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1. Equity capital in young businesses is known as venture capital and it is provided by
venture capital firms, wealthy individuals, and investment institutions such as pension funds.
2. Venture capitalists generally provide sufficient up-front funding in one lump sum to take a
new firm to the point where it can go public.
3. In many countries it is common for businesses to remain privately owned.
4. Underwriters usually play a triple role—first providing the company with procedural and
financial advice, then buying the stock, and finally reselling it to the public.
5. Some successful corporations will provide venture capital to new firms with innovative
ideas.
6. A consequence of the Sarbanes-Oxley Act has been a decreased reporting burden on
small public companies and a decrease in the number of companies reverting to private
ownership.
7. When a public company makes a general cash offer of debt or equity, it essentially follows
the same procedure used when it first went public.
8. Shelf registration is a procedure that allows firms to file several registration statements for
one issue of the security.
9. The bookbuilding method used by almost all IPOs in the United States is like an auction,
since potential buyers indicate how many shares they are prepared to buy at given prices.
10. The SEC requires the sale of a private placement to be limited to a small number of
knowledgeable investors.
11. The advantage of the bookbuilding method is that it allows underwriters to give preference
to those investors whose bids are most helpful in setting the issue price and to offer them a
reward in the shape of underpricing.
12. When securities are issued under a firm commitment, the underwriter bears the risk of low
sales.
13. The SEC reviews the registration statement and determines whether or not an investment
in the firm is advisable.
14. Like a general cash offering, a rights issue is an offer to buy shares made to existing and
potential shareholders.
15. In a rights offering, the shares are priced at a substantial discount to current market value,
which ensures that the shareholders will either exercise the rights themselves or sell them to
other investors.
16. Shelf registration is used more frequently for equity financing than for debt financing.
17. An average-sized firm should expect the underwriting and administrative costs of going
public to be around 7% to 8% of the IPO proceeds.
18. Issue costs for debt are considerably lower than issue costs for equity securities.
19. The evidence indicates that industrial stock prices in the U.S. decrease by approximately
3%, on average, when new equity issues are announced.
20. Firms are attracted to the private placement of debt because of the lower average interest
rates.
21. A prospectus certificate indicates equity ownership in a firm.
22. IPOs are generally overpriced in order to raise large amounts of cash.
23. The winner's curse theory assumes that the informed investor receives the majority of the
underpriced IPOs.
24. Privately placed securities may be difficult to resell.
25. A rights issue is one in which a public company offers shares only to existing shareholders
in order to raise additional cash.
26. Crowdfunding is primarily used as a means for a publicly-traded company to raise
additional capital.
27. A general cash offer is necessary when issuing a private placement.
28. Private placement contracts may be custom tailored for firms with special needs or unique
opportunities.
29. One advantage to private placements is the low cost.
30. Typical firms that engage in private placements usually incur the highest costs when
issuing public securities.
31. Money that is offered to finance a new business is known as:
32. An investor exercises the right to buy one additional share at $20 for every five shares
held. How much should each share be worth after the rights issue if they previously sold for $50
each?
33. A firm's first offering of stock to the general public is known as:
34. A secondary offering IPO occurs when:
35. The most important function of an underwriter is to:
36. When underwriters issue securities on a best efforts basis, they:
37. If an underwriter charges the public $40 per share for a new issue after having promised
the issuer $38 per share, the spread per share is:
38. When underwriters are unsure of the demand for a new offering, they:
39. A major purpose of the prospectus is to:
40. Studies have shown that, on average, new security issues are:
41. The most likely reason that underpricing of new issues occurs more frequently than
overpricing is that:
42. How much will a firm receive in net funding from a firm commitment underwriting of
250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the
price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees.
43. The primary reason for an underwriters' syndication is to:
44. Who bears the bulk of the cost of underpricing an IPO?
45. An IPO was offered to the public at $18 a share with the issuing firm receiving $16.50 of
that amount. The issuer incurred $750,000 in legal and administrative costs. At the end of the
first trading day, the stock was priced at $22.40 a share. What was the total dollar cost, including
both direct and indirect costs, of issuing the securities if 225,000 shares were offered?
46. The consent of a corporation's stockholders must be received prior to any:
47. When securities are issued under a rights issue:
