Corporate Finance: Core Principles & Apps, 5e (Ross)
Chapter 19 Raising Capital
1) Which one of the following projects is most apt to be financed with venture capital?
A) Seasonal merchandise for a major retailer
B) New product for an international manufacturing company
C) Domestic outlet for a large global importer
D) Additional warehouse space for a profitable trucking firm
E) Prototype for a newly patented tool by an individual inventor
2) Individual or limited partner venture capitalists generally
A) seek an exit strategy.
B) provide only seed money to start-up firms.
C) tend to be long-term investors.
D) are easy to contact.
E) request less than 25 percent ownership.
3) An individual who wishes to participate in crowdfunding a company must
A) have at least 10 years of investment experience and a net worth of $500,000 or more.
B) have a net worth of at least $1 million and net income of $200,000 or more in 2 of the last 3
years.
C) be an SEC registered investor and have annual income of $250,000 or more.
D) have a net worth of at least $500,000, annual net income of $200,000 or more in 2 of the last 3
years, and a minimum of 10 years of investment experience.
E) have net income of $250,000 or more in 2 of the last 3 years along with a minimum net worth of
$2 million.
2
4) Which stage of venture capital financing provides the funding needed to develop a working
model of a new product?
A) Start-up
B) First-round
C) Mezzanine
D) Seed money
E) Second-round
5) Arctic Adventures just filed the required paperwork with the SEC that contains all of the
material information related to their upcoming IPO. What is the name associated with this
paperwork?
A) Comment letter
B) Registration statement
C) Security agreement
D) Prospectus
E) Red herring
6) What is the legal document called that is provided to potential investors and describes a new
security offering?
A) Prospectus
B) Security agreement
C) Formal filing
D) Registration statement
E) Public statement
7) Assume the SEC approved the registration statement for a new securities issue this morning.
Which one of the following statements must be true about this issue?
A) The red herrings can now be distributed as their distribution was awaiting the SEC approval.
B) The waiting period started when the approval was received this morning.
C) The final prospectuses were all delivered or the SEC would not have approved the issue.
D) The issuer is following all of the required rules and regulations in regards to this issue.
E) The SEC believes the issue will be a profitable investment for all purchases made at the offer
price.
8) Which one of the following statements is correct?
A) The underwriters must approve any increase in the authorized number of shares for a firm.
B) A prospectus must be provided to all investors who purchase shares of a new equity offering.
C) The corporate CEO has the authority to authorize additional shares of stock for a new issue.
D) When issuing new securities, the first step is the distribution of the prospectus.
E) Written offers can be made for new securities during the waiting period.
9) Prior to receiving SEC approval, a company selling new securities can
A) accept both written and oral offers to purchase shares.
B) determine the offer price and accept all offers to purchase shares.
C) not distribute any information or communicate with any investors regarding the securities.
D) distribute red herrings and accept oral offers to purchase shares.
E) presell shares but cannot determine the final selling price.
10) What is the length of the SEC registration waiting period?
A) 10 days
B) 45 days
C) 20 days
D) 90 days
E) 180 days
11) Which one of the following best describes an initial public offering?
A) The first sale of equity shares to the general public
B) Any newly issued shares offered to the general public
C) Shares sold to the public in exchange for cash
D) Shares held by a firm’s founder
E) Any shares initially offered to a firm’s existing shareholders
12) BL Lumber just authorized 5,000 new shares that is the number of shares they expect to sell
over the next 2 years. These shares will be sold as, and if, funds are needed. This situation best
describes which one of the following terms?
A) Shelf cash offer
B) Timed placement
C) Competitive firm cash offer
D) Dutch auction
E) Direct placement
13) A publicly traded company plans to issue an additional 10,000 shares of common stock to the
general public in the near future. Which term applies to this issue of securities?
A) Initial public offering
B) Private placement
C) In-house offering
D) Rights offering
E) Seasoned equity offer
14) Which one of these parties is primarily responsible for the pricing and selling of new securities
to the general public?
A) Underwriter
B) Investment advisor
C) Specialist
D) Securities dealer
E) Venture capitalist
15) The difference between the price an underwriter pays to a securities’ issuer and the price at
which the securities are offered for sale is called the
A) agents’ fee.
B) commission.
C) spread.
D) rights price.
E) private price.
16) What is the group of underwriters called who share both the risks and the marketing
responsibilities for a securities offering?
A) Underwriting cartel
B) Syndicate
C) Firm commitment group
D) Dutch auction group
E) Venture capitalists
17) Which one of the following terms is defined as an underwriting for which the underwriters
assume full responsibility for any unsold shares?
A) Initial public offering
B) Best efforts underwriting
C) Firm commitment underwriting
D) Rights offer
E) Private placement
18) Kite Flyers recently offered 6,000 shares of stock for sale but only received payment from its
underwriters for the 4,500 shares they sold. This must have been a ________ underwriting.
A) standby
B) best efforts
C) firm commitment
D) Dutch auction
E) private placement
19) Which one of the following is a type of underwriting of securities where the final offer price is
determined by investor bids?
A) Private placement
B) Best efforts
C) Initial public offering
D) Green Shoe option
E) Dutch auction
20) A Green Shoe provision can be defined as a(n):
A) privileged subscription.
B) guarantee of sale for all shares offered.
C) overallotment option.
D) public price auction.
E) private price auction.
21) The Green Shoe option is most apt to be exercised when an IPO is ________ and ________.
A) underpriced; undersubscribed
B) underpriced; oversubscribed
C) correctly priced; neither over nor undersubscribed
D) overpriced; oversubscribed
E) overpriced; undersubscribed
22) The specified period of time following an IPO when insiders are prevented from selling their
shares is called the:
A) lockup period.
B) quiet period.
C) comment period.
D) Green Shoe period.
E) waiting period.
23) The primary purpose of a lockup agreement is to ensure
A) the lead underwriter maintains an economic interest in the IPO it is managing.
B) company insiders maintain an economic interest in the issuer of an IPO for a minimum period
of time.
C) research reports are issued.
D) the issuer of new securities receives a minimally agreed upon amount from the issue.
E) investors purchasing shares at the offer price hold those shares for a stated number of days
following the IPO.
24) A lockup agreement:
A) temporarily supports the market price of IPO shares.
B) maximizes the return on an IPO to a firm’s original owners.
C) increases the volume of trading for shares of a recent IPO.
D) limits price volatility on the first day shares of an IPO trade.
E) guarantees a minimum number of IPO shares sold.
25) A company enters a quiet period at the time it seriously considers an IPO. This period ends
________ calendar days following the IPO.
A) 1
B) 5
C) 20
D) 40
E) 50
26) Galactic Travel wants to do an IPO but is quite concerned that the underwriters might
underprice the issue. Which one of the following might the firm consider to address this concern?
A) Extended lockup period
B) Dutch auction underwriting
C) Extended quiet period
D) Best efforts underwriting
E) Standby underwriting
27) What was the average first-day return on IPOs for the period 1980−2015 in the United States?
A) 22.7 percent
B) 17.2 percent
C) 9.2 percent
D) 11.4 percent
E) 15.6 percent
28) Which of the following have been offered as explanations of IPO underpricing?
I. Underpricing helps offset the “winner’s curse.”
II. Underpricing helps ensure investors will be long-term holders of the IPO securities.
III. Underpricing helps ensure investment bank customers will earn a profit on average.
IV. Underpricing is needed to convince investors to accept the risks associated with IPOs.
A) II only
B) IV only
C) II and III only
D) I, III, and IV only
E) I, II, III, and IV only
29) In the United States, the period from 1960 to 2015 illustrates that
A) both the number of IPO offerings and the amount of underpricing vary significantly over time.
B) the number of IPO offerings is relatively constant over time but the amount of underpricing
varies considerably.
C) both the number of IPO offerings and the amount of underpricing follow a set pattern.
D) IPO underpricing is relatively constant over time but the number of offerings varies quite
dramatically.
E) the level of underpricing steadily increased over the period while the number of offerings
consistently decreased.
30) A stock with a file price range of ________, a final offer price of ________, and a first-day
closing price of ________ is the best example of the partial adjustment phenomenon.
A) $14−$16; $15; $16
B) $10−$12; $16; $15
C) $16−$18; $15; $12
D) $10−$12; $24; $24
E) $11–$13; $22; $29
31) Going public offers which two major benefits?
A) Decreased costs of raising capital and firm growth from increased name recognition
B) Increased ability to raise external capital and reduced market risk
C) Shareholder loyalty and increased availability of external capital
D) Increased equity capital and lowered firm risk
E) Diversification for shareholders and increased ability to raise capital
32) In the Brau and Fawcett survey, which one of these was most cited by CFOs as the motive for
going public?
A) Creating public shares for use in future acquisitions
B) Allowing the firm’s principals to diversify their holdings
C) Establishing a market value for the firm
D) Minimizing the firm’s cost of capital
E) Allowing venture capitalists to cash out
33) Generally speaking, stock prices tend to ________ following a new debt announcement and
________ following a new equity announcement.
A) increase; increase
B) increase; decrease
C) remain steady; increase
D) remain steady; decrease
E) decrease; increase
34) Which of the following have been offered as justification for stock price declines following an
SEO announcement?
I. Investors assume managers issue stock when shares are overvalued.
II. Corporate taxes imposed on stock offerings lower the value of the issuer’s cash flows.
III. Issuing equity may be considered a signal that the issuer has too much debt.
IV. Issue costs reduce the value of the issuing firm.
A) I and III only
B) II and IV only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, III, and IV
35) The cost of the time managers spend on an issue of securities is
A) considered to be part of the abnormal return.
B) a direct cost of the issue and must be reported on the prospectus.
C) reimbursed when the issuer invokes the Green Shoe option.
D) an indirect expense of the issue.
E) not considered an expense of the issue because it is a sunk cost.
36) Assume ABC stock declines by 2 percent following the announcement of a new stock offering.
Also assume the prices in the overall market remained steady on the announcement date. ABC’s
price decline is best categorized as
A) a direct expense of the issue.
B) a part of the issue’s underpricing.
C) an abnormal return.
D) the spread.
E) the overallotment cost.
37) Which one of these statements is true concerning issue costs?
A) Issue costs tend to be higher for debt than for equity issues.
B) Underwriter spreads for IPOs tend to range from 10 to 15 percent.
C) The costs of SEOs generally exceed the costs of IPOs.
D) Convertible bonds generally have the lowest issue costs.
E) Underwriting spreads tend to decrease as issue size increases.
38) Currently, you own 7 percent of the outstanding stock of Metals Unlimited. The firm has
decided to issue additional shares of stock and has given you the first option to purchase 7 percent
of those additional shares. Which one of the following will you be participating in if you opt to
purchase the shares you have been offered?
A) Red herring offer
B) Rights offer
C) Private placement
D) IPO
E) General cash offer
39) What is the primary reason why securities are sometimes offered through a rights offering?
A) To avoid corporate taxation of excessive profits
B) To provide additional income to the current shareholders
C) To assist current shareholders in maintaining their current proportional ownership position
D) To replace a regular stock dividend
E) To allow shareholders to avoid taxes by purchasing shares directly from the issuer
40) Which one of these conditions must exist if a rights offering is to be successful?
A) The rights cannot be resold.
B) The book value per share must be less than the subscription price.
C) Shareholders must be able to obtain one new share for every right they receive.
D) The issuer must guarantee to repurchase the rights at the offer price if the market price declines.
E) The subscription price must be less than the market price.
41) Given an efficient market, a rights offer
A) provides a means for current shareholders to sell their shares for more than their actual worth.
B) increases the wealth of the firm’s current shareholders.
C) neither creates nor destroys shareholder value.
D) provides a means of creating value for only those who exercise their rights.
E) imposes losses on the firm’s current shareholders.
42) Ariel and Todd both own rights on TL stock that grant each of them the right to purchase 10
shares at $15 a share. Ariel does not sell or exercise her rights. Thus, Todd purchases 20 shares at
the subscription price. Todd exercised
A) a neglected rights offer.
B) a shareholder takedown offer.
C) an oversubscription privilege.
D) a standby fee arrangement.
E) a standby underwriting.
43) Which one of these is not a reason given for issuing shares without a rights offering?
A) The risk of the subscription price exceeding the market price is significant.
B) Underwriters provide a wider distribution of shares than would be possible with a rights
offering.
C) Rights must be exercised by their original owner or forfeited.
D) Underwritten issues provide funds faster than rights offerings do.
E) Investment bankers provide valuable advice.