that allows firms to file several registration statements for one issue of the security.

Question 9

The evidence indicates that industrial stock prices decrease by approximately 3%,on average,when new equity issues are announced.

Question 10

Equity capital in young businesses is known as venture capital and it is provided by venture capital firms,wealthy individuals,and investment institutions such as pension funds.

Question 11

When a public company makes a general cash offer of debt or equity,it essentially follows the same procedure used when it first went public.

Question 12

Like a general cash offering,a rights issue is an offer to buy shares made to existing and potential shareholders.

Question 13

A general cash offer is necessary when issuing a private placement.

Question 14

A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.

Question 15

In many countries it is common for businesses to remain privately owned.

Question 16

Shelf registration is used more frequently for equity financing than for debt financing.

Question 17

Privately placed securities may be difficult to remarket.

Question 18

Firms are attracted to the private placement of debt because of the lower average interest rates.

Question 19

The Sarbanes-Oxley Act sought to prevent a repeat of the corporate scandals that brought about the collapse of Enron and WorldCom.

Question 20

According to the efficient market hypothesis,large issues of new stock may depress the stock price temporarily.

Question 21

Shelf registration was enacted to allow:

A) the Department of Justice to prosecute those guilty of insider trading.
B) the prospectus to be distributed after the sale of securities begins.
C) underwriters to join together in syndication.
D) single registration of limited future financing plans.

Question 22

The bookbuilding method used by almost all IPOs in the United States is like an auction,since potential buyers indicate how many shares they are prepared to buy at given prices.

Question 23

The advantage of the bookbuilding method is that it allows underwriters to give preference to those investors whose bids are most helpful in setting the issue price and to offer them a reward in the shape of underpricing.

Question 24

The consent of a corporation's stockholders must be received prior to any:

A) issue of new securities.
B) selection of an underwriter.
C) increase in authorized capital.
D) private placement of securities.

Question 25

Studies have shown that,on average,new security issues are:

A) subject to flotation costs of approximately 32%.
B) overpriced by the amount of the spread.
C) underpriced.
D) overpriced to reward venture capitalists.

Question 26

What would you expect to be the market price of stock after a sold-out rights issue if each existing shareholder purchases one new share at $60 for each three that he or she currently holds and the current share price is $100?

A) $75.00
B) $80.00
C) $85.00
D) $90.00

Question 27

Typical firms that will engage in private placements usually have a low degree of risk.

Question 28

Major international commercial banks are:

A) the vast majority of underwriters in the United States.
B) not allowed to engage in any form of underwriting.
C) not able to compete with U.S. investment banks.
D) engaged in underwriting a significant portion of securities.

Question 29

One advantage to private placements is the low cost associated with its issue.

Question 30

Underwriters usually play a triple role-first providing the company with procedural and financial advice,then buying the stock,and finally reselling it to the public.

Question 31

When securities are issued under a firm commitment,the underwriter bears the risk of low sales.

Question 32

A major purpose of the prospectus is to:

A) inform investors of the security's rate of return.
B) advise investors of the security's potential risk.
C) distribute stock warrants to prospective investors.
D) list the security's dividend payment dates.

Question 33

Money that is offered to finance a new business is known as:

A) a general cash offer.
B) venture capital.
C) private placement.
D) a rights issue.

Question 34

When a public company offers shares to the general public,it does so under a(n):

A) rights issue.
B) initial public offering.
C) shelf registration.
D) general cash offer.

Question 35

Private placement contracts may be custom tailored for each individual investor.

Question 36

IPOs are generally overpriced in order to raise large amounts of cash.

Question 37

Google went public in 2004 at a price of $85 a share,putting a value on the enterprise of $23 billion.China's state-owned Industrial and Commercial Bank raised even more capital in its 2006 IPO.

Question 38

An investor exercises the right to buy one additional share at $20 for every five shares held.How much should each share be worth after the rights issue if they previously sold for $50 each?

A) $35.00
B) $41.67
C) $45.00
D) $46.00

Question 39

A firm's first offering of stock to the general public is known as:

A) first-stage financing.
B) an IPO.
C) a general cash offer.
D) a seasoned offering.

