26) You founded your own irm 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 irm. This venture capital irm would invest $4 million and
would receive 2 million newly issued shares in return. Assuming that this is the venture
capitalist’s irst investment in your irm, what percentage of the irm will the venture
capitalist own?
A) 36%
B) 29%
C) 17%
D) 21%
Answer: B
Explanation: B)
Dif: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
27) You founded your own irm 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 irm. This venture capital irm would invest $6 million and
would receive 3million newly issued shares in return. After the venture capitalist’s
investment, what percentage of the irm will you own?
A) 42%
B) 33%
C) 25%
D) 20%
Answer: B
Explanation: B)
Dif: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
11
Copyright © 2015 Pearson Education, Inc.
28) You founded your own irm 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 irm. This venture capital irm 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 ________.
A) $2.5 million
B) $6.3 million
C) $2.0 million
D) $1.3 million
Answer: A
Explanation: A)
Dif: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
29) You founded your own irm 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 irm. This venture capital irm 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 ________.
A) $12.5 million
B) $4.0 million
C) $5.0 million
D) $2.5 million
Answer: D
Explanation: D)
Therefore, the angel investor’s post-money
Dif: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
12
Copyright © 2015 Pearson Education, Inc.
30) You founded your own irm 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 irm. This venture capital irm 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?
A) $500,000
B) $0.75 million
C) $1.5 million
D) $1.9 million
Answer: B
Explanation: B) The angel investor paid = $0.25 per share
Dif: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
31) You founded your own irm 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 irm. This venture capital irm would invest $5 million and
would receive 4 million newly issued shares in return. Suppose you sold the2 million shares
to the angel investor for $500,000. What was your percentage ownership in the company
immediately following the angel investor’s investment?
A) 50%
B) 40.0%
C) 60.0%
D) 100%
Answer: C
Explanation: C) Total shares outstanding = 3 million + 2 million = 5 million. Your share is
Dif: 2 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
32) What are angel investors?
Answer: Individual investors who buy equity in small private irms are called angel
investors. These are often friends or acquaintances of the entrepreneur and receive a
sizable equity share in the business in return for their funds.
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
33) What are venture capital irms?
Answer: Venture capital irms are limited partnerships that specialize in raising money to
invest in private equity of young irms. Typically, institutional investors, such as pension
funds are partners in the venture capital irm.
Dif: 1 Var: 1
13
Copyright © 2015 Pearson Education, Inc.
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
34) What is the diference between preferred stocks issued by a private company and a
mature company?
Answer: Preferred stock issued by a private company generally does not carry a dividend
but is often convertible to common equity if the irm is successful. Alternately, if the irm
does not do well, the preferred stock has a higher claim on the assets of the irm. Preferred
stock issued by a mature company generally carries a preferred dividend, seniority in
liquidation, and special voting rights.
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Previous Edition
14.2 Taking Your Firm Public: The Initial Public Ofering
1) The main advantages for a irm in going public are greater liquidity and better access to
capital.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) In a best-eforts IPO, the underwriter guarantees that all stock will be sold.
Answer: FALSE
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) The irm commitment process is the most common practice for IPOs in the United
States.
Answer: TRUE
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) Which of the following is NOT a reason why an IPO is attractive to the managers of a
private company?
A) It gives its private equity investors the opportunity to diversify.
B) It gives access to large amounts of capital in the IPO.
C) It reduces the complexity of requirements regulating the company’s management.
D) It gives access to much larger amounts of capital through the public markets in
subsequent oferings.
Answer: C
Dif: 1 Var: 1
Skill: Conceptual
14
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) Which of the following best describes those shares sold when a company goes public
which raise new capital?
A) primary ofering
B) secondary ofering
C) tertiary ofering
D) preliminary ofering
Answer: A
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) 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 ofer price to the underwriters’
largest customers?
A) when iling with the secs
B) after initial price range is established
C) when managing risk
D) when matching buyers to sellers of the stock
Answer: B
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
15
7) Which of the following is an activity typically taken by an underwriter during an IPO of a
company?
A) helping the company with all necessary ilings
B) determining the ofer price
C) marketing the IPO
D) all of the above
Answer: D
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) Which of the following best describes a irm commitment IPO?
A) The underwriter purchases the entire issue at a small discount and then resells it at the
ofer 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 suicient demand to sell the entire issue.
Answer: A
Dif: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16
9)
Price ($) Number of Shares Bid
5.00 600,000
5.25 700,000
5.50 850,000
5.75 775,000
6.00 700,000
6.25 300,000
6.50 225,000
Felicity Industries is selling 2 million shares of stock in an auction IPO. At the end of the
bidding period it has received the bids shown above. Which of the following is closest to the
price at which the shares will be ofered?
A) $5.00
B) $5.25
C) $5.75
D) $6.00
Answer: C
Explanation: C)
hence, $5.75 is the price at which there is suicient demand to sell the entire issue.
Dif: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
17
10)
Price ($) Number of Shares Bid
6.00 100,000
6.25 200,000
6.50 450,000
6.75 150,000
7.00 450,000
7.25 100,000
7.50 300,000
Harrison Products is selling 1 million shares of stock in an auction IPO. At the end of the
bidding period it has received the bids shown above. Which of the following is closest to the
price at which the shares will be ofered?
A) $6.25
B) $6.60
C) $6.75
D) $7.00
Answer: C
Explanation: C)
hence, $6.75 is the price at which there is suicient demand to sell the entire issue.
Dif: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
18
11)
Price ($) Number of Shares Bid
3.00 100,000
3.25 100,000
3.50 170,000
3.75 100,000
4.00 40,000
4.25 80,000
4.50 135,000
4.75 65,000
Bejeweled, a chain of crafting shops, is selling 500,000 shares of stock in an auction IPO. At
the end of the bidding period they have received the bids shown above. Which of the
following is closest to the price at which the shares will be ofered?
A) $3.50
B) $3.75
C) $4.25
D) $4.75
Answer: A
Explanation: A)
hence, $3.50 is the price at which there is suicient demand to sell the entire issue.
Dif: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
19
12) 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?
A) $3.68
B) $22.07
C) $36.79
D) $68.06
Answer: C
Explanation: C)
EPS = $9 million / 3.425 million; IPO price = $14 × $9 million / 3.425 million = $36.79
Dif: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
20