Deck 15: Raising Capital

Question 1

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

A)venture capitalists
B)dutch auction group
C)syndicate
D)underwriting cartel
E)firm commitment group

Answer 1

syndicate

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?

A)underwriter
B)specialist
C)venture capitalist
D)investment advisor
E)securities dealer

Answer 2

underwriter

Question 3

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

A)formal filing
B)public statement
C)security agreement
D)prospectus
E)registration statement

Answer 3

prospectus

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

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

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.

A)Joe could have sold some of his shares for $23 a share.
B)The maximum profit that an investor who purchased the shares at the offer price could have earned thus far is $15 per share.
C)Angelina could have sold some of her shares for $38 a share.
D)The underwriters earned a spread equal to $1.50 per share.
E)The underwriters earned a profit of $15 a share on the first day of trading.

Question 6

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

A)the market price
B)the price listed in the prospectus
C)the opening price
D)the first day's closing price
E)the offer price

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?

A)in-house offering
B)general cash offer
C)initial public offering
D)private placement
E)rights offer

Question 8

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

A)global expansion for an established firm
B)bankruptcy reorganisation
C)new,high-risk venture
D)seasonal production
E)daily operations for an established,profitable firm

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.

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

A)4 190 909 shares
B)4 380 122 shares
C)4 209 707 shares
D)4 359 198 shares
E)4 414 141 shares

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.

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

Question 12

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

A)building a new factory overseas to move production closer to existing foreign customers
B)building a prototype of a new invention
C)expanding a firm's existing production line
D)raising capital to purchase a competitor
E)raising equity to reduce the debt load of a firm

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?

A)$26 315 789
B)$26 041 667
C)$25 853 429
D)$25 000 000
E)$26 250 000

Question 14

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

A)shares held by a firm's founder
B)the first sale of equity shares to the general public
C)any newly issued shares offered to the general public
D)any shares initially offered to a firm's existing shareholders
E)shares issued to the public on a cash basis

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:

A)private placement
B)subordinated debt
C)public issue
D)matching principle
E)family issue

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

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

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?

A)general public offer
B)IPO
C)private placement
D)dutch auction
E)rights offer

Question 18

The founders of a new firm generally receive:

A)compensation which is referred to as 'seed money'
B)minimal salaries during the early stages of venture capital financing
C)a sizeable salary once venture capital becomes available
D)a fixed percentage of all venture capital raised
E)sufficient funding in the early stages of venture capital financing to pay off any personal obligations incurred for the sake of the business entity

Question 19

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

A)IPO
B)rights offer
C)private placement
D)general cash offer
E)general offer

Question 20

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

A)investment advisors
B)Green Shoe firms
C)brokers
D)underwriters
E)red herrings

Question 21

Northern Importers wants to raise $58 million to expand its operations into South America.The company will sell new shares in a general cash offering.The underwriters charge a 7.8 per cent fee,the administrative costs are $411 000,and the offer price is $36 per share.How many shares must be sold if the firm is to raise the funds it desires?

A)1 759 792 shares
B)1 648 315 shares
C)1 811 502 shares
D)2 051 515 shares
E)1 989 415 shares

Question 22

Currently,you own 5.4 per cent 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 per cent 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?

A)term loan
B)rights offer
C)private placement
D)IPO
E)bond issue

Question 23

Alicia placed an order with her broker to purchase 500 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $16 a share.The number of shares allocated to Alicia along with the closing stock price at the end of the first day of trading for each stock,are as follows:
What is Alicia's total profit or loss on these three stocks as of the end of the first day of trading for each stock?

A)-$150
B)-$425
C)$375
D)-$260
E)$550

Question 24

Hilltop Market is offering 60 000 shares of stock to the public in a general cash offer.The offer price is $30 a share and the underwriter's fee is 8 per cent.The administrative costs are estimated at $310 000.How much will Hilltop Market receive from this stock offering assuming the issue is completely sold?

A)$1 490 000
B)$1 346 000
C)$1 610 000
D)$1 370 800
E)$1 800 000

Question 25

Kendal placed an order with her broker to purchase 300 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $22 a share.The number of shares allocated to Kendal,along with the closing stock price at the end of the first day of trading for each stock,are as follows:
What is Kendal's total profit or loss on these three stocks as of the end of the first day of trading for each stock?

