Question 1

The two advantages of going public are ________ and ________.

Accepted Answer

A)  greater liquidity; better access to capital 
B)  better cash flows; better access to capital 
C)  greater liquidity; better access to free cash 
D)  greater liquidity; better control 
A)  greater liquidity; better access to capital 
B)  better cash flows; better access to capital 
C)  greater liquidity; better access to free cash 
D)  greater liquidity; better control A

Question 2

A) Underwriters appear to use the information they acquire during the book-building stage to intentionally underprice the IPO, thereby reducing their exposure to losses.

Accepted Answer

B)  The blue tooth option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price. 
C)  The lead underwriter usually makes a market in the stock and assigns an analyst to cover it. 
D)  In most cases, the preexisting shareholders are subject to a 180-day lockup; they cannot sell their shares for 180 days after the IPO. Once the lockup period expires, they are free to sell their shares.
Answer: B
Explanation: 
B)  The green shoe option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price.
Diff: 3 Type: MC
Topic: 23.2 The Initial Public Offering
-Which of the following statements regarding exit strategies is false? 
A)  An alternative way to provide liquidity to its investors is for the company to become a publicly traded company. 
B)  An important consideration for investors in private companies is their exit strategy, or how they will eventually realize the return from their investment 
C)  Often large corporations purchase successful start-up companies. In such a case, the acquiring company purchases the outstanding stock of the private company, allowing all investors to cash out. 
D)  Roughly 20% of venture capital exits from 2003-2012 occurred through mergers or acquisitions. 
B)  The blue tooth option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price. 
C)  The lead underwriter usually makes a market in the stock and assigns an analyst to cover it. 
D)  In most cases, the preexisting shareholders are subject to a 180-day lockup; they cannot sell their shares for 180 days after the IPO. Once the lockup period expires, they are free to sell their shares.
Answer: B
Explanation: 
B)  The green shoe option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price.
Diff: 3 Type: MC
Topic: 23.2 The Initial Public Offering
-Which of the following statements regarding exit strategies is false? 
A)  An alternative way to provide liquidity to its investors is for the company to become a publicly traded company. 
B)  An important consideration for investors in private companies is their exit strategy, or how they will eventually realize the return from their investment 
C)  Often large corporations purchase successful start-up companies. In such a case, the acquiring company purchases the outstanding stock of the private company, allowing all investors to cash out. 
D)  Roughly 20% of venture capital exits from 2003-2012 occurred through mergers or acquisitions. D

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. B

Question 4

Use the information for the question(s) below.
Luther Industries is in the process of selling shares of stock in an auction IPO. At the end of the bidding period, Luther's investment bank has received the following bids:
  
-The proceeds from the IPO if Luther is selling 1.25 million shares is closest to:

Accepted Answer

A)  $20.6 million 
B)  $21.6 million 
C)  $21.1 million 
D)  $20.9 million 
A)  $20.6 million 
B)  $21.6 million 
C)  $21.1 million 
D)  $20.9 million

Question 5

Which of the following statements is false?

Accepted Answer

A)  The process of selling stock to the public for the first time is called a seasoned equity offering (SEO). 
B)  Public companies typically have access to much larger amounts of capital through the public markets. 
C)  By going public, companies give their private equity investors the ability to diversify. 
D)  The two advantages of going public are greater liquidity and better access to capital. 
A)  The process of selling stock to the public for the first time is called a seasoned equity offering (SEO). 
B)  Public companies typically have access to much larger amounts of capital through the public markets. 
C)  By going public, companies give their private equity investors the ability to diversify. 
D)  The two advantages of going public are greater liquidity and better access to capital.

Question 6

Which of the following statements is false?

