Question 1

When securities are issued under a rights issue:

Accepted Answer

A)  existing shareholders have the opportunity to expand their holdings. 
B)  shares are offered to the public at a discount. 
C)  the existing shares will increase in price. 
D)  current shareholders have the right to resell their stock to the issuer. 
A)  existing shareholders have the opportunity to expand their holdings. 
B)  shares are offered to the public at a discount. 
C)  the existing shares will increase in price. 
D)  current shareholders have the right to resell their stock to the issuer.

Question 2

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

Accepted Answer

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. 
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 3

Shelf registration was enacted to allow:

Accepted Answer

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)  a joint filing for multiple issues of a single security. 
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)  a joint filing for multiple issues of a single security.

Question 4

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

Accepted Answer

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. 
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 5

Second stage financing:

Accepted Answer

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

Question 6

An IPO was priced to sell at $23 a share and closed at $22 a share at the end of the first day of trading.The underwriting spread was 7% of the offer price and the legal,accounting and administrative costs were $160,000.What was the total percentage cost of the issue as a percentage of the market value at the end of the first day if 250,000 shares were offered?

Accepted Answer

A)  3.89% 
B)  5.68% 
C)  4.21% 
D)  3.64% 
A)  3.89% 
B)  5.68% 
C)  4.21% 
D)  3.64%

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

When underwriters are unsure of the demand for a new offering,they:

Accepted Answer

A)  reduce their spread. 
B)  undertake the issue on a firm commitment basis. 
C)  undertake the issue on a best efforts basis. 
D)  provide shelf registration for the issue. 
A)  reduce their spread. 
B)  undertake the issue on a firm commitment basis. 
C)  undertake the issue on a best efforts basis. 
D)  provide shelf registration for the issue.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

A private placement avoids which one of the following costs?

Accepted Answer

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

Question 11

In a firm commitment,the underwriter:

Accepted Answer

A)  encounters virtually no risk because the spread is fixed. 
B)  is allowed to sell the shares at any price they choose. 
C)  is protected against being stuck with unsold shares. 
D)  is allowed to sell the shares at a price slightly higher than the price it paid to the company. 
A)  encounters virtually no risk because the spread is fixed. 
B)  is allowed to sell the shares at any price they choose. 
C)  is protected against being stuck with unsold shares. 
D)  is allowed to sell the shares at a price slightly higher than the price it paid to the company.

Question 12

One advantage to private placements is the low cost.

Accepted Answer

A) True 
 B)False

Question 13

When underwriters offer a firm commitment on a stock issue,they:

Accepted Answer

A)  employ their best efforts in selling the stock. 
B)  guarantee the net proceeds to the issuing firm. 
C)  agree to purchase the venture capitalists' shares. 
D)  assure purchasers that the stock will appreciate. 
A)  employ their best efforts in selling the stock. 
B)  guarantee the net proceeds to the issuing firm. 
C)  agree to purchase the venture capitalists' shares. 
D)  assure purchasers that the stock will appreciate.

Question 14

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

Accepted Answer

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. 
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 15

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

Accepted Answer

A) True 
 B)False

Question 16

The most important function of an underwriter is to:

Accepted Answer

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 securities issue from the firm and resell the securities to the public. 
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 securities issue from the firm and resell the securities to the public.

Question 17

One way to reduce the risk of marketing a stock is for the underwriter to:

Accepted Answer

A)  offer a firm commitment on the issue. 
B)  set the initial stock price below its true value. 
C)  sell the securities in foreign countries. 
D)  offer price rebates on the stock purchases. 
A)  offer a firm commitment on the issue. 
B)  set the initial stock price below its true value. 
C)  sell the securities in foreign countries. 
D)  offer price rebates on the stock purchases.

Question 18

Which one of the following is correct for stock issued under a firm commitment where the underwriter is to receive a spread of 8%?

Accepted Answer

A)  The underwriter's profits are guaranteed to be 8%. 
B)  The underwriter must sell at least 92% of the shares. 
C)  The underwriter receives 8% of all shares. 
D)  The underwriter may suffer a loss on the issue. 
A)  The underwriter's profits are guaranteed to be 8%. 
B)  The underwriter must sell at least 92% of the shares. 
C)  The underwriter receives 8% of all shares. 
D)  The underwriter may suffer a loss on the issue.

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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:

Accepted Answer

A)  $1. 
B)  $2. 
C)  $38. 
D)  $40. 
A)  $1. 
B)  $2. 
C)  $38. 
D)  $40.

Exam 15: Venture Capital, IPOs, and Seasoned Offerings

When securities are issued under a rights issue:

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

Shelf registration was enacted to allow:

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

Second stage financing:

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.

When underwriters are unsure of the demand for a new offering,they:

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

A private placement avoids which one of the following costs?

In a firm commitment,the underwriter:

One advantage to private placements is the low cost.

When underwriters offer a firm commitment on a stock issue,they:

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

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

The most important function of an underwriter is to:

One way to reduce the risk of marketing a stock is for the underwriter to:

Which one of the following is correct for stock issued under a firm commitment where the underwriter is to receive a spread of 8%?

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.

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:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk,Return,and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

Filters