Question 40

In the United States,auctions of common stock are rare.For example,in 2004 Google raised $1.7 billion in the world's largest IPO to be sold by auction.

Question 41

All of the following are advantages of shelf registration except:

A) The issuing firm can avoid competition from underwriters.
B) Securities can be issued with short notice.
C) Securities can be issued in small amounts without excessive costs.
D) It allows the firm to take advantage of market conditions.

Question 42

Blue-sky laws exist in order to:

A) protect stock underwriters from fraudulent firms.
B) restrict the amount of profit from IPOs.
C) control the amount of stock owned by one investor.
D) protect investors from deceptive firms.

Question 43

Which of the following statements is incorrect concerning private placements?

A) Terms of the financing can be custom-tailored.
B) The securities are not made available to the public.
C) The securities are often less marketable.
D) Only a small amount of corporate debt is financed in this manner.

Question 44

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

A) equity issues have higher administrative costs.
B) underwriting stock is riskier than underwriting bonds.
C) equity issues involve significantly more time to sell.
D) equity issues have lower economies of scale.

Question 45

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

A) if they have been overpriced.
B) prior to approval of the registration statement.
C) unless the issuer guarantees their value.
D) until a shelf registration exists.

Question 46

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

A) the stock is currently undervalued.
B) the stock is currently overvalued.
C) the firm will avoid dilution of stock value.
D) a shelf registration of securities will occur.

Question 47

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?

A) $4 million
B) $6 million
C) $7 million
D) $8 million

Question 48

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

A) underwriter.
B) underpricing laws.
C) prospectus.
D) initial public offering.

Question 49

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

A) forgoing the security issuance and investment.
B) lowering the price of the existing shares to equal the new shares.
C) increasing the number of shares to be sold.
D) adopting shelf registration, which automatically raises the issue price.

Question 50

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

A) avoid tax liability.
B) identify and cut losses early.
C) increase the importance of the venture capitalist.
D) take advantage of the time value of money.

Question 51

In return for providing funds,venture capitalists receive:

A) long-term bonds of the firm.
B) short-term bonds of the firm.
C) an equity position in the firm.
D) ownership of the entire firm.

Question 52

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

A) Reduction of lead time for security issuance
B) No additional registration necessary for 5 years
C) Issuer can take advantage of favorable conditions
D) Issuer can search for best underwriting terms

Question 53

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

A) supply of equity will outstrip demand.
B) management knows the issue to be overpriced.
C) the firm has no attractive investment opportunities.
D) underwriters charge too high a spread.

Question 54

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

A) successful bidders may often overpay for an object.
B) underwriters charge excessive fees.
C) stocks are much riskier than bonds.
D) underpricing an issue is a cost to existing owners.

Question 55

Shelf registration allows firms to:

A) purchase securities for up to 2 years without registration.
B) incur only short time delays in selling securities.
C) wait for 2 years before paying for securities.
D) offer rights issues to nonexisting shareholders.

Question 56

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:

A) $7.5 million
B) $30.0 million
C) $33.3 million
D) $37.5 million

Question 57

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:

A) 7.14%.
B) 8.00%.
C) 10.71%.
D) 12.00%.

Question 58

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

A) acts as a signal to venture capitalists.
B) repays debt held by the venture capitalist.
C) retains a portion of the firm's equity.
D) provides incentive to expend effort.

Question 59

The direct expense of a stock issue includes the:

A) cost of underpricing the stock.
B) underwriting spread and other expenses.
C) underwriting spread, other expenses, and cost of underpricing.
D) underwriting spread.

Question 60

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

A) Underpricing is rarely a significant cost.
B) Equity is cheaper to issue than debt.
C) Debt is cheaper to issue than equity.
D) There are no economies of scale in security issuance.

Question 61

Companies making smaller security issues may prefer to issue them through:

A) a private placement because lower rates of return can be offered.
B) a private placement because it is cheaper than a public issue.
C) a public issue because it is cheaper than a private placement.
D) a public issue because more exposure will be achieved.

