Question 1

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

Question 2

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 3

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 4

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.

Question 5

A large publishing firm specializing in college textbooks wishes to expand into online delivery of its materials. In order to facilitate this, it invests in a number of small start-up companies that deliver college courses online and uses these companies to start diversifying the delivery of its content. Which of the following best describes the role of the publishing firm as described above?

Accepted Answer

A)  a venture capitalist 
B)  an institutional investor 
C)  a corporate investor 
D)  a family investor

Question 6

The founder of a company currently holds 12 million of the 15 million shares in that company. She considers an IPO where she sells a mix of primary shares and 2 million of her own secondary shares for $16 per share. If she wants to retain a 70% ownership of the company, how much money can she raise in this IPO?

Accepted Answer

A)  $9 million 
B)  $12 million 
C)  $15 million 
D)  $24 million

Question 7

When a company founder sells stock to outside investors in order to raise capital, the share of the company owned by the founder and the founder's control over the company will be reduced.

Accepted Answer

A) True 
 B)False

Question 8

Chambers Industries has a market capitalization of $800 million and 250 million shares outstanding. The management of this firm plans to raise further capital through a rights issue. Which of the following rights schemes will raise the most money, if all shareholders exercise their rights?

Accepted Answer

A)  two rights to purchase one share at $1.60 per share 
B)  three rights to purchase two shares at $1.80 per share 
C)  four rights to purchase three shares at $2.00 per share 
D)  five rights to purchase two shares at $1.50 per share

Question 9

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%

Question 10

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 11

Which of the following statements is FALSE?

Accepted Answer

A)  The process of selling stock to the public for the first time is called a seasoned equity offering (SEO). 
B)  Public companies typically have access to much larger amounts of capital through the public markets. 
C)  By going public, companies give their private equity investors the ability to diversify. 
D)  The two advantages of going public are greater liquidity and better access to capital.

Question 12

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 13

Stock issued in an IPO usually trades significantly higher at the end of the first day of trading than the original IPO price.

Accepted Answer

A) True 
 B)False

Question 14

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

Question 15

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:  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 16

In its IPO, Jillian's Imprints, a small publishing house, offered stock at a price of $10.00 per share. The underwriters of this IPO had a spread of 6.5% per share. If 2 million shares were sold, what funds did Jillian's receive from the IPO?

Accepted Answer

A)  $5.61 million 
B)  $18.70 million 
C)  $20.57 million 
D)  $22.44 million

Question 17

Which of the following statements is FALSE?

Accepted Answer

A)  SEO rights offers have lower costs than cash offers. 
B)  The decision to raise financing externally usually implies that a firm plans to pursue an investment opportunity. 
C)  Although not as costly as IPOs, seasoned offerings are still expensive. 
D)  Researchers have found that, on average, the market greets the news of an SEO with a price increase.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Moon Company plans to issue 10 million shares in a seasoned equity offering. The owner, Ken Moon, plans to sell 4 million shares as part of the offering. Which of the following is true regarding the seasoned equity issue?

Accepted Answer

A)  It is a primary offering. 
B)  It is a secondary offering. 
C)  Some shares are primary shares and some shares are secondary shares. 
D)  None of the above is true regarding this seasoned equity offering.

Question 20

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.

Exam 14: Raising Equity Capital

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

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.

Which of the following statements is FALSE?

When a company founder sells stock to outside investors in order to raise capital, the share of the company owned by the founder and the founder's control over the company will be reduced.

Chambers Industries has a market capitalization of $800 million and 250 million shares outstanding. The management of this firm plans to raise further capital through a rights issue. Which of the following rights schemes will raise the most money, if all shareholders exercise their rights?

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

Which of the following statements is FALSE?

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?

Stock issued in an IPO usually trades significantly higher at the end of the first day of trading than the original IPO price.

What is a seasoned equity offering?

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: What is the post-money valuation for the series D funding round?

In its IPO, Jillian's Imprints, a small publishing house, offered stock at a price of $10.00 per share. The underwriters of this IPO had a spread of 6.5% per share. If 2 million shares were sold, what funds did Jillian's receive from the IPO?

Which of the following statements is FALSE?

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

Moon Company plans to issue 10 million shares in a seasoned equity offering. The owner, Ken Moon, plans to sell 4 million shares as part of the offering. Which of the following is true regarding the seasoned equity issue?

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?