Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1) 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.
2) 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.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
3) Which of the following is LEAST likely to be a possible source of funds to finance a growing business?
A) angel investors
B) venture capital firms
C) institutional investors
D) family investors
4) 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 this individual’s relationship with Nature’s Bounty?
A) an angel investor
B) a venture capitalist
C) an institutional investor
D) a corporate investor
5) Why do most people launching a start–up company acquire their funds through the venture capital industry
rather than through angel investors?
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.
6) Which of the following is NOT a reason why an investor would choose to invest in new and growing firms
as a limited partner in a venture capital firm rather than making those investments directly by themselves?
A) Venture capital firms use their control of the companies they invest in to protect those investments.
B) The investments of venture capital firm are more diversified than the investments of a single
individual.
C) A venture capital firm generally has a wide range of expertise among its general partners.
D) The investor will have a direct say in how the companies that the venture capital firm funds will be run.
7) Which of the following best describes a limited partnership that specializes in raising money to invest in the
private equity of young firms?
A) venture capital firms
B) institutional investors
C) corporate investors
D) family investors
8) 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?
A) a venture capitalist
B) an institutional investor
C) a corporate investor
D) a family investor
9) The Ontario Teacher’s 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 Teacher’s Pension Plan?
A) an angel investor
B) a venture capitalist
C) an institutional investor
D) a family investor
10) 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?
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.
11) Simone founded her company using $150,000 of her own money, issuing herself 300,000 shares of stock. An
angel investor bought an additional 200,000 shares for $100,000. She now sells another 500,000 shares of stock
to a venture capitalist for $2 million. What is the post–money valuation of the company?
A) $2,000,000
B) $2,250,000
C) $4,000,000
D) $6,000,000
12) Simone founded her company using $150,000 of her own money, issuing herself 300,000 shares of stock. An
angel investor bought an additional 200,000 shares for $100,000. She now sells another 500,000 shares of stock
to a venture capitalist for $2 million. What percentage of the firm does Simone now own?
A) 10%
B) 20%
C) 30%
D) 40%
13) 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 $200,000. The entrepreneur now sells
another 400,000 shares of stock to a venture capitalist for $1 million. What is the post–money valuation of the
company?
A) $1,000,000
B) $1,140,000
C) $1,750,000
D) $2,000,000
14) Jeremy founded a company. He issues 200,000 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 $2.25 400,000
What is the post–money valuation for the series–D funding round?
A) $1.95 million
B) $2.025 million
C) $2.85 million
D) $3.15 million
15) Jeremy founded a company. He issues 200,000 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 $2.25 400,000
Which of the following is closest to the percentage of the company owned by the Series D investors?
A) 25%
B) 29%
C) 33%
D) 46%
16) The founder of a company issues 100,000 shares of series A stock for his own $250,000 investment. He then
goes through three further rounds of investment, as shown below:
Round Price Number of Shares
Series B $2.50 200,000
Series C $2.75 300,000
Series D $2.80 200,000
What is the post–money valuation for the series–D funding round?
A) $1.96 million
B) $2.14 million
C) $2.24 million
D) $2.43 million
17) The founder of a company issues 100,000 shares of stock of series A stock for his own $250,000 investment.
He then goes through three further rounds of investment, as shown below:
Round Price Number of Shares
Series B $2.50 200,000
Series C $2.75 300,000
Series D $2.80 200,000
Which of the following is closest to the percentage of the company owned by the founder of the company?
A) 12.5%
B) 25.0%
C) 37.5%
D) 42%
18) Which of the following statements is NOT true regarding angel investors?
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 sizeable equity share in the business in return for their funds.
D) These investors are frequently friends or acquaintances of the entrepreneur.
19) Which of the following statements is NOT true regarding venture capitalists?
A) They can provide substantial capital for young companies.
B) The firms offer limited partners a number of advantages over investing directly in start–ups themselves
as angel investors.
C) They use their control to protect their investments, so they may therefore perform a key nurturing and
monitoring role for the firm.
D) They might invest for strategic objectives in addition to the desire for investment returns.
20) Which of the following is NOT a common name for a corporation that invests in private companies?
A) strategic investor
B) corporate partner
C) venture partner
D) strategic partner
21) Which of the following statements is FALSE?
A) A venture capital firm is a limited partnership that specializes in raising money to invest in the private
equity of young firms.
B) Venture capitalists typically control about three–quarters of the seats on a start–up’s board of directors,
and often represent the single largest voting block on the board.
C) The initial capital that is required to start a business is usually provided by the entrepreneur herself and
her immediate family.
D) Individual investors who buy equity in small private firms are called angel investors.
22) Which of the following statements is FALSE?
A) The general partners work for the venture capital firm 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.
23) Which of the following statements is FALSE?
A) The preferred stock issued by young companies typically does not pay regular cash dividends.
B) The preferred stock issued by young companies usually gives the owner an option to convert it to
common stock on some future date, so it is often called callable preferred stock.
C) If the company runs into financial difficulties, the preferred stockholders have a senior claim on the
assets of the firm relative to any common stockholders.
D) Preferred stock issued by mature companies such as banks usually has a preferential dividend and
seniority in any liquidation and sometimes special voting rights.