A)-$230
B)$540
C)-$680
D)$170
E)-$540

Question 26

Scott placed an order with his broker to purchase 1000 shares of each of three IPOs that are being released this month.Each IPO has an offer price of $24 a share.The number of shares allocated to Scott along with the closing stock price at the end of the first day of trading for each stock,are as follows:
What is Scott's total profit or loss on these three stocks as of the end of the first day of trading for each stock?

A)-$10
B)-$240
C)$450
D)-$380
E)$220

Question 27

Stock prices tend to _____ following the announcement of a new equity issue and tend to _____ following the announcement of a new debt issue.

A)decrease;increase
B)increase;remain relatively constant
C)increase;decrease
D)increase;increase
E)decrease;remain relatively constant

Question 28

Nu Tech wants to raise $21 million to purchase equipment by issuing new securities.Management estimates the issue will cost the firm $320 000 for accounting,legal,and other costs.The underwriting fee is 7.5 per cent and the issue price is $21 per share.How many shares must be sold if Nu Tech is to receive sufficient funds to purchase all the desired equipment?

A)1 097 555 shares
B)1 008 010 shares
C)1 110 333 shares
D)1 021 121 shares
E)1 102 048 shares

Question 29

Lewis Materials recently offered 15 000 shares but only received payment for 12 500 shares since that was all the shares the underwriters could sell.What type of underwriting was this?

A)private placement
B)firm commitment
C)rights issue
D)best-efforts
E)syndicated

Question 30

Bondi Bakery needs to raise $38 million to expand its operations nationally.The company will sell new shares using a general cash offering.The underwriters charge a 7.65 per cent fee,the administrative costs are $395 000,and the offer price is $26 per share.How many shares of stock must be sold for Bondi Bakery to receive the total funds it desires?

A)1 814 141 shares
B)1 638 311 shares
C)1 833 333 shares
D)1 599 059 shares
E)1 647 222 shares

Question 31

Sly's just arranged a three-year direct business loan with his bank.Which one of the following terms matches this loan arrangement?

A)new equity issue
B)rights offer
C)private placement
D)term loan
E)bond issue

Question 32

Which of the following are valid comments regarding venture capitalists?
I.Venture capitalists provide funding for high-risk ventures.
II.Venture capitalists often take part in the running of the firm.
III.Venture capitalists only provide secured debt.
IV.Venture capitalists often provide money in stages.

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

Question 33

If the market price of existing publicly traded shares declines due to the announcement of a new share issue,the decline is referred to as which one of the following?

A)other direct underwriting costs
B)underpricing
C)underwriters fee
D)direct issue cost
E)abnormal return

Question 34

Which one of the following statements is correct?

A)Informed managers tend to issue new securities when the existing securities are underpriced.
B)The financial market generally reacts in the same way to a new issue of equity as it does to a new issue of debt as long as the issuer is the same.
C)A decline in the price of existing stock when a new issue is released is a direct cost of selling securities.
D)Issuing new equity shares is always viewed by the market as a positive event.
E)A firm's existing shareholders would prefer that new securities be issued when those securities are overpriced rather than underpriced.

Question 35

Which one of the following tends to be true for the average investor?

A)They are protected from losses by ASX regulations.
B)They often encounter the 'winner's curse'.
C)Average investors are not allowed to purchase IPOs at the offer price.
D)They frequently earn initially high returns on IPOs when shares are undersubscribed.
E)They generally receive their full allocation of shares even when an IPO is oversubscribed.

Question 36

Which one of the following statements concerning IPOs and underpricing is correct?

A)IPO underpricing primarily benefits a firm's pre-issue owners.
B)The more an issue is underpriced,the more it tends to be oversubscribed.
C)IPO underpricing is a function of the underwriting fee.
D)Underpricing tends to discourage investors from participating in the IPO market.
E)Undersubscribed shares generally tend also to be underpriced shares.

Question 37

Which one of the following terms is defined as an underwriting for which the underwriters assume full responsibility for any unsold shares?

A)initial public offering
B)best-efforts underwriting
C)private placement
D)standby underwriting
E)rights offer

Question 38

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

A)The IPOs of larger-sized firms tend to be more underpriced than the IPOs of smaller-sized firms.
B)The only period in Australia when underpricing produced first-day returns of 50 per cent or more was during the tech bubble of 1999-2000.
C)Some of the greatest IPO underpricing has occurred in China.
D)The percentage of underpricing remains stable over time in Australia.
E)IPO underpricing is limited to the Australian market.