Fundamentals of Corporate Finance 3e Test Bank
Chapter 15 How Firms Raise Capital
1.
Most businesses are started when an entrepreneur who has a vision is given seed funding by
institutional investors.
A)
True
B)
False
2.
The process by which many entrepreneurs raise seed money and obtain other resources
necessary to start their businesses is often called bootstrapping.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
3.
The initial seed money usually comes from the entrepreneur or other founders.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
4.
The bootstrapping period usually lasts for at least five years.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
5.
Venture capitalists are individuals or firms that help privately held businesses by providing
funds in the bootstrapping process.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
6.
Angel investors are investors who come to the rescue of firms threatened by takeovers.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
7.
A significant number of venture capital firms focus on high-technology investments.
A)
True
B)
False
Ans:
A
8.
A significant number of venture capital firms focus on mature businesses.
A)
True
B)
False
Ans:
B
9.
Traditional sources of funding, such as from financial and insurance firms, work for new or
emerging businesses despite the presence of only intangible assets.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
10.
The key idea behind staged funding is that each funding stage gives the venture capitalist an
opportunity to reassess the management team and the firm’s financial performance.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
11.
A principal way for venture capitalists to exit is to sell part of the firm’s equity back to the
entrepreneur.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
12.
A venture capitalist may exit an investment by selling common stock in an initial public
offering.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
13.
The amount of equity capital that can be raised in the public equity markets is typically smaller
than the amount that can be raised through private sources.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
14.
Privately held firms find it easier to attract top management talent and to better motivate current
managers.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
15.
To complete an IPO, a firm will need the services of investment bankers, who are experts in
bringing new securities to market.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
16.
To complete an IPO, a firm will need the services of angel investors, who are experts in
bringing new securities to market.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
17.
Underwriting is the risk-bearing part of investment banking.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
18.
In the firm-commitment underwriting, which is more typical, the investment banker guarantees
the issuer a fixed amount of money from the stock sale.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
19.
With a firm-commitment underwriting, the investment banking firm makes no guarantee to sell
the securities at a particular price.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
20.
In a best-effort offering, the underwriter promises to make its “best effort” to sell all securities
at a certain price.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
21.
Underpricing is defined as offering new securities for sale at a price below their true value.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
22.
In a firm-commitment offering, the underwriters will suffer a financial loss if the offer price is
set too high.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
23.
If the offer price is set too high, the issuing firm will lose under a best-effort agreement.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
24.
A general cash offer is a sale of debt or equity, open to all investors, by a registered public
company that has previously sold stock to the public.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
25.
Bootstrapping and venture capital financing are part of the public market operations of a
business.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
26.
Private placement occurs when a firm sells unregistered securities directly to investors such as
insurance companies, commercial banks, or wealthy individuals.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
27.
The biggest drawback of private placements involves restrictions on the resale of the securities.
A)
True
B)
False
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
28.
Transactions, in which a public company sells unregistered stock to an investor, such as a
hedge fund or some other institutional investor, are called PIPE transactions.
A)
True
B)
False
Ans:
A
AICPA: Industry/Sector Perspective
29.
The major disadvantage of a PIPE transaction to issuers is that the funding cost is higher as
compared to making a public offer.
A)
True
B)
False
Ans:
B
AICPA: Industry/Sector Perspective
30.
Term loans are defined as business loans with maturities greater than one month but less than
one year.
A)
True
B)
False
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
31.
The initial seed money usually comes from
A)
public investors.
B)
investment banks.
C)
the entrepreneur or other founders.
D)
commercial banks.
Ans:
C
AICPA: Industry/Sector Perspective
32.
Bootstrapping is the process by which
A)
many entrepreneurs raise seed money and obtain other resources necessary to start their
businesses.
B)
the entrepreneur often fleshes out his or her ideas and makes them operational.
C)
most businesses are started by an entrepreneur.
D)
None of the above
Ans:
A
AICPA: Industry/Sector Perspective
33.
Which of the following statements is NOT true?
A)
The process by which many entrepreneurs raise seed money and obtain other resources
necessary to start their businesses is often called bootstrapping.
B)
Most businesses are started by an entrepreneur who has a vision for a new business or
product and a passionate belief in the concept’s viability.
C)
The initial “seed” money usually comes from the entrepreneur or other founders.
D)
The seed money is spent on developing an initial public offering.
Ans:
D
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
34.
Which of the following statements is true?
A)
The venture capital industry as we know it today emerged in the late 1960s with the
formation of the first venture capital limited partnerships.
B)
Modern venture capital firms tend to specialize in a specific line of business, such as
hospitality, food manufacturing, or medical devices.
C)
A significant number of venture capital firms focus on high-technology investments.
D)
All of the above statements are true.
Ans:
D
35.
Which of the following statements is NOT true?
A)
Venture capitalists bear a substantial amount of risk when they fund a new business.
B)
Venture capitalists’ sole function is to provide financing for new firms.
C)
Modern venture capital firms tend to specialize in a specific line of business, such as
hospitality, food manufacturing, or medical devices.
D)
A significant number of venture capital firms focus on high-technology investments.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
36.
Tactics that venture capitalists use to reduce the risk of their investment include
A)
funding the ventures in stages, requiring entrepreneurs to take charge of all important
business decisions .
B)
funding the ventures completely in the beginning, requiring entrepreneurs to make
personal investments, syndicating investments, and maintaining in-depth knowledge
about the industry in which they specialize.
C)
funding the ventures in stages, requiring entrepreneurs to make personal investments,
syndicating investments, and maintaining in-depth knowledge about the industry in
which they specialize.
D)
None of the above
Ans:
C
AICPA: Industry/Sector Perspective
37.
