Question 1

Which of the following statements regarding firm commitment IPOs is FALSE?

Accepted Answer

A) If the entire issue does not sell out,the remaining shares must be sold at a lower price and the underwriter must take the loss. 
B) The underwriter purchases the entire issue (at the offer price)and then resells it at a slightly higher price to interested investors. 
C) It is the most common underwriting arrangement. 
D) The underwriter guarantees that it will sell all of the stock at the offer price. 
A) If the entire issue does not sell out,the remaining shares must be sold at a lower price and the underwriter must take the loss. 
B) The underwriter purchases the entire issue (at the offer price)and then resells it at a slightly higher price to interested investors. 
C) It is the most common underwriting arrangement. 
D) The underwriter guarantees that it will sell all of the stock at the offer price.

Question 2

Use the following information to answer the question(s)below.
Wyatt Oil has 8 million shares outstanding and is about to issue 10 million new shares in an IPO.The IPO price has been set at $15 per share,and the underwriting spread is 6%.The IPO is a big success with investors,and the share price rises to $35 on the first day of trading.
-The amount that Wyatt Oil raised during the IPO is closest to:

Accepted Answer

A) $113 million. 
B) $141 million. 
C) $150 million. 
D) $329 million. 
E) $350 million. 
A) $113 million. 
B) $141 million. 
C) $150 million. 
D) $329 million. 
E) $350 million.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) After deciding to go public,managers of the company work with an underwriter,an investment banking firm that manages the offering and designs its structure. 
B) The shares that are sold in the IPO may either be new shares that raise new capital,known as a secondary offering,or existing shares that are sold by current shareholders (as part of their exit strategy),known as a primary offering. 
C) Many IPOs,especially the larger offerings,are managed by a group of underwriters. 
D) At an IPO,a firm offers a large block of shares for sale to the public for the first time. 
A) After deciding to go public,managers of the company work with an underwriter,an investment banking firm that manages the offering and designs its structure. 
B) The shares that are sold in the IPO may either be new shares that raise new capital,known as a secondary offering,or existing shares that are sold by current shareholders (as part of their exit strategy),known as a primary offering. 
C) Many IPOs,especially the larger offerings,are managed by a group of underwriters. 
D) At an IPO,a firm offers a large block of shares for sale to the public for the first time.

Question 4

Luther Industries currently has 100 million shares of stock outstanding at a price of $25 per share.The company would like to raise money and has announced a rights issue.Every existing shareholder will be sent one right per share of stock that he or she owns.The company plans to require twenty rights to purchase one share at a price of $20 per share.The amount of money that Luther will raise through its rights offering is closest to:

Accepted Answer

A) $500 million. 
B) $125 million. 
C) $100 million. 
D) $400 million. 
A) $500 million. 
B) $125 million. 
C) $100 million. 
D) $400 million.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) The preferred stock issued by young companies typically does not pay regular cash dividends. 
B) The preferred stock issued by young companies usually gives the owner an option to convert it into common stock on some future date,so it is often called callable preferred stock. 
C) If the company runs into financial difficulties,the preferred stockholders have a senior claim on the assets of the firm relative to any common stockholders. 
D) Preferred stock issued by mature companies such as banks usually has a preferential dividend and seniority in any liquidation and sometimes special voting rights. 
A) The preferred stock issued by young companies typically does not pay regular cash dividends. 
B) The preferred stock issued by young companies usually gives the owner an option to convert it into common stock on some future date,so it is often called callable preferred stock. 
C) If the company runs into financial difficulties,the preferred stockholders have a senior claim on the assets of the firm relative to any common stockholders. 
D) Preferred stock issued by mature companies such as banks usually has a preferential dividend and seniority in any liquidation and sometimes special voting rights.

