Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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.

Question 3

Harrison Products is selling 1 million shares of stock in an auction IPO. At the end of the bidding period it has received the bids shown above. Which of the following is closest to the price at which the shares will be offered?

Accepted Answer

A)  $6.25 
B)  $6.60 
C)  $6.75 
D)  $7.00 
A)  $6.25 
B)  $6.60 
C)  $6.75 
D)  $7.00

Question 4

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 5

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 6

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 $6 million. The price of shares is set using average price-earnings ratios for similar businesses of 15. What portion of the company will be owned by the angel investor after the IPO?

Accepted Answer

A)  10% 
B)  13% 
C)  19% 
D)  24% 
A)  10% 
B)  13% 
C)  19% 
D)  24%

Question 7

Which of the following statements is FALSE?

Accepted Answer

A)  More often than not, firms return to the equity markets and offer new shares for sale, a type of offering called a seasoned equity offering (SEO). 
B)  Usually, profitable growth opportunities occur throughout the life of a firm, and in some cases it is not feasible to finance these opportunities out of retained earnings. 
C)  When a firm issues stock using an SEO, it follows many of the same steps as for an IPO. The main difference is that a market price for the stock already exists, so the price-setting process is not necessary. 
D)  A firm's need for outside capital usually ends at the IPO. 
A)  More often than not, firms return to the equity markets and offer new shares for sale, a type of offering called a seasoned equity offering (SEO). 
B)  Usually, profitable growth opportunities occur throughout the life of a firm, and in some cases it is not feasible to finance these opportunities out of retained earnings. 
C)  When a firm issues stock using an SEO, it follows many of the same steps as for an IPO. The main difference is that a market price for the stock already exists, so the price-setting process is not necessary. 
D)  A firm's need for outside capital usually ends at the IPO.

Question 8

Which of the following statements is FALSE?

Accepted Answer

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. 
B)  The green shoe option restricts an underwriter to issue more stock at the IPO offer price. 
C)  The lead underwriter usually makes a market in the stock by matching buyers and sellers and assigns an analyst to cover it. 
D)  In most cases, the existing 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. 
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. 
B)  The green shoe option restricts an underwriter to issue more stock at the IPO offer price. 
C)  The lead underwriter usually makes a market in the stock by matching buyers and sellers and assigns an analyst to cover it. 
D)  In most cases, the existing 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.

Question 9

An equity issue that raises new funds for a publicly traded company is called ________.

Accepted Answer

A)  an initial public offering 
B)  a seasoned equity offering 
C)  an underpriced offering 
D)  a secondary offering 
A)  an initial public offering 
B)  a seasoned equity offering 
C)  an underpriced offering 
D)  a secondary offering

Question 10

How does IPO pricing puzzle financial economists?

Accepted Answer

On average, IPOs appear to be

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

Which of the following statements is FALSE?

Harrison Products is selling 1 million shares of stock in an auction IPO. At the end of the bidding period it has received the bids shown above. Which of the following is closest to the price at which the shares will be offered?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

An equity issue that raises new funds for a publicly traded company is called ________.

How does IPO pricing puzzle financial economists?

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

Exam 14: Raising Equity Capital

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

Which of the following statements is FALSE?

Harrison Products is selling 1 million shares of stock in an auction IPO. At the end of the bidding period it has received the bids shown above. Which of the following is closest to the price at which the shares will be offered?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

An equity issue that raises new funds for a publicly traded company is called ________.

How does IPO pricing puzzle financial economists?

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