Question 1

How many types of seasoned equity offerings are there?

Accepted Answer

There are two kinds of seasoned equity o

Question 2

Which of the following best describes a firm commitment IPO?

Accepted Answer

A)  The underwriter purchases the entire issue at a small discount and then resells it at the offer price. 
B)  The underwriter sells new issues directly to the public in an online auction. 
C)  The underwriter tries to sell the stock for the best possible price but does not guarantee that the stock will be sold. 
D)  The underwriter solicits bids from investors and chooses the highest price at which there is sufficient demand to sell the entire issue. 
A)  The underwriter purchases the entire issue at a small discount and then resells it at the offer price. 
B)  The underwriter sells new issues directly to the public in an online auction. 
C)  The underwriter tries to sell the stock for the best possible price but does not guarantee that the stock will be sold. 
D)  The underwriter solicits bids from investors and chooses the highest price at which there is sufficient demand to sell the entire issue.

Question 3

What is the major reason that underwriters tend to offer stocks in an IPO at a price that is below that which the market will pay?

Accepted Answer

A)  to gain from the rise in value of any stocks they hold after the IPO 
B)  to reduce their exposure to losses from unsold stock 
C)  to benefit from greenshoe provisions 
D)  to increase their spread 
A)  to gain from the rise in value of any stocks they hold after the IPO 
B)  to reduce their exposure to losses from unsold stock 
C)  to benefit from greenshoe provisions 
D)  to increase their spread

Question 4

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 5

How does the size of an issue affect the fees charged by underwriters?

Accepted Answer

A)  Although large issues generally have a smaller spread, the total fees for large number of shares released is smaller than that for smaller issues. 
B)  Large issues generally have a similar spread to small issues and thus attract much greater fees. 
C)  Large issues have a reduced spread, which means that the total fees are generally the same as for smaller issues. 
D)  Large issues have substantially larger direct costs and, thus, must charge a larger spread in order to be profitable for the underwriter. 
A)  Although large issues generally have a smaller spread, the total fees for large number of shares released is smaller than that for smaller issues. 
B)  Large issues generally have a similar spread to small issues and thus attract much greater fees. 
C)  Large issues have a reduced spread, which means that the total fees are generally the same as for smaller issues. 
D)  Large issues have substantially larger direct costs and, thus, must charge a larger spread in order to be profitable for the underwriter.

Question 6

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 be if Luther is selling 1.25 million shares is closest to ________.

Accepted Answer

A)  $18.9 million 
B)  $22.1 million 
C)  $21.0 million 
D)  $20.0 million 
A)  $18.9 million 
B)  $22.1 million 
C)  $21.0 million 
D)  $20.0 million

Question 7

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 an 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 an 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 8

Highlander Homes stock trades at $34 per share and there are 50 million shares outstanding. The management would like to raise $200 million in an SEO. If the underwriter charges 6% of gross proceeds, how many shares must it sell?

Accepted Answer

A)  5.32 million 
B)  5.63 million 
C)  5.94 million 
D)  6.26 million 
A)  5.32 million 
B)  5.63 million 
C)  5.94 million 
D)  6.26 million

Question 9

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 10

The announcement of an SEO usually raises a stock's price.

Accepted Answer

A) True 
 B)False

Question 11

Nature's Bounty, an organic seed company, is seeking to grow from a small company selling seeds in local markets into a company that sells seeds across several states. The funding for this expansion comes from a wealthy individual who uses his considerable inherited wealth to fund a variety of eco-friendly businesses. Which of the following best describes the individual's relationship with Nature's Bounty?

Accepted Answer

A)  an angel investor 
B)  a venture capitalist 
C)  an institutional investor 
D)  a corporate investor 
A)  an angel investor 
B)  a venture capitalist 
C)  an institutional investor 
D)  a corporate investor

Question 12

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, a 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, a 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 13

Which of the following best describes a limited partnership that specializes in raising money to invest in the private equity of young firms?

Accepted Answer

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

Question 14

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 15

The founders and owners of a private company have funded it through the following rounds of investment:   The owners decide to take the company public through an IPO, issuing 1 million new shares. Assuming that they successfully complete the IPO, the net income for the next year is estimated to be $5 million. The price of shares is set using average price-earnings ratios for similar businesses of 16. What will be the IPO price per share?

Accepted Answer

A)  $12 
B)  $24 
C)  $9 
D)  $47 
A)  $12 
B)  $24 
C)  $9 
D)  $47

Question 16

The firm commitment process is the most common practice for IPOs in the United States.

Accepted Answer

A) True 
 B)False

Question 17

What are venture capital firms?

Accepted Answer

Venture capital firms are limited partne

Question 18

How do the transaction costs of IPO puzzle financial economists?

Accepted Answer

The costs of IPO are

Question 19

As part of the registration statement, the preliminary prospectus circulates to investors before the stock is offered. This preliminary prospectus is also called a(n) ________.

Accepted Answer

A)  IPO filing 
B)  10-K filing 
C)  blue whale 
D)  red herring 
A)  IPO filing 
B)  10-K filing 
C)  blue whale 
D)  red herring

Question 20

What are some of the disadvantages of going public?

Accepted Answer

When investors sell their stak

Exam 14: Raising Equity Capital

How many types of seasoned equity offerings are there?

Which of the following best describes a firm commitment IPO?

What is the major reason that underwriters tend to offer stocks in an IPO at a price that is below that which the market will pay?

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

How does the size of an issue affect the fees charged by underwriters?

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 be if Luther is selling 1.25 million shares is closest to ________.

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

Highlander Homes stock trades at $34 per share and there are 50 million shares outstanding. The management would like to raise $200 million in an SEO. If the underwriter charges 6% of gross proceeds, how many shares must it sell?

Which of the following statements is FALSE?

The announcement of an SEO usually raises a stock's price.

Which of the following statements is FALSE?

Which of the following best describes a limited partnership that specializes in raising money to invest in the private equity of young firms?

Which of the following statements is FALSE?

The firm commitment process is the most common practice for IPOs in the United States.

What are venture capital firms?

How do the transaction costs of IPO puzzle financial economists?

As part of the registration statement, the preliminary prospectus circulates to investors before the stock is offered. This preliminary prospectus is also called a(n) ________.

What are some of the disadvantages of going public?

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

Filters