Question 1

What is a seasoned equity offering?

Accepted Answer

A) the sale of shares by the owners of a company 
B) the raising of capital through retained earnings 
C) the issuing of shares to the public in a proven private company 
D) the issuing of shares by a company at a time after its IPO 
A) the sale of shares by the owners of a company 
B) the raising of capital through retained earnings 
C) the issuing of shares to the public in a proven private company 
D) the issuing of shares by a company at a time after its IPO

Question 2

The offer price of shares in an IPO is generally less than the price those shares sell for at the end of the first trading day. Which of the following parties suffer most from this situation?

Accepted Answer

A) the buyers of shares after the initial offering 
B) the underwriters of the IPO 
C) the pre-IPO shareholders of the issuing firm 
D) the lead underwriter of the IPO 
A) the buyers of shares after the initial offering 
B) the underwriters of the IPO 
C) the pre-IPO shareholders of the issuing firm 
D) the lead underwriter of the IPO

Question 3

How does the total cost of issuing stock for the first time compare to the costs of other securities?

Accepted Answer

A) substantially larger than the costs for most other securities 
B) about the same as the cost for most other securities 
C) substantially less than the cost for a few other securities 
D) substantially less than the costs for most other securities 
A) substantially larger than the costs for most other securities 
B) about the same as the cost for most other securities 
C) substantially less than the cost for a few other securities 
D) substantially less than the costs for most other securities

Question 4

When a company founder sells stock to outside investors in order to raise capital, the share of the company owned by the founder and the founder's control over the company will be reduced.

Accepted Answer

A) True 
 B)False

Question 5

What are some of the disadvantages of going public?

Accepted Answer

When investors sell their stak

Question 6

Which of the following is an activity typically taken by an underwriter during an IPO of a company?

Accepted Answer

A) helping the company with all necessary filings 
B) determining the offer price 
C) marketing the IPO 
D) all of the above 
A) helping the company with all necessary filings 
B) determining the offer price 
C) marketing the IPO 
D) all of the above

Question 7

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 8

In its IPO, Jillian's Imprints, a small publishing house, offered stock at a price of $10.00 per share. The underwriters of this IPO had a spread of 6.5% per share. If 2 million shares were sold, what funds did Jillian's receive from the IPO?

Accepted Answer

A) $5.61 million 
B) $18.70 million 
C) $20.57 million 
D) $22.44 million 
A) $5.61 million 
B) $18.70 million 
C) $20.57 million 
D) $22.44 million

Question 9

Highlander Homes stock trades at $35 per share and there are 50 million shares outstanding. The management would like to raise $300 million in an SEO. If the underwriter charges 5% of gross proceeds, and all the shares are primary shares sold to new investors, what percentage of the company will be owned by the new investors?

Accepted Answer

A) 12.99% 
B) 13.76% 
C) 14.52% 
D) 15.29% 
A) 12.99% 
B) 13.76% 
C) 14.52% 
D) 15.29%

Question 10

Equity investors in a private company usually plan to realize a return on their investment by selling their stock when that company is acquired by another firm or sold to the public in a public offering.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is FALSE?

Accepted Answer

A) The general partners work for and run the venture capital firm; they are called venture capitalists. 
B) An important consideration for investors in private companies is their exit strategy-how they will eventually realize the return from their investment. 
C) When a company founder decides to sell equity to outside investors for the first time, it is common practice for private companies to issue common stock rather than preferred stock to raise capital. 
D) Institutional investors such as pension funds, insurance companies, endowments, and foundations manage large quantities of money. 
A) The general partners work for and run the venture capital firm; they are called venture capitalists. 
B) An important consideration for investors in private companies is their exit strategy-how they will eventually realize the return from their investment. 
C) When a company founder decides to sell equity to outside investors for the first time, it is common practice for private companies to issue common stock rather than preferred stock to raise capital. 
D) Institutional investors such as pension funds, insurance companies, endowments, and foundations manage large quantities of money.

Question 12

Underpricing of an IPO would most likely be greatest in which of the following markets?

Accepted Answer

A) Australia 
B) China 
C) Japan 
D) United States 
A) Australia 
B) China 
C) Japan 
D) United States

Question 13

Which of the following is NOT a reason why an IPO is attractive to the managers of a private company?

Accepted Answer

A) It gives its private equity investors the opportunity to diversify. 
B) It gives access to large amounts of capital in the IPO. 
C) It reduces the complexity of requirements regulating the company's management. 
D) It gives access to much larger amounts of capital through the public markets in subsequent offerings. 
A) It gives its private equity investors the opportunity to diversify. 
B) It gives access to large amounts of capital in the IPO. 
C) It reduces the complexity of requirements regulating the company's management. 
D) It gives access to much larger amounts of capital through the public markets in subsequent offerings.

Question 14

A cash offer differs from a rights offer in that in the latter shares are offered to both existing shareholders and investors at large.