Accepted Answer

A)  In recent years, the investment banking firm of W.R. Hambrecht and Company has attempted to change the IPO process by selling new issues directly to the public using an online auction IPO mechanism called Open IPO. 
B)  The lead underwriter is the primary banking firm responsible for managing the deal. The lead underwriter provides most of the advice and arranges for a group of other underwriters, called the syndicate, to help market and sell the issue. 
C)  Because of the potential conflict of interest, the underwriter will not make a market in the stock after the issue. 
D)  The SEC requires that companies prepare a registration statement, a legal document that provides financial and other information about the company to investors, prior to an IPO. Company managers work closely with the underwriters to prepare this registration statement and submit it to the SEC. 
A)  In recent years, the investment banking firm of W.R. Hambrecht and Company has attempted to change the IPO process by selling new issues directly to the public using an online auction IPO mechanism called Open IPO. 
B)  The lead underwriter is the primary banking firm responsible for managing the deal. The lead underwriter provides most of the advice and arranges for a group of other underwriters, called the syndicate, to help market and sell the issue. 
C)  Because of the potential conflict of interest, the underwriter will not make a market in the stock after the issue. 
D)  The SEC requires that companies prepare a registration statement, a legal document that provides financial and other information about the company to investors, prior to an IPO. Company managers work closely with the underwriters to prepare this registration statement and submit it to the SEC.

Question 7

Which of the following statements is false?

Accepted Answer

A)  Once the issue price (or offer price) is set, underwriters may invoke another mechanism to protect themselves against a loss - the over-allotment allocation. 
B)  Before the offer price is set, the underwriters work closely with the company to come up with a price range that they believe provides a reasonable valuation for the firm. 
C)  Before an IPO, the company prepares the final registration statement and final prospectus containing all the details of the IPO, including the number of shares offered and the offer price. 
D)  A "road trip" is where senior management and the lead underwriters travel around the country (and sometimes around the world) promoting the company and explaining their rationale for the offer price to the underwriters' largest customers - mainly institutional investors such as mutual funds and pension funds. 
A)  Once the issue price (or offer price) is set, underwriters may invoke another mechanism to protect themselves against a loss - the over-allotment allocation. 
B)  Before the offer price is set, the underwriters work closely with the company to come up with a price range that they believe provides a reasonable valuation for the firm. 
C)  Before an IPO, the company prepares the final registration statement and final prospectus containing all the details of the IPO, including the number of shares offered and the offer price. 
D)  A "road trip" is where senior management and the lead underwriters travel around the country (and sometimes around the world) promoting the company and explaining their rationale for the offer price to the underwriters' largest customers - mainly institutional investors such as mutual funds and pension funds.

Question 8

Which of the following statements is NOT true regarding angel investors?

Accepted Answer

A)  They are typically arranged as limited partnerships. 
B)  For many start-ups, the first round of outside private equity financing is often obtained from them. 
C)  Because their capital investment is often large relative to the amount of capital already in place at the firm, they typically receive a sizeable equity share in the business in return for their funds. 
D)  These investors are frequently friends or acquaintances of the entrepreneur. 
A)  They are typically arranged as limited partnerships. 
B)  For many start-ups, the first round of outside private equity financing is often obtained from them. 
C)  Because their capital investment is often large relative to the amount of capital already in place at the firm, they typically receive a sizeable equity share in the business in return for their funds. 
D)  These investors are frequently friends or acquaintances of the entrepreneur.

Question 9

A) Underwriters appear to use the information they acquire during the book-building stage to intentionally underprice the IPO, thereby reducing their exposure to losses.

Accepted Answer

B)  The blue tooth option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price. 
C)  The lead underwriter usually makes a market in the stock and assigns an analyst to cover it. 
D)  In most cases, the preexisting shareholders are subject to a 180-day lockup; they cannot sell their shares for 180 days after the IPO. Once the lockup period expires, they are free to sell their shares.
Answer: B
Explanation: 
B)  The green shoe option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price.
Diff: 3 Type: MC
Topic: 23.2 The Initial Public Offering
-Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists? 
A)  On average, IPOs appear to be underpriced. 
B)  The long-run performance of a newly public company (three to five years from the date of issue) is superior to the overall market return. 
C)  The number of issues is highly cyclical. 
D)  The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs. 
B)  The blue tooth option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price. 
C)  The lead underwriter usually makes a market in the stock and assigns an analyst to cover it. 
D)  In most cases, the preexisting shareholders are subject to a 180-day lockup; they cannot sell their shares for 180 days after the IPO. Once the lockup period expires, they are free to sell their shares.
Answer: B
Explanation: 
B)  The green shoe option allows the underwriter to issue more stock, amounting to 15% of the original offer size, at the IPO offer price.
Diff: 3 Type: MC
Topic: 23.2 The Initial Public Offering
-Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists? 
A)  On average, IPOs appear to be underpriced. 
B)  The long-run performance of a newly public company (three to five years from the date of issue) is superior to the overall market return. 
C)  The number of issues is highly cyclical. 
D)  The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs.

