Question 1

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. B

Question 2

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 B

Question 3

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 A

Question 4

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 5

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 6

Equity investors in a private company usually plan to realize a return on their investment by selling their stock when that company is acquired by another firm or sold to the public in a public offering.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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 9

Which of the following is an activity typically taken by an underwriter during an IPO of a company?

Accepted Answer

A)   helping the company with all necessary filings
B)   determining the offer price
C)   marketing the IPO
D)   all of the above

Question 10

David found a company and goes through the investment rounds shown below:

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 $8 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 share of the company will David own after the IPO?

Accepted Answer

A)   10%
B)   13%
C)   15%
D)   19%

Question 11

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 12

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 13

Luther Industries is in the process of selling shares of stock in an auction IPO. At the end of the bidding period, Luther's investment bank has received the following bids:

What will the offer price of these shares be if Luther is selling 1 million shares?

Accepted Answer

A)   $17.15
B)   $17.60
C)   $17.35
D)   $16.75

Question 14

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 15

At what stage of the IPO process do senior management and the lead underwriters travel to promote the company and explain their rationale for the offer price to the underwriters' largest customers?

Accepted Answer

A)   when filing with the secs
B)   after initial price range is established
C)   when managing risk
D)   when matching buyers to sellers of the stock

Question 16

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 17

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 18

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 19

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 20

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

Exam 14: Raising Equity Capital