Question 1

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 your percentage ownership in the company immediately following the angel investor's investment?

Accepted Answer

A)  50% 
B)  40.0% 
C)  60.0% 
D)  100%

Question 2

Which of the following statements is FALSE?

Accepted Answer

A)  Once the issue price (or offer price) is set, underwriters may invoke another mechanism that allows them to sell extra shares of more successful offerings-the over-allotment allocation. 
B)  Before the offer price is set, the underwriters work closely with the company to come up with a price range that they believe provides a reasonable valuation for the firm. 
C)  Before an IPO, the company prepares the final registration statement and final prospectus containing all the details of the IPO, including the number of shares offered and the offer price. 
D)  In a cash offer, a firm offers the new shares only to existing shareholders.

Question 3

The Ontario Teachers' Pension Plan is a pension fund for public school teachers in the province of Ontario. It has a large and diverse portfolio of investments, both in Canada and internationally, and had net assets in December 2007 of C$108.5 billion. Which of the following best describes the Ontario Teachers' Pension Plan?

Accepted Answer

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

Question 4

Big Box retailing has a market capitalization of $500 million and 4 million shares outstanding. In order to finance its growth, the management of Big Box plans to raise further capital through a rights issue. All shareholders will be issued ten rights to purchase ten shares at a price of $1.00 per share. How much money will this raise, if all shareholders exercise their rights?

Accepted Answer

A)  $20.0 million 
B)  $40.0 million 
C)  $60.0 million 
D)  $80.0 million

Question 5

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 6

What is the general long-run performance of an IPO?

Accepted Answer

The answer of What is the general long-run performance of...

Question 7

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 8

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:

The proceeds from the IPO be if Luther is selling 1.25 million shares is closest to ________.

Accepted Answer

A)  $18.9 million 
B)  $22.1 million 
C)  $21.0 million 
D)  $20.0 million

Question 9

An entrepreneur founded his company using $200,000 of his own money, issuing himself 200,000 shares of stock. An angel investor bought an additional 100,000 shares for $150,000. The entrepreneur now sells another 400,000 shares of stock to a venture capitalist for$2 million. What is the post-money valuation of the company?

Accepted Answer

A)  $1,750,000 
B)  $1,925,000 
C)  $3,500,000 
D)  $4,025,000

Question 10

What are the advantages of a rights offer over a cash offer when issuing new shares?

Accepted Answer

A)  It enables a firm to attract new investors from outside its current owners. 
B)  It enables a firm to issue equity without imposing a loss on current shareholders. 
C)  It enables a firm to access new sources of capital to fund its growth. 
D)  It enables a firm to attract new investors by offering them a windfall from the difference between the price of the issued stock and the price of stock after the offering.

Question 11

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 12

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 13

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 14

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 15

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 $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 16

Which of the following statements is FALSE?

Accepted Answer

A)  The general partners work for and run the venture capital firm; they are called venture capitalists. 
B)  An important consideration for investors in private companies is their exit strategy-how they will eventually realize the return from their investment. 
C)  When a company founder decides to sell equity to outside investors for the first time, it is common practice for private companies to issue common stock rather than preferred stock to raise capital. 
D)  Institutional investors such as pension funds, insurance companies, endowments, and foundations manage large quantities of money.

Question 17

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 18

Braynerd Chemicals sells 40 million shares of stock in an SEO-25 million being primary shares issued by the company and 15 million being secondary shares sold by investors in the company. At the time of the sale, Braynerd's stock was selling at $21.00 per share. If the underwriter charges 5% of the gross proceeds as a fee, how much money was raised in the sale?

Accepted Answer

A)  $374.06 million 
B)  $423.94 million 
C)  $498.75 million 
D)  $573.56 million

Question 19

Which of the following statements is NOT true regarding angel investors?

Accepted Answer

A)  They are typically arranged as limited partnerships. 
B)  For many start-ups, the first round of outside private equity financing is often obtained from them. 
C)  Because their capital investment is often large relative to the amount of capital already in place at the firm, they typically receive a sizable equity share in the business in return for their funds. 
D)  These investors are frequently friends or acquaintances of the entrepreneur.

Question 20

The main advantages for a firm in going public are greater liquidity and better access to capital.

Accepted Answer

A) True 
 B)False

Exam 14: Raising Equity Capital

Which of the following statements is FALSE?

What is the general long-run performance of an IPO?

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?

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: The proceeds from the IPO be if Luther is selling 1.25 million shares is closest to ________.

What are the advantages of a rights offer over a cash offer when issuing new shares?

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

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

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.

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

Which of the following statements is FALSE?

Which of the following statements is NOT true regarding angel investors?

The main advantages for a firm in going public are greater liquidity and better access to capital.