Question 10

In Canada the average size of an IPO in 2007 was about ________,which is quite ________ compared to IPOs in other countries.

Accepted Answer

A)  $35 billion; small 
B)  $35 million; small 
C)  $35 million; big 
D)  $35 billion; big 
A)  $35 billion; small 
B)  $35 million; small 
C)  $35 million; big 
D)  $35 billion; big

Question 11

Which of the following statements is false?

Accepted Answer

A)  In a rights offer, the firm offers the new shares only to existing shareholders. 
B)  Secondary shares are shares sold by existing shareholders, including the company's founder. 
C)  If a firm's management is concerned that its equity may be underpriced in the market, by using a rights offering the firm can continue to issue equity without imposing a loss on its current shareholders. 
D)  In the United States most offers are rights offers. 
A)  In a rights offer, the firm offers the new shares only to existing shareholders. 
B)  Secondary shares are shares sold by existing shareholders, including the company's founder. 
C)  If a firm's management is concerned that its equity may be underpriced in the market, by using a rights offering the firm can continue to issue equity without imposing a loss on its current shareholders. 
D)  In the United States most offers are rights offers.

Question 12

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 13

What will the offer price of these shares be if Luther is selling 800,000 shares?

Accepted Answer

@#IMG-DLM& By looking at Cumulative dema

Question 14

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 15

Use the information for the question(s) below.
Luther Industries has sold 10 million shares of stock in an SEO. The market price of Luther at the time was $25 per share. Of the 10 million shares sold, 6 million shares were primary shares being sold by the company, and the remaining 4 million shares were being sold by venture capitalists. Luther's underwriter charges 5% of the gross proceeds as an underwriting fee.
-How much money did Luther raise?

Accepted Answer

6 million shares × $25 per sha

Question 16

Which of the following statements is false?

Accepted Answer

A)  Primary shares are new shares issued by the company. 
B)  Today, investors become informed about the impending sale of stock by the news media, via a road show, or through the book-building process, so tombstones are purely ceremonial. 
C)  In a cash offer, the firm offers the new shares to existing shareholders. 
D)  Historically, intermediaries would advertise the sale of stock (both IPOs and SEOs) by taking out advertisements in newspapers called tombstones. 
A)  Primary shares are new shares issued by the company. 
B)  Today, investors become informed about the impending sale of stock by the news media, via a road show, or through the book-building process, so tombstones are purely ceremonial. 
C)  In a cash offer, the firm offers the new shares to existing shareholders. 
D)  Historically, intermediaries would advertise the sale of stock (both IPOs and SEOs) by taking out advertisements in newspapers called tombstones.

Question 17

When referring to IPOs,what is book building?

Accepted Answer

At the end of the road show,customers in

Question 18

Describe the four characteristics of IPOs that puzzle financial economists.

Accepted Answer

First,on average,IPOs appear to be under

Question 19

Use the information for the question(s) below.
Luther Industries is in the process of selling shares of stock in an auction IPO. At the end of the bidding period, Luther's investment bank has received the following bids:
  
-What will the offer price of these shares be if Luther is selling 1 million shares?

Accepted Answer

A)  $17.00 
B)  $17.50 
C)  $17.25 
D)  $16.75 
A)  $17.00 
B)  $17.50 
C)  $17.25 
D)  $16.75

Question 20

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 over-perform 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 over-perform 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.

Exam 23: The Mechanics of Raising Equity Capital

The two advantages of going public are ________ and ________.

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is false?

Which of the following statements is NOT true regarding angel investors?

In Canada the average size of an IPO in 2007 was about ________,which is quite ________ compared to IPOs in other countries.

Which of the following statements is false?

What will the offer price of these shares be if Luther is selling 800,000 shares?

Which of the following statements is false?

Which of the following statements is false?

When referring to IPOs,what is book building?

Describe the four characteristics of IPOs that puzzle financial economists.

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

The two advantages of going public are and .

In Canada the average size of an IPO in 2007 was about ,which is quite compared to IPOs in other countries.