Question 1

Valiant Industries has 30 million shares of stock outstanding at a price of $28 per share. The company wishes to raise more money and plans to do so through a rights issue. Every existing stockholder will receive one right for each share of stock held. For every four rights held by the stockholder, they can buy one share at a price of $28. If all rights are exercised, how much money will be raised in this offer?

Accepted Answer

A) $105.0 million 
B) $168.0 million 
C) $210.0 million 
D) $252.0 million

Question 2

Simone founded her company using $200,000 of her own money, issuing herself 200,000 shares of stock. An angel investor bought an additional 100,000 shares for $150,000. She now sells another 500,000 shares of stock to a venture capitalist for $1.5 million. What is the post-money valuation of the company?

Accepted Answer

A) $1,200,000 
B) $1,320,000 
C) $2,400,000 
D) $3,600,000

Question 3

You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are now considering raising capital from a venture capital firm. This venture capital firm would invest $4 million and would receive 2 million newly issued shares in return. The post-money valuation of your firm is closest to ________.

Accepted Answer

A) $10.0 million 
B) $4.0 million 
C) $9.0 million 
D) $3.5 million

Question 4

Which of the following is NOT a common name for a corporation that invests in private companies?

Accepted Answer

A) strategic investor 
B) corporate partner 
C) venture partner 
D) strategic partner

Question 5

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

Question 6

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

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 $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

Question 8

Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists?

Accepted Answer

A) On average, IPOs appear to be underpriced. 
B) The long-run performance of a newly public company (three to five years from the date of issue)is superior to the overall market return. 
C) The number of issues is highly cyclical. 
D) The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs.

Question 9

What are venture capital firms?

Accepted Answer

The answer of What are venture capital firms?...

Question 10

The founder of a company issues 100,000 shares of series A stock for his own $250,000 investment. He then goes through three further rounds of investment, as shown below: Round Price Number of Shares
Series B $2.50 200,000
Series C $2.75 300,000
Series D $2.80 300,000
What is the post-money valuation for the series D funding round?

Accepted Answer

A) $2.27 million 
B) $2.39 million 
C) $2.52 million 
D) $2.77 million

Question 11

Parafoil Avionics sells 50 million shares of stock in an SEO-20 million being primary shares issued by the company and 30 million being secondary shares sold by investors in the company. At the time of the sale, Parafoil's stock was selling at $13.00 per share. If the underwriter charges 7% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

A) $242 million 
B) $254 million 
C) $290 million 
D) $314 million

Question 12

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

Question 13

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

Question 14

Luther Industries currently has 100 million shares of stock outstanding at a price of $25 per share. The company would like to raise money and has announced a rights issue. Every existing shareholder will be sent one right per share of stock that he or she owns. The company plans to require twenty rights to purchase one share at a price of $30 per share. The amount of money that Luther will raise through its rights offering is closest to ________.

Accepted Answer

A) $750 million 
B) $187.5 million 
C) $150 million 
D) $600 million

Question 15

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.

Question 16

Which of the following is NOT a reason why an investor would choose to invest in new and growing firms as a limited partner in a venture capital firm rather than making those investments directly by themselves?

Accepted Answer

A) Venture capital firms use their control of the companies they invest in to protect those investments. 
B) The investments of venture capital firm are more diversified than the investments of a single individual. 
C) A venture capital firm generally has a wide range of expertise among its general partners. 
D) The investor will have a direct say in how the companies that the venture capital firm funds will be run.

Question 17

Which of the following is a notable puzzle in IPOs?

Accepted Answer

A) The number of IPOs is highly underestimated. 
B) The number of IPOs is highly cyclical. 
C) The number of IPOs is highly seasonal. 
D) The number of IPOs is almost the same every year.

Question 18

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.

Question 19

The founder of a company issues 200,000 shares of stock of series A stock for his own $250,000 investment. He then goes through three further rounds of investment, as shown below: Round Price Number of Shares
Series B $2.50 200,000
Series C $2.75 300,000
Series D $2.90 100,000
Which of the following is closest to the percentage of the company owned by the founder of the company?

Accepted Answer

A) 25.0% 
B) 50.0% 
C) 62.5% 
D) 68.8%

Question 20

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.

Exam 14: Raising Equity Capital