Question 1

One of the primary reasons for disbursing venture capital funds in installments is to:

Accepted Answer

A)  avoid tax liability. 
B)  identify and cut losses early. 
C)  increase the importance of the venture capitalist. 
D) take advantage of the time value of money.

Question 2

An investor exercises the right to buy one additional share at $20 for every five shares held. How much should each share be worth after the rights issue if they previously sold for $50 each?

Accepted Answer

A)  $35.00 
B)  $41.67 
C)  $45.00 
D) $46.00

Question 3

The SEC reviews the registration statement and determines whether or not an investment in the firm is advisable.

Accepted Answer

A) True 
 B)False

Question 4

The financial analyst at GoodBuys reasoned that since the costs of flotation amount to about 15% of the proceeds for small common stock issues, the opportunity cost of external equity capital is about 15 percentage points higher than that of retained earnings. Comment on his reasoning.

Accepted Answer

The answer of The financial analyst at GoodBuys reasoned that...

Question 5

When a new issue goes wrong and the stock price immediately crashes once trading commences, the IPO investors are most apt to:

Accepted Answer

A)  only blame their bad luck. 
B)  convert their shares into bonds. 
C)  sue the company executives who are still shareholders. 
D) sue the underwriters for overhyping the issue.

Question 6

IPOs are generally overpriced in order to raise large amounts of cash.

Accepted Answer

A) True 
 B)False

Question 7

The direct expense of a stock issue includes the:

Accepted Answer

A)  cost of underpricing the stock. 
B)  underwriting spread and other expenses. 
C)  underwriting spread, other expenses, and cost of underpricing. 
D) underwriting spread.

Question 8

A consequence of the Sarbanes-Oxley Act has been a decreased reporting burden on small public companies and a decrease in the number of companies reverting to private ownership.

Accepted Answer

A) True 
 B)False

Question 9

The "winner's curse" is a reminder that:

Accepted Answer

A)  successful bidders may often overpay for an object. 
B)  underwriters charge excessive fees. 
C)  stocks are much riskier than bonds. 
D) underpricing an issue is a cost to existing owners.

Question 10

The liquidity of Baja Corporation has been decreasing, and it contemplates a rights issue. There are currently 2 million shares outstanding with a market value of $60 each. The firm needs to raise $24 million and wants you to design a rights issue that will allow the new stock price to be no lower than $55 and for there to be no more than 2.5 million shares outstanding after the issue. How many shares must be held to obtain the right to one new share, and what will be the price of the new share?

Accepted Answer

The answer of The liquidity of Baja Corporation has been...

Question 11

A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue.

Accepted Answer

A)  $7.5 million 
B)  $30.0 million 
C)  $33.3 million 
D) $37.5 million

Question 12

An underwriter issues a firm commitment to sell 1 million shares at $20 each, including a $2 spread. How much does the issuing firm receive if only 500,000 shares are sold?

Accepted Answer

A)  $9 million 
B)  $10 million 
C)  $18 million 
D) $20 million

Question 13

The consent of a corporation's stockholders must be received prior to any:

Accepted Answer

A)  issue of new securities. 
B)  selection of an underwriter. 
C)  increase in authorized capital. 
D) private placement of securities.

Question 14

The most important function of an underwriter is to:

Accepted Answer

A)  assess the firm's capital needs. 
B)  approve the prospectus before distribution to the public. 
C)  provide private placement of the firm's debt. 
D) buy the securities issue from the firm and resell the securities to the public.

Question 15

What do venture capitalists generally provide to start-up firms besides monetary capital?

Accepted Answer

The answer of What do venture capitalists generally provide to...

Question 16

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

Accepted Answer

A)  6.98% 
B)  7.19% 
C)  7.75% 
D) 8.33%

Question 17

Plasti-tech Inc. has decided to go public and has sold 2 million of its shares to its underwriter for $20 per share. The underwriter then sold them to the public for $22 each. Plasti-tech also encountered $0.5 million in administrative fees. Soon after the issue, the stock price rose to $25. Find Plasti-tech Inc.'s total cost of this issue.

Accepted Answer

A)  $4.5 million 
B)  $9.5 million 
C)  $10.5 million 
D) $14.5 million

Question 18

Shelf registration is used more frequently for equity financing than for debt financing.

Accepted Answer

A) True 
 B)False

Question 19

A major purpose of the prospectus is to:

Accepted Answer

A)  inform investors of the security's rate of return. 
B)  advise investors of the security's potential risks. 
C)  distribute stock warrants to prospective investors. 
D) list the security's dividend payment dates.

Question 20

Which one of the following is correct if an underwriter is selling stock to the public at $40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold, and the issuing firm receives $111 million from the underwriter?

Accepted Answer

A)  The underwriter's spread was greater than $3. 
B)  The issue appreciated in price immediately. 
C)  The issue included 3 million shares. 
D) The stock was issued on a best efforts basis.

Exam 15: How Corporations Raise Venture Capital and Issue Securities

One of the primary reasons for disbursing venture capital funds in installments is to:

An investor exercises the right to buy one additional share at $20 for every five shares held. How much should each share be worth after the rights issue if they previously sold for $50 each?

The SEC reviews the registration statement and determines whether or not an investment in the firm is advisable.

The financial analyst at GoodBuys reasoned that since the costs of flotation amount to about 15% of the proceeds for small common stock issues, the opportunity cost of external equity capital is about 15 percentage points higher than that of retained earnings. Comment on his reasoning.

When a new issue goes wrong and the stock price immediately crashes once trading commences, the IPO investors are most apt to:

IPOs are generally overpriced in order to raise large amounts of cash.

The direct expense of a stock issue includes the:

A consequence of the Sarbanes-Oxley Act has been a decreased reporting burden on small public companies and a decrease in the number of companies reverting to private ownership.

The "winner's curse" is a reminder that:

A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue.

An underwriter issues a firm commitment to sell 1 million shares at $20 each, including a $2 spread. How much does the issuing firm receive if only 500,000 shares are sold?

The consent of a corporation's stockholders must be received prior to any:

The most important function of an underwriter is to:

What do venture capitalists generally provide to start-up firms besides monetary capital?

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

Shelf registration is used more frequently for equity financing than for debt financing.

A major purpose of the prospectus is to:

Which one of the following is correct if an underwriter is selling stock to the public at $40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold, and the issuing firm receives $111 million from the underwriter?