Exam 15: Venture Capital, IPOs, and Seasoned Offerings

What risk is assumed by an underwriter when issuing a firm commitment to a corporation? Will the corporation be better off with the firm commitment?

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Question 1

Correct Answer:

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The firm commitment obligates the underwriter to purchase the entire issue from the firm at the agreed price.The responsibility for selling the issue then lies entirely with the underwriter; the firm has already received its funds.Is this method a sure gain to the firm? Not necessarily,since underwriters should be assumed rational.It would seem logical that the underwriter will increase the spread in response for taking on the added risk.Further,the underwriter may be inclined to set the price to the public lower than it would have been on a best efforts basis.If there is more underpricing with a firm commitment,then the firm might have been better off to accept a best efforts bid from the underwriter.Finally,the underwriter takes on conceivably even more risk when there is a syndication,since the price to the public cannot be reduced unless the syndication is broken.It is unclear whether the firm receives more funds with a firm commitment.

The POP system allows firms to:

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Question 2

Correct Answer:

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What must be the subscription price on the rights the company plans to offer?

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Question 3

Correct Answer:

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$4 million/400,000 = $20.

Underwriters are used for all of the following except:

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Question 4

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

(True/False)

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Question 5

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

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Question 6

Underwriters typically try to overprice the initial public offering.

(True/False)

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Question 7

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

(True/False)

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Question 8

How do firms make initial public offerings and what are the costs of such offerings?

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Question 9

An investor exercises her 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?

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Question 10

Ying Corporation,Inc.plans to issue 10 million additional shares of its stock.The investment bank recommends net proceeds of $19.90 per share and will charge an underwriter's spread of 5.5% of the gross proceeds.In addition,Ying Corporation must pay $2 million in legal and other administrative expenses.Calculate the gross proceeds and the total funds received by Ying Corporation from the sale of the 10 million shares of stock.

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Question 11

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

(True/False)

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Question 12

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

(Multiple Choice)

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Question 13

When issuing new stock,a firm received $50 million while the underwriting spread was $4 million and total direct expenses were $6 million.The %age of the proceeds absorbed by direct expenses was:

(Multiple Choice)

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Question 14

Privately placed securities may be difficult to remarket.

(True/False)

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Question 15

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

(Multiple Choice)

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Question 16

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

(Multiple Choice)

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Question 17

Which of the following statements is incorrect concerning private placements?

(Multiple Choice)

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Question 18

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

(True/False)

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Question 19

If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share,the spread per share is:

(Multiple Choice)

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Question 20

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Exam 15: Venture Capital, IPOs, and Seasoned Offerings

What risk is assumed by an underwriter when issuing a firm commitment to a corporation? Will the corporation be better off with the firm commitment?

The POP system allows firms to:

What must be the subscription price on the rights the company plans to offer?

Underwriters are used for all of the following except:

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

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

Underwriters typically try to overprice the initial public offering.

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

How do firms make initial public offerings and what are the costs of such offerings?

An investor exercises her 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?

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

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

When issuing new stock,a firm received $50 million while the underwriting spread was $4 million and total direct expenses were $6 million.The %age of the proceeds absorbed by direct expenses was:

Privately placed securities may be difficult to remarket.

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

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

Which of the following statements is incorrect concerning private placements?

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

If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share,the spread per share is:

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