Chapter 15 Test bank – Static Key
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 even for large 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 demand from investors.
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.
The contract between the underwriter and the issuing company is known as the new issue prospectus.
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 more 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.
Private placements tend to be made by smaller firms that 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.
One 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.
One 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:
48.
What would you expect to be the market price of stock after a sold-out rights issue, if each existing shareholder purchases
one new share at $60 for each three that he or she currently holds, and the current share price is $100?
49.
What was the market price of a share of stock before a rights issue, if one share of new stock could be purchased at $100 for
every four shares that were previously owned? The stock price after the successful rights issue was $200.
50.
Which one of these terms applies to a public company offering new shares to the general public?
51.
Shelf registration was enacted to allow:
52.
Which one of the following would not be included among the benefits of shelf registration?
53.
The enactment of shelf registration is likely to have increased:
54.
If a corporation’s management, with its superior knowledge of proposed investments, considers a security issue to be
underpriced, it may react by:
55.
If a new stock offering were overpriced and could be sold, then the:
56.
Issue costs for equity are higher than those for debt for all of the following reasons except:
57.
A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the
firm’s equity given that its market value of equity was $1 billion before the new issue.
58.
Companies offering smaller security issues may prefer to issue them through a:
59.
Which one of the following statements is incorrect concerning private placements?
60.
Private placement of debt securities occurs more frequently in:
61.
In return for providing funds, venture capitalists generally require: