Question 1

Which of the following is an advantage of a cash offer over a rights offer?

Accepted Answer

A)  The underwriter can credibly attest to the issue's quality. 
B)  The overall costs are lower. 
C)  There is no loss imposed on the current holders of stock. 
D)  There are lower underwriting fees. 
A)  The underwriter can credibly attest to the issue's quality. 
B)  The overall costs are lower. 
C)  There is no loss imposed on the current holders of stock. 
D)  There are lower underwriting fees.

Question 2

How do the transaction costs of IPO puzzle financial economists?

Accepted Answer

The costs of IPO are

Question 3

You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you received 3 million shares of stock. Since then, you have sold an additional 3 million shares of stock to angel investors. You are now considering raising capital from a venture capital firm. This venture capital firm would invest $6 million and would receive 3million newly issued shares in return. After the venture capitalist's investment, what percentage of the firm will you own?

Accepted Answer

A)  42% 
B)  33% 
C)  25% 
D)  20% 
A)  42% 
B)  33% 
C)  25% 
D)  20%

Question 4

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 5

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 6

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 7

Convex Incorporated sells 10 million shares of stock in an SEO-8 million being primary shares issued by the company and 2 million being secondary shares sold by investors in the company. At the time of the sale, Convex's stock was selling at $8.00. If the underwriter charges 4% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

A)  $61.44 million 
B)  $64.51 million 
C)  $98.30 million 
D)  $104.45 million 
A)  $61.44 million 
B)  $64.51 million 
C)  $98.30 million 
D)  $104.45 million

Question 8

In a best-efforts IPO, the underwriter guarantees that all stock will be sold.

Accepted Answer

A) True 
 B)False

Question 9

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 to common stock on some future date, so it is often called callable preferred stock. 
C)  If a 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 to common stock on some future date, so it is often called callable preferred stock. 
C)  If a 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 10

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)  In 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)  In an IPO, a firm offers a large block of shares for sale to the public for the first time.

Question 11

How many types of seasoned equity offerings are there?

Accepted Answer

There are two kinds of seasoned equity o

Question 12

Managers will try to protect their existing shareholders by selling new shares at a price that correctly values or overvalues their firm, leading investors to reason that the announcement of an SEO indicates that a company is over-valued.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

Newly listed firms tend to perform relatively poorly in the three to five years after their IPOs.

Accepted Answer

A) True 
 B)False

Question 16

Convex Incorporated sells 10 million shares of stock in an SEO-8 million being primary shares issued by the company and 2 million being secondary shares sold by investors in the company. At the time of the sale, Convex's stock was selling at $7.50 per share. If the underwriter charges 4% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

A)  $46.08 million 
B)  $57.60 million 
C)  $60.48 million 
D)  $92.16 million 
A)  $46.08 million 
B)  $57.60 million 
C)  $60.48 million 
D)  $92.16 million

Question 17

Dusty Corporation is issuing an IPO with an issue price of $15 per share that is expected to raise about $100 million. Which of the following is likely to be true?

Accepted Answer

A)  The price of the stock will be less than $15 at the close of the first trading day. 
B)  The cost of the IPO to Dusty will be about $7 million. 
C)  The stock will perform very well in the three to five years after the issue. 
D)  None of the above is likely to happen. 
A)  The price of the stock will be less than $15 at the close of the first trading day. 
B)  The cost of the IPO to Dusty will be about $7 million. 
C)  The stock will perform very well in the three to five years after the issue. 
D)  None of the above is likely to happen.

Question 18

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 19

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 20

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%

Exam 14: Raising Equity Capital

Which of the following is an advantage of a cash offer over a rights offer?

How do the transaction costs of IPO puzzle financial economists?

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

What is a seasoned equity offering?

In a best-efforts IPO, the underwriter guarantees that all stock will be sold.

Which of the following statements is FALSE?

Which of the following statements is FALSE?

How many types of seasoned equity offerings are there?

Managers will try to protect their existing shareholders by selling new shares at a price that correctly values or overvalues their firm, leading investors to reason that the announcement of an SEO indicates that a company is over-valued.

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?

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?

Newly listed firms tend to perform relatively poorly in the three to five years after their IPOs.

Dusty Corporation is issuing an IPO with an issue price of $15 per share that is expected to raise about $100 million. Which of the following is likely to be true?

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

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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