Question 62

Firms go public to:

A) raise additional capital.
B) diversify public debtholders' risk.
C) avoid second-stage financing.
D) increase their leverage.

Question 63

Second stage financing:

A) involves a substantial increase in leverage.
B) immediately proceeds first-stage financing for every new business.
C) involves issuing more stock.
D) occurs when the company is in danger of bankruptcy.

Question 64

Which of the following methods may be particularly cost-effective to smaller issuers of securities?

A) Seasoned offerings
B) Private placement
C) General cash offer
D) Best efforts underwriting

Question 65

Private placement of debt securities occurs more frequently in:

A) smaller-sized firms.
B) larger-sized firms.
C) firms that are using venture capitalists.
D) combination with convertible bonds.

Question 66

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

A) 6.98%
B) 7.19%
C) 7.75%
D) 8.33%

Question 67

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.What is the cost of underpricing?

A) $81 million
B) $91 million
C) $101 million
D) $111 million

Question 68

In regard to new issues of common stock,economists have found that the announcement of a new issue:

A) results in the stock price falling.
B) causes the stock price to rise.
C) has no effect on the stock price.
D) increases the market value of the stock temporarily.

Question 69

When underwriters issue securities on a best efforts basis,they:

A) sell as much of the stock as possible, but with no guarantee.
B) submit a bid for purchase, which the issuer compares to other bids.
C) buy the entire issue from the firm.
D) guarantee that the issuer will receive the spread.

Question 70

If an investor can earn 20% on underpriced IPOs,but will lose 10% on overpriced IPOs in which he was awarded $2,000 worth of the overpriced issue,how much of the underpriced issue must he be awarded in order to gain $500?

A) $1,500
B) $2,500
C) $3,500
D) $10,000

Question 71

A secondary offering IPO occurs when:

A) new shares are sold to provide the company with additional funds.
B) the second public issue of equity becomes available.
C) the company's founders or venture capitalists market a portion of their shares.
D) not all of the shares in a primary IPO were sold.

Question 72

Which of the following security issues might have the lowest direct costs?

A) Bonds
B) Convertibles
C) Seasoned equity offerings
D) IPOs

Question 73

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.What is the total cost (direct expenses plus underpricing cost)?

A) $81 million
B) $91 million
C) $101 million
D) $111 million

Question 74

The largest IPO at the time of this edition,the Visa IPO in 2008:

A) was underwritten by a single underwriter.
B) had no significant underpricing.
C) was underwritten by the four largest underwriters.
D) increased by over $12 in the first day of trading.

Question 75

Plasti-tech Inc.has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share.The underwriter then sold them to the public for $22 each.Plasti-tech also encountered $0.5 million in administrative fees.Soon after the issue,the stock price rose to $25.Find Plasti-tech Inc.'s total cost of this issue.

A) $4.5 million
B) $9.5 million
C) $10.5 million
D) $14.5 million

Question 76

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading,the issuing company's stock price had risen to $70.In percentage terms,how much market value is absorbed by the total cost (direct expenses plus underpricing cost)?

A) 13.33%
B) 23.33%
C) 33.33%
D) 43.33%

Question 77

A private placement avoids which of the following costs?

A) Depression in the stock price
B) Administration costs
C) Registration with the SEC
D) Fixed costs

Question 78

Second-stage financing occurs:

A) prior to the initial public offering.
B) when company founders sell a portion of their shares.
C) after the best efforts of the underwriters.
D) when the IPO does not raise sufficient cash.

Question 79

Private placement of securities involves:

A) selling only to the firm's current investors.
B) nondisclosure of the issuing firm's name until after the sale.
C) the exchange of convertible bonds for equity.
D) nonpublic sale of securities to a limited number of investors.

Question 80

The most important function of an underwriter is to:

A) assess the firm's capital needs.
B) approve the prospectus before distribution to the public.
C) provide private placement of the firm's debt.
D) buy the issue of securities from the firm and resell to the public.