Question 1

Jeremy founded a company. He issues 100,000 shares of series A stock for his own $100,000 investment. He then goes through three further rounds of investment, as shown below: Round Price Number of Shares
Series B $1.00 500,000
Series C $1.50 300,000
Series D $1.75 500,000
What is the post-money valuation for the series D funding round?

Accepted Answer

A) $1.23 million 
B) $1.72 million 
C) $2.21 million 
D) $2.45 million

Question 2

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 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 $5 million and would receive 2 million newly issued shares in return. After the venture capitalist's investment, the post-money valuation of the angel investor's shares is closest to ________.

Accepted Answer

A) $12.5 million 
B) $4.0 million 
C) $5.0 million 
D) $2.5 million

Question 3

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.

Question 4

Which of the following best describes those shares sold when a company goes public which raise new capital?

Accepted Answer

A) primary offering 
B) secondary offering 
C) tertiary offering 
D) preliminary offering

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) In a rights offer, a firm offers the new shares only to existing shareholders. 
B) Secondary shares are shares sold by existing shareholders, including the company's founder. 
C) If a firm's management is concerned that its equity may be underpriced in the market, by using a rights offering the firm can continue to issue equity without imposing a loss on its current shareholders. 
D) In the United States, most offers are rights offers.

Question 6

Which of the following statements regarding exit strategies is FALSE?

Accepted Answer

A) An alternative way to provide liquidity to its investors is for the company to become a publicly traded company. 
B) An important consideration for investors in private companies is their exit strategy, or how they will eventually realize the return from their investment. 
C) Often large corporations purchase successful start-up companies. In such a case, the acquiring company purchases the outstanding stock of the private company, allowing all investors to cash out. 
D) Roughly 25% of venture capital exits from 2001-2005 occurred through mergers or acquisitions.

Question 7

Which of the following statements concerning the volume and number of IPOs issued over time is most correct?

Accepted Answer

A) They are cyclical. 
B) They tend to rise over time. 
C) They tend to fall over time. 
D) They remain approximately the same over time.

Question 8

David found a company and goes through the investment rounds shown below: Round Source Price Number of Shares
Series A Self $0.50 375,000
Series B Angel $1.00 400,000
Series C Venture Capital $1.50 250,000
Series D Venture Capital $2.25 400,000
He decides to take the company public through an IPO, issuing 2 million new shares. Assuming that he successfully completes the IPO, the net income for the next year is estimated to be $9 million. His banker informs him that the price of shares should be set using average price-earnings ratios for similar businesses, which is 14. What will be the IPO price per share?

Accepted Answer

A) $3.68 
B) $22.07 
C) $36.79 
D) $68.06

Question 9

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 $5 million and would receive 4 million newly issued shares in return. After the venture capitalist's investment, the post-money valuation of your shares is closest to ________.

Accepted Answer

A) $2.5 million 
B) $6.3 million 
C) $2.0 million 
D) $1.3 million

Question 10

Highlander Homes stock trades at $30 per share and there are 50 million shares outstanding. The management would like to issue a total of 10 million (primary and secondary)shares in an SEO. If the underwriter charges 5% of gross proceeds, 25% of the shares are primary shares sold to new investors, and 75% of the shares are secondary shares sold to new investors, what percentage of the company will be owned by the new investors?

Accepted Answer

A) 13.33% 
B) 18.10% 
C) 14.29% 
D) 19.05%

Question 11

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%

Question 12

The founders and owners of a private company have funded it through the following rounds of investment: Round Source Price Number of Shares
Series A Self $1.00 100,000
Series B Angel $1.00 225,000
Series C Venture Capital $1.25 350,000
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%

Question 13

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

Question 14

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.

Question 15

Why do most people launching a start-up company acquire their funds through the venture capital industry rather than through angel investors?

Accepted Answer

A) Most entrepreneurs are not willing to relinquish the control of their business demanded by angel investors. 
B) Most entrepreneurs do not want the fees associated with investment by an angel investor. 
C) Most entrepreneurs do not need the expertise brought to a young firm by an angel investor. 
D) Most entrepreneurs do not have any relationships with individuals with substantial capital to invest.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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.

Question 18

Criswell Mining stock trades at $19 per share, and there are 200 million shares outstanding. The management would like to raise $100 million in an SEO. If the underwriter charges 5% of gross proceeds, how many shares must it sell?

Accepted Answer

A) 5.26 million 
B) 5.54 million 
C) 8.86 million 
D) 9.97 million

Question 19

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 2 million shares of stock to angel investors. You are now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would receive 4 million newly issued shares in return. Suppose you sold the 2 million shares to the angel investor for $500,000. What was the post-money valuation of your shares immediately following the angel investor's investment?

Accepted Answer

A) $500,000 
B) $0.75 million 
C) $1.5 million 
D) $1.9 million

Question 20

How do the transaction costs of IPO puzzle financial economists?

Accepted Answer

The answer of How do the transaction costs of IPO...

Exam 14: Raising Equity Capital

Which of the following statements is FALSE?

Which of the following best describes those shares sold when a company goes public which raise new capital?

Which of the following statements is FALSE?

Which of the following statements regarding exit strategies is FALSE?

Which of the following statements concerning the volume and number of IPOs issued over time is most correct?

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

Why do most people launching a start-up company acquire their funds through the venture capital industry rather than through angel investors?

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

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

Criswell Mining stock trades at $19 per share, and there are 200 million shares outstanding. The management would like to raise $100 million in an SEO. If the underwriter charges 5% of gross proceeds, how many shares must it sell?

How do the transaction costs of IPO puzzle financial economists?