Use the information for the question(s) below.
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 2 million newly issued shares in return.
24) The post–money valuation of your firm is closest to:
A) $12.5 million
B) $5.2 million
C) $10.0 million
D) $5.0 million
25) Assuming that this is the venture capitalist’s first investment in your firm, what percentage of the firm will
the venture capitalist own?
A) 50%
B) 40%
C) 25%
D) 33%
26) After the venture capitalist’s investment, what percentage of the firm will you own?
A) 50%
B) 40%
C) 33%
D) 25%
27) After the venture capitalist’s investment, the post–money valuation of your shares is closest to:
A) $5.0 million
B) $12.5 million
C) $4.0 million
D) $2.5 million
28) 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
29) Suppose you sold the 1 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) $1.0 million
C) $2.0 million
D) $2.5 million
30) Suppose you sold the 1 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) 33.3%
C) 66.7%
D) 100%
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
31) What are angel investors?
32) What are venture capital firms?
33) What is the difference between preferred stocks issued by a private company and a mature company?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
34) The main advantages for a firm in going public are greater liquidity, better access to capital, and greater
ability of investors to monitor the management of the firm.
35) In a best–efforts IPO, the underwriter guarantees that all stock will be sold.
36) The firm commitment process is the most common practice for IPOs in the United States.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
37) Which of the following is NOT a reason why an IPO is attractive to the managers of a private company?
A) It gives their 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 offerings.
38) Which of the following best describes those shares sold when a company goes public which raise new
capital?
A) primary offering
B) secondary offering
C) tertiary offering
D) preliminary offering
39) 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?
A) when filing with the SEC
B) when valuating the firm
C) when managing risk
D) when matching buyers to sellers of the stock
40) 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 filings
B) determining the offer price
C) marketing the IPO
D) all of the above
41) Which of the following best describes a firm commitment IPO?
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.
42) Price ($) Number of Shares Bid
5.00 600,000
5.25 700,000
5.50 850,000
5.75 800,000
6.00 650,000
6.25 400,000
6.50 150,000
Felicity Industries is selling 2 million 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
offered?
A) $5.00
B) $5.25
C) $5.75
D) $6.00
43) Price ($) Number of Shares Bid
6.00 100,000
6.25 200,000
6.50 450,000
6.75 200,000
7.00 350,000
7.25 200,000
7.50 250,000
Harrison Products is selling 1 million 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
offered?
A) $6.25
B) $6.60
C) $6.75
D) $7.00
44) Price ($) Number of Shares Bid
3.00 100,000
3.25 100,000
3.50 150,000
3.75 100,000
4.00 40,000
4.25 80,000
4.50 150,000
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 offered?
A) $3.50
B) $3.75
C) $4.25
D) $4.75
45) David found a company and goes through the investment rounds shown below:
Round Source Price Number of Shares
Series A Self $0.50 400,000
Series B Angel $1.00 500,000
Series C Venture Capital $1.50 300,000
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 $8 million. His banker
informs him that the price of shares should be set using average price–earnings ratios for similar businesses,
which is 15.0. What will be the IPO price per share?
A) $3.40
B) $20.25
C) $33.33
D) $60.00
46) David found a company and goes through the investment rounds shown below:
Round Source Price Number of Shares
Series A Self $0.50 400,000
Series B Angel $1.00 500,000
Series C Venture Capital $1.50 300,000
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 $8 million. His banker informs him that the price
of shares should be set using average price–earnings ratios for similar businesses, which is 15.0. What share
of the company will David own after the IPO?
A) 11%
B) 14%
C) 16%
D) 22%
47) In its IPO, Jillian’s Imprints, a small publishing house, offered stock at a price of $8.00 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?
A) $5.21 million
B) $14.96 million
C) $16.00 million
D) $17.04 million
48) 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 $1.00 200,000
Series B Angel $1.00 300,000
Series C Venture Capital $1.25 400,000
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 $5 million. The price of
shares is set using average price–earnings ratios for similar businesses of 17.0. What will be the IPO price per
share?
A) $12
B) $22
C) $36
D) $45
49) 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 $1.00 200,000
Series B Angel $1.00 300,000
Series C Venture Capital $1.25 400,000
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 $5 million. The price of
shares is set using average price–earnings ratios for similar businesses of 17.0. What portion of the company
will be owned by the angel investor after the IPO?
A) 12%
B) 16%
C) 22%
D) 30%
50) What is the major reason that underwriters tend to offer stocks in an IPO at a price that is below that which
the market will pay?
A) to gain from the rise in value of any stocks they hold after the IPO
B) to reduce their exposure to losses from unsold stock
C) to benefit from greenshoe provisions
D) to increase their spread
51) 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 $18 per share.
If she wants to retain a 60% ownership of the company, how much money can she raise in this IPO?
A) $30 million
B) $42 million
C) $54 million
D) $66 million
52) Which of the following statements is FALSE?
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.
53) Which of the following statements is FALSE?
A) Once a company goes public, it must satisfy all of the requirements of public companies.
B) Organizations such as the Securities and Exchange Commission (SEC), the securities exchanges
(including the NYSE and the NASDAQ), and Congress (through the Sarbanes–Oxley Act of 2002)