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Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Which of the following statements is false?
1)
A)
At an IPO, a firm offers a large block of shares for sale to the public for the first time.
B)
Many IPOs, especially the larger offerings, are managed by a group of underwriters.
C)
After deciding to go public, managers of the company work with an underwriter, an
investment banking firm that manages the offering and designs its structure.
D)
The shares that are sold in the IPO may either be new shares that raise new capital, known as
a secondary offering, or existing shares that are sold by current shareholders (as part of their
exit strategy), known as a primary offering.
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.
2)
Assuming that this is the venture capitalist's first investment in your firm, the post-money
valuation of the angel investor's shares are closest to:
2)
A)
$12.5 million
B)
$2.5 million
C)
$5.0 million
D)
$4.0 million
3)
Which of the following statements is false?
3)
A)
In a rights offer, the firm offers the new shares only to existing shareholders.
B)
If a firm's management is concerned that its equity may be under priced in the market, by
using a rights offering the firm can continue to issue equity without imposing a loss on its
current shareholders.
C)
In the United States most offers are rights offers.
D)
Secondary shares are shares sold by existing shareholders, including the company's founder.
4)
Which of the following statements is false?
4)
A)
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.
B)
A venture capital firm is a limited partnership that specializes in raising money to invest in
the private equity of young firms.
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.
5)
Which of the following is not a common name for a corporation that invests in private companies?
5)
A)
Corporate partner
B)
Venture partner
C)
Strategic partner
D)
Strategic investor
6)
Which of the following statements is false?
6)
A)
Today, investors become informed about the impending sale of stock by the news media, via
a road show, or through the book-building process, so tombstones are purely ceremonial.
B)
Historically, intermediaries would advertise the sale of stock (both IPOs and SEOs) by taking
out advertisements in newspapers called tombstones.
C)
In a cash offer, the firm offers the new shares to existing shareholders.
D)
Primary shares are new shares issued by the company.
7)
Which of the following is not one of the four characteristics of IPOs that puzzle financial
economists?
7)
A)
On average, IPOs appear to be underpriced.
B)
The number of issues is highly cyclical.
C)
The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs.
D)
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.
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 $20 per share. The amount of money that
Luther will raise through its rights offering is closest to?
8)
A)
$400 million
B)
$500 million
C)
$100 million
D)
$125 million
9)
Which of the following statements is false?
9)
A)
Although not as costly as IPOs, seasoned offerings are still expensive.
B)
Researchers have found that, on average, the market greets the news of an SEO with a price
increase.
C)
The decision to raise financing externally usually implies that a firm plans to pursue an
investment opportunity.
D)
SEO rights offers have lower costs than cash offers.
10)
As part of the registration statement, called the preliminary prospectus, circulates to investors
before the stock is offered. This preliminary prospectus is also called a(n)
10)
A)
10-K filing.
B)
IPO filing.
C)
blue whale.
D)
red herring.
11)
Which of the following statements is false?
11)
A)
Usually, profitable growth opportunities occur throughout the life of the firm, and in some
cases it is not feasible to finance these opportunities out of retained earnings.
B)
When a firm issues stock using an SEO, it follows many of the same steps as for an IPO. The
main difference is that a market price for the stock already exists, so the price-setting process
is not necessary.
C)
A firm’s need for outside capital usually ends at the IPO.
D)
More often than not, firms return to the equity markets and offer new shares for sale, a type of
offering called a seasoned equity offering (SEO).
Use the information for the question(s) below.
Luther Industries is in the process of selling shares of stock in an auction IPO. At the end of the bidding period, Luther's
investment bank has received the following bids:
Price ($)
Number of
Shares Bid
$19.50 50,000
$19.25 25,000
$19.10 25,000
$19.00 100,000
$18.75 125,000
$18.50 75,000
$18.25 150,000
$18.00 240,000
$17.75 80,000
$17.50 125,000
$17.25 150,000
$17.00 100,000
$16.90 60,000
$16.75 80,000
$16.50 75,000
$16.25 200,000
5
12)
What will the offer price of these shares be if Luther is selling 1 million shares?
12)
A)
$16.75
B)
$17.50
C)
$17.25
D)
$17.00
13)
Which of the following statements is not true regarding Angel Investors?
13)
A)
These investors are frequently friends or acquaintances of the entrepreneur.
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)
They are typically arranged as limited partnerships.
14)
Which of the following statements is false?
14)
A)
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.
B)
A "road trip" is where senior management and the lead underwriters travel around the
country (and sometimes around the world) promoting the company and explaining their
rationale for the offer price to the underwriters’ largest customers–mainly institutional
investors such as mutual funds and pension funds.
C)
Once the issue price (or offer price) is set, underwriters may invoke another mechanism to
protect themselves against a loss–the over-allotment allocation.
D)
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.
15)
Which of the following statements regarding exit strategies is false?
15)
A)
Roughly 25% of venture capital exits from 2001-2005 occurred through mergers or
acquisitions.
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)
An alternative way to provide liquidity to its investors is for the company to become a
publicly traded company.
16)
Which of the following statements is false?
16)
A)
Often the value destroyed by the price decline can be a significant fraction of the new money
raised with a SEO.
B)
As with IPOs, evidence suggests that companies over perform following a seasoned offering.
C)
SEO underwriting fees average about 5% of the proceeds of the issue and, as with IPOs, the
variation across issues of different sizes is relatively small.
D)
The one advantage of a cash offer is that the underwriter takes on a larger role and, therefore,
can credibly certify the issue's quality.
Use the information for the question(s) below.
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:
Price ($)
Number of
Shares Bid
$19.50 50,000
$19.25 25,000
$19.10 25,000
$19.00 100,000
$18.75 125,000
$18.50 75,000
$18.25 150,000
$18.00 240,000
$17.75 80,000
$17.50 125,000
$17.25 150,000
$17.00 100,000
$16.90 60,000
$16.75 80,000
$16.50 75,000
$16.25 200,000
8
17)
The proceeds from the IPO be if Luther is selling 1.25 million shares is closest to:
17)
A)
$21.6 million
B)
$21.1 million
C)
$20.6 million
D)
$20.9 million
18)
Which of the following statements regarding best efforts IPOs is false?
18)
A)
If the entire issue does not sell out, the underwriter is on the hook.
B)
Often these arrangements have an all-or-none clause: either all of the shares are sold in the
IPO, or the deal is called off.
C)
The underwriter does not guarantee that the stock will be sold, but instead tries to sell the
stock for the best possible price.
D)
For smaller IPOs, the underwriter commonly accepts the deal on this basis.
19)
Which of the following statements is false?
19)
A)
The lead underwriter is the primary banking firm responsible for managing the deal. The lead
underwriter provides most of the advice and arranges for a group of other underwriters,
called the syndicate, to help market and sell the issue.
B)
Because of the potential conflict of interest, the underwriter will not make a market in the
stock after the issue.
C)
The SEC requires that companies prepare a registration statement, a legal document that
provides financial and other information about the company to investors, prior to an IPO.
Company managers work closely with the underwriters to prepare this registration statement
and submit it to the SEC.
D)
In recent years, the investment banking firm of W.R. Hambrecht and Company has attempted
to change the IPO process by selling new issues directly to the public using an online auction
IPO mechanism called Open IPO.
20)
Which of the following statements is not true regarding venture capitalists?
20)
A)
They might invest for strategic objectives in addition to the desire for investment returns.
B)
They firms offer limited partners a number of advantages over investing directly in start-ups
themselves as angel investors.
C)
They can provide substantial capital for young companies.
D)
They use their control to protect their investments, so they may therefore perform a key
nurturing and monitoring role for the firm.
21)
Which of the following statements is false?
21)
A)
The process of selling stock to the public for the first time is called a seasoned equity offering
(SEO).
B)
The two advantages of going public are greater liquidity and better access to capital.
C)
Public companies typically have access to much larger amounts of capital through the public
markets.
D)
By going public, companies give their private equity investors the ability to diversify.
22)
Which of the following statements is false?
22)
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 New York Stock Exchange and the Nasdaq), and Congress (through
the Sarbanes-Oxley Act of 2002) adopted new standards that focused on more thorough
financial disclosure, greater accountability, and more stringent requirements for the board of
directors.
C)
Several high profile corporate scandals during the early part of the twenty-first century
prompted tougher regulations designed to address corporate abuses.
D)
The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO:
When investors diversify their holdings, the equity holders of the corporation become more
concentrated.
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.
23)
Assuming that this is the venture capitalist's first investment in your firm, what percentage of the
firm will you own?
23)
A)
40%
B)
50%
C)
33%
D)
25%
24)
Which of the following statements regarding firm commitment IPOs is false?
24)
A)
It is the most common underwriting arrangement.
B)
The underwriter guarantees that it will sell all of the stock at the offer price.
C)
The underwriter purchases the entire issue (at a the offer price) and then resells it at a slightly
higher price to interested investors.
D)
If the entire issue does not sell out, the remaining shares must be sold at a lower price and the
underwriter must take the loss.