Accepted Answer

A) True 
 B)False

Question 15

Big Box retailing has a market capitalization of $500 million and 20 million shares outstanding. In order to finance its growth, the management of Big Box plans to raise further capital through a rights issue. All shareholders will be issued ten rights to purchase a new share at a price of $1.00. What will the price of a share be after the SEO, if all shareholders exercise their rights?

Accepted Answer

A) $23.82 
B) $24.81 
C) $23.00 
D) $22.82 
A) $23.82 
B) $24.81 
C) $23.00 
D) $22.82

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) Once a company goes public, it must satisfy all of the requirements of public companies. 
B) Organizations such as the Securities and Exchange Commission (SE
C) , the securities exchanges (including the NYSE and the NASDAQ), and Congress (through the Sarbanes-Oxley Act of 2002)adopted new standards that focused on more thorough financial disclosure, greater accountability, and more stringent requirements for the board of directors. 
C) The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When investors diversify their holdings, the equity holders of the corporation become more concentrated. 
D) Several high profile corporate scandals during the early part of the twenty-first century prompted tougher regulations designed to address corporate abuses. 
A) Once a company goes public, it must satisfy all of the requirements of public companies. 
B) Organizations such as the Securities and Exchange Commission (SE
C) , the securities exchanges (including the NYSE and the NASDAQ), and Congress (through the Sarbanes-Oxley Act of 2002)adopted new standards that focused on more thorough financial disclosure, greater accountability, and more stringent requirements for the board of directors. 
C) The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When investors diversify their holdings, the equity holders of the corporation become more concentrated. 
D) Several high profile corporate scandals during the early part of the twenty-first century prompted tougher regulations designed to address corporate abuses.

Question 17

Which of the following is LEAST likely to be a possible source of funds to finance a growing business?

Accepted Answer

A) angel investors 
B) venture capital firms 
C) institutional investors 
D) family investors 
A) angel investors 
B) venture capital firms 
C) institutional investors 
D) family investors

Question 18

Moon Company plans to issue 10 million shares in a seasoned equity offering. The owner, Ken Moon, plans to sell 4 million shares as part of the offering. Which of the following is true regarding the seasoned equity issue?

Accepted Answer

A) It is a primary offering. 
B) It is a secondary offering. 
C) Some shares are primary shares and some shares are secondary shares. 
D) None of the above is true regarding this seasoned equity offering. 
A) It is a primary offering. 
B) It is a secondary offering. 
C) Some shares are primary shares and some shares are secondary shares. 
D) None of the above is true regarding this seasoned equity offering.

Question 19

A firm's founder sells equity to outside investors for the first time in the form of preferred stock. In what way is this preferred stock most likely to differ from the preferred stock issued by an established public firm?

Accepted Answer

A) It will have a larger dividend. 
B) It will most likely not pay cash dividends. 
C) It will give the holder seniority in any liquidation of the company. 
D) It cannot be converted into common stock. 
A) It will have a larger dividend. 
B) It will most likely not pay cash dividends. 
C) It will give the holder seniority in any liquidation of the company. 
D) It cannot be converted into common stock.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) In recent years, the investment banking firm of WR Hambrecht + 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 WR Hambrecht + 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.

Exam 14: Raising Equity Capital

What is a seasoned equity offering?

The offer price of shares in an IPO is generally less than the price those shares sell for at the end of the first trading day. Which of the following parties suffer most from this situation?

How does the total cost of issuing stock for the first time compare to the costs of other securities?

When a company founder sells stock to outside investors in order to raise capital, the share of the company owned by the founder and the founder's control over the company will be reduced.

What are some of the disadvantages of going public?

Which of the following is an activity typically taken by an underwriter during an IPO of a company?

Which of the following statements is FALSE?

In its IPO, Jillian's Imprints, a small publishing house, offered stock at a price of $10.00 per share. The underwriters of this IPO had a spread of 6.5% per share. If 2 million shares were sold, what funds did Jillian's receive from the IPO?

Equity investors in a private company usually plan to realize a return on their investment by selling their stock when that company is acquired by another firm or sold to the public in a public offering.

Which of the following statements is FALSE?

Underpricing of an IPO would most likely be greatest in which of the following markets?

Which of the following is NOT a reason why an IPO is attractive to the managers of a private company?

A cash offer differs from a rights offer in that in the latter shares are offered to both existing shareholders and investors at large.

Which of the following statements is FALSE?

Which of the following is LEAST likely to be a possible source of funds to finance a growing business?

Moon Company plans to issue 10 million shares in a seasoned equity offering. The owner, Ken Moon, plans to sell 4 million shares as part of the offering. Which of the following is true regarding the seasoned equity issue?

A firm's founder sells equity to outside investors for the first time in the form of preferred stock. In what way is this preferred stock most likely to differ from the preferred stock issued by an established public firm?

Which of the following statements is FALSE?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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