Which of the following statements is NOT true?
A)
Venture capitalists often require an entrepreneur to make a substantial personal
investment in the business.
B)
Syndication occurs when the originating venture capitalist buys off other venture
capitalists involved in the venture.
C)
Another factor that reduces risk is the venture capitalist’s in-depth knowledge of the
industry and technology.
D)
The key idea behind staged funding is that each funding stage gives the venture capitalist
an opportunity to reassess the management team and the firm’s financial performance.
Ans:
B
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
38.
Provisions that are part of venture capital agreements include
A)
timing of exit, number of board positions after exit, and what price is acceptable.
B)
timing of exit, the method of exit, and what price is acceptable.
C)
the method of exit, number of board positions after exit, and what price is acceptable.
D)
None of the above
Ans:
B
AICPA: Industry/Sector Perspective
39.
The three principal ways in which venture capital firms exit venture-backed companies are
A)
selling to a strategic buyer, buying out the founder, and offering stock to the public.
B)
selling to a strategic buyer, selling to a financial buyer, and buying out the founder.
C)
selling to a strategic buyer, selling to a financial buyer, and offering stock to the public.
D)
None of the above
Ans:
C
AICPA: Industry/Sector Perspective
40.
A typical venture capital fund may generate annual returns of
A)
15 to 25 percent on the money that it invests, compared with an average annual return for
the S&P 500 of almost 12 percent.
B)
12 percent on the money that it invests, compared with an average annual return for the
S&P 500 of about 20 percent.
C)
12 percent on the money that it invests, compared with an average annual return for the
S&P 500 of about 25 percent.
D)
None of the above
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
41.
Advantages of going public include all EXCEPT
A)
larger amount of capital can be raised this way than the amount that can be raised
through private sources.
B)
the cost of going public is less compare to debt financing.
C)
going public can enable an entrepreneur to fund a growing business without giving up
control.
D)
additional equity capital can usually be raised through follow-on seasoned public
offerings at a low cost.
Ans:
B
42.
Which of the following statements is true?
A)
After the IPO, there is a less active secondary market for the firm’s shares.
B)
Only smaller amounts of capital can be raised through an IPO than the amount that can
be raised through private sources.
C)
Publicly traded firms find it easier to attract top management talent.
D)
Going public can enable an entrepreneur to fund a growing business but not without
giving up control.
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
43.
Disadvantages of going public include all EXCEPT
A)
managers’ tendency to focus on long-term profits.
B)
the high cost of the IPO itself.
C)
the costs of complying with ongoing SEC disclosure requirements.
D)
the transparency that results from this compliance can be costly for some firms.
Ans:
A
AICPA: Industry/Sector Perspective
44.
All of the following about a firm-commitment underwriting is true EXCEPT
A)
the investment banker guarantees the issuer a fixed amount of money from the stock sale.
B)
the investment banker actually buys the stock from the firm.
C)
the issuer bears the risk that the resale price might be lower than the price the
underwriter pays.
D)
the underwriter bears the risk that the resale price might be lower than the price the
underwriter pays.
Ans:
C
45.
With a best-effort underwriting
A)
the investment banking firm makes no guarantee to sell the securities at a particular
price.
B)
the investment banker does not bear the price risk associated with underwriting the issue.
C)
the compensation is based on the number of shares sold.
D)
All of the above
Ans:
D
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
46.
Which of the following statements is NOT true?
A)
In a best-effort offering, the underwriters will suffer a financial loss if the offer price is
set too high.
B)
In a best-effort agreement, the issuing firm will lose if the offer price is set too high.
C)
If the underpricing is significant, the investment banking firm will suffer a loss of
reputation for failing to price the new issue correctly and raising less money for its client
than it could have.
D)
Underpricing is defined as offering new securities for sale at a price below their true
value.
Ans:
A
47.
Basic services investment bankers provide when bringing securities to market include
A)
origination.
B)
underwriting.
C)
distribution.
D)
All of the above
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
48.
Which of the following statements is NOT true?
A)
Investment bankers provide three basic services when bringing securities to market—
origination, underwriting, and distribution.
B)
During the origination phase, the investment banker helps the firm determine whether it
is ready for an IPO.
C)
Origination is the risk-bearing part of investment banking.
D)
Origination includes giving the firm financial advice and getting the issue ready to sell.
Ans:
C
AICPA: Industry/Sector Perspective
49.
The three basic costs associated with issuing stock in an IPO are
A)
price premium, out-of-pocket expenses, and underpricing.
B)
underwriting spread, out-of-pocket expenses, and underpricing.
C)
underwriting spread, price premium, and underpricing.
D)
None of the above
Ans:
B
AICPA: Industry/Sector Perspective
Fundamentals of Corporate Finance 3e Test Bank
50.
Data from the marketplace show that the shares sold in an IPO are typically
A)
priced between 2 and 5 percent below the price at which they close at the end of the first
day of trading.
B)
priced between 10 and 15 percent above the price at which they close at the end of the
first day of trading.
C)
priced between 10 and 15 percent below the price at which they close at the end of the
first day of trading.
D)
priced between 2 and 5 percent above the price at which they close at the end of the first
day of trading.
Ans:
C
51.
Stump, Inc. a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17
per share, and the offering price to the public is $22 per share. The firm’s legal fees, SEC
registration fees, and other administrative costs are $350,000. The firm’s stock price increases
15 percent on the first day. What is the underpricing spread?
A)
$51 million
B)
$15 million
C)
$66 million
D)
None of the above
Ans:
B
Underwriting cost = ($5 per share × 3.0 million shares) = $15.0 million
AICPA: Industry/Sector Perspective