Question 6

Use the following information to answer the question(s)below.
Nielson Motors sold 10 million shares of stock in an SEO.The market price of Nielson's stock at the time was $37.50.Of the 10 million shares sold,4 million shares were primary shares sold by the company,and the remaining 6 million shares were being sold by the venture capital investors.Assume the underwriter charges 4% of the gross proceeds as an underwriting fee which is shared proportionately between the primary and secondary shares.
-The amount of money the underwriter will earn on this transaction is closest to:

Accepted Answer

A) $4 million. 
B) $6 million. 
C) $9 million. 
D) $15 million. 
A) $4 million. 
B) $6 million. 
C) $9 million. 
D) $15 million.

Question 7

Use the information for the question(s)below.
During the most recent fiscal year,KD Industries had revenues of $400 million and earnings of $30 million.KD has filed a registration statement with the SEC for its IPO.Before it is offered,KD's investment bankers would like to estimate the value of the company using comparable companies.The investment bankers have assembled the following information based on data for other companies in the same industry that have recently gone public.In each case,the ratios are based upon the IPO price.  
-Based upon the price/revenue ratio,what would be a reasonable value for KD?

Accepted Answer

@#IMG-DLM& Taking the average

Question 8

Use the following information to answer the question(s) below.

Suppose that Galt Ventures, a venture capital firm, raised $250 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay Galt's management fee. As is typical in the venture capital industry, Galt will only invest $200 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $800 million. Galt also charges 20% carried interest on the profits of the fund (net of management fees). Assume that Galt collects the $250 million of committed capital and invests $200 million of it immediately. Also assume that Galt collects all proceeds from its investments at the end of the ten-year life.

-The IRR on the investment of a limited partner into Galt Ventures net of all management fees and expenses is closest to:

Accepted Answer

A) 7.8%. 
B) 9.9%. 
C) 12.4%. 
D) 14.9%. 
A) 7.8%. 
B) 9.9%. 
C) 12.4%. 
D) 14.9%.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) The one advantage of a cash offer is that the underwriter takes on a larger role and,therefore,can credibly certify the issue's quality. 
B) SEO underwriting fees average about 5% of the proceeds of the issue and,as with IPOs,the variation across issues of different sizes is relatively small. 
C) As with IPOs,evidence suggests that companies overperform following a seasoned offering. 
D) Often the value destroyed by the price decline can be a significant fraction of the new money raised with a SEO. 
A) The one advantage of a cash offer is that the underwriter takes on a larger role and,therefore,can credibly certify the issue's quality. 
B) SEO underwriting fees average about 5% of the proceeds of the issue and,as with IPOs,the variation across issues of different sizes is relatively small. 
C) As with IPOs,evidence suggests that companies overperform following a seasoned offering. 
D) Often the value destroyed by the price decline can be a significant fraction of the new money raised with a SEO.

Question 10

Use the following information to answer the question(s) below.

Suppose that Galt Ventures, a venture capital firm, raised $250 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay Galt's management fee. As is typical in the venture capital industry, Galt will only invest $200 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $800 million. Galt also charges 20% carried interest on the profits of the fund (net of management fees). Assume that Galt collects the $250 million of committed capital and invests $200 million of it immediately. Also assume that Galt collects all proceeds from its investments at the end of the ten-year life.

-The IRR on the investments made by Galt Ventures is closest to:

Accepted Answer

A) 9.9%. 
B) 12.4%. 
C) 14.9%. 
D) 15.8%. 
A) 9.9%. 
B) 12.4%. 
C) 14.9%. 
D) 15.8%.

Question 11

Use the following information to answer the question(s)below.
Nielson Motors sold 10 million shares of stock in an SEO.The market price of Nielson's stock at the time was $37.50.Of the 10 million shares sold,4 million shares were primary shares sold by the company,and the remaining 6 million shares were being sold by the venture capital investors.Assume the underwriter charges 4% of the gross proceeds as an underwriting fee which is shared proportionately between the primary and secondary shares.
-The amount of money raised by the venture capitalists is closest to:

Accepted Answer

A) $144 million. 
B) $150 million. 
C) $216 million. 
D) $219 million. 
A) $144 million. 
B) $150 million. 
C) $216 million. 
D) $219 million.

Which of the following statements regarding firm commitment IPOs is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 23: Raising Equity Capital

Which of the following statements regarding firm commitment IPOs is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters