Fundamentals of Corporate Finance, 12e (Ross)
Chapter 15 Raising Capital
1) Business Aid is funded by a group of wealthy investors for the sole purpose of providing
funding for individuals and small firms that are trying to convert their new ideas into viable
products. What is this type of funding called?
A) Green shoe funding
B) Tombstone underwriting
C) Venture capital
D) Red herring funding
E) Life cycle capital
2) It is common for venture capitalists to receive at least ________ percent of a start-up
company’s equity in exchange for the venture capital.
A) 10
B) 15
C) 20
D) 30
E) 40
3) Equity financing of new, non-public companies is broadly referred to as:
A) singular-risk financing.
B) mezzanine-level stock.
C) stylized financing.
D) private equity.
E) exit funding.
4) Which one of the following statements concerning venture capital financing is correct?
A) Venture capitalists desire shares of common stock but avoid preferred stock.
B) Venture capital is relatively easy to obtain.
C) Venture capitalists rarely assume active roles in the management of the financed firm.
D) Venture capitalists should have key contacts and financial strength.
E) Venture capital is relatively inexpensive in today’s competitive markets.
5) Which one of the following statements concerning venture capitalists is correct?
A) Venture capitalists always assume management responsibility for the companies they finance.
B) Exit strategy is a key consideration when selecting a venture capitalist.
C) Venture capitalists limit their services to providing money to start-up firms.
D) Most venture capitalists are long-term investors in the companies they finance.
E) A venture capitalist normally invests in a new idea from conception through the IPO.
6) When selecting a venture capitalist, which one of the following characteristics is probably the
least important?
A) Financial strength
B) Level of involvement
C) Contacts
D) Exit strategy
E) Underwriting experience
7) Trevor is the CEO of Harvest Foods, which is a privately held corporation. What is the first
step he must take if he wishes to take Harvest Foods public?
A) Select an underwriter
B) Obtain SEC approval
C) Gain board approval
D) Prepare a registration statement
E) Distribute a prospectus
8) Which one of these describes an exception to the registration filing requirement of the SEC?
A) Loans that mature in one year or less
B) Issues that have an approved prospectus
C) Loans of $10 million or less
D) Issues of less than $5 million
E) Issues that have received an approved letter of comment
9) The Securities and Exchange Commission:
A) verifies the accuracy of the information contained in the prospectus.
B) publishes red herrings on prospective new security offerings.
C) examines the prospectus during the Green Shoe period.
D) reviews registration statements to ensure they comply with current laws and regulations.
E) determines the final offer price once they have approved the registration statement.
10) What is the form called that is filed with the SEC and discloses the material information on a
securities issuer when that issuer offers new securities to the general public?
A) Prospectus
B) Red herring
C) Indenture
D) Public disclosure statement
E) Registration statement
11) M&C Merchants is offering $2.5 million of new securities to the general public. Which SEC
regulation governs this offering?
A) Regulation A
B) Regulation C
C) Regulation G
D) Regulation Q
E) Regulation R
12) What is a prospectus?
A) A letter issued by the SEC authorizing a new issue of securities
B) A report stating that the SEC recommends a new security to investors
C) A letter issued by the SEC that outlines the changes required for a registration statement to be
approved
D) A document that describes the details of a proposed security offering along with relevant
information about the issuer
E) An advertisement in a financial newspaper that describes a security offering
13) Which one of the following is a preliminary prospectus?
A) Tombstone
B) Green shoe
C) Registration statement
D) Rights offer
E) Red herring
14) Advertisements in a financial newspaper announcing a public offering of securities, along
with a list of the investment banks handling the offering, are called:
A) red herrings.
B) tombstones.
C) Green Shoes.
D) registration statements.
E) cash offers.
15) The raising of small amounts of capital from a large number of people is known as:
A) a rights offering.
B) over allocating.
C) a diversified offer.
D) crowdfunding.
E) a standby offer.
16) During a 12-month period, a company is permitted to issue new securities through
crowdfunding up to a limit of:
A) $200 thousand.
B) $500 thousand.
C) $1 million.
D) $5 million.
E) $50 million.
17) What is an issue of securities that is offered for sale to the general public on a direct cash
basis called?
A) Best efforts underwriting
B) Firm commitment underwriting
C) General cash offer
D) Rights offer
E) Herring offer
18) Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the
company is issuing additional shares and he is being given a chance to purchase some of these
shares prior to the shares being offered to the general public. What is this type of an offer called?
A) Best efforts offer
B) Firm commitment offer
C) General cash offer
D) Rights offer
E) Priority offer
19) JLK is a partnership that was formed two years ago and has been extremely successful thus
far. The owners have decided to incorporate and offer shares of stock to the general public. What
is this type of an equity offering called?
A) Venture capital offering
B) Shelf offering
C) Private placement
D) Seasoned equity offering
E) Initial public offering
20) What is a seasoned equity offering?
A) An offering of shares by shareholders for repurchase by the issuer
B) Shares of stock that have been recommended for purchase by the SEC
C) Equity securities held by a company’s founder that are being offered for sale to the general
public
D) Sale of newly issued equity shares by a publicly owned company
E) Outstanding shares that are offered for sale by one of a company’s original founders
21) Executive Tours has decided to go public and has hired an investment firm to handle the
offering. The investment firm is serving as a(n):
A) aftermarket specialist.
B) venture capitalist.
C) underwriter.
D) seasoned writer.
E) primary investor.
22) Underwriters generally:
A) pay a spread to the issuing firm.
B) provide only best efforts underwriting in the U.S.
C) accept the risk of selling the new securities in exchange for the gross spread.
D) market and distribute an entire issue of new securities within their own firm.
E) pass the risk of unsold shares back to the issuing firm via a firm commitment agreement.
23) A syndicate can best be defined as a:
A) venture capitalist.
B) group of attorneys providing services for an IPO.
C) block of investors who control a firm.
D) bank that loans funds to finance the start-up of a new company.
E) group of underwriters sharing the risk of selling a new issue of securities.
24) The difference between the underwriters’ cost of buying shares in a firm commitment and the
offering price of those securities to the public is called the:
A) gross spread.
B) under price amount.
C) filing fee.
D) new issue premium.
E) offer price.
25) Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000
shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer
price of $26.50 a share. What type of underwriting was this?
A) Best efforts
B) Shelf
C) Oversubscribed
D) Private placement
E) Firm commitment
26) Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the
public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform
auction price for each of those shares. Which one of the following terms best describes this
underwriting?
A) Dutch auction
B) Best efforts
C) Public rights
D) Private placement
E) Market commitment
27) The 40-day period following an IPO during which the SEC places restrictions on the public
communications of the issuer is known as the ________ period.
A) auction
B) quiet
C) lockup
D) Green Shoe
E) red
28) Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a
total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were
purchased in accordance with which one of the following?
A) Green Shoe provision
B) Red herring provision
C) Quiet provision
D) Lockup agreement
E) Post-issue agreement
29) With firm commitment underwriting, the issuing firm:
A) is unsure of the total amount of funds it will receive until after the offering is completed.
B) is unsure of the number of shares it will actually issue until after the offering is completed.
C) knows exactly how many shares will be purchased by the general public during the offer
period.
D) retains the financial risk associated with unsold shares.
E) knows upfront the amount of money it will receive from the stock offering.
30) Which one of the following is a key goal of the aftermarket period?
A) Collecting the largest number of Dutch auction bids as possible
B) Determining a fair offer price
C) Supporting the market price for a new securities issue
D) Establishing a broad-based underwriting syndicate
E) Distributing red herrings to as many potential investors as possible
31) Which one of the following statements is correct?
A) The quiet period commences when a registration statement is filed with the SEC and ends on
the day the IPO shares commence trading.
B) Lockup agreements outline how oversubscribed IPO shares will be allocated.
C) Additional IPO shares can be issued in accordance with the lockup agreement.
D) Quiet period restrictions only apply to the issuer of new securities.
E) A public interview with an issuer’s CFO could cause a forced delay in the issuer’s IPO.
32) With Dutch auction underwriting:
A) each winning bidder pays the minimum price offered by any bidder.
B) all successful bidders pay the same price per share.
C) all bidders receive at least a portion of the quantity for which they bid.
D) the selling firm receives the maximum possible price for each security sold.
E) the bidder for the largest quantity receives the first allocation of securities.
33) Individual investors might avoid requesting 100 shares in an upcoming IPO because they:
A) do not want to be bothered with submitting their bid to the SEC for approval.
B) do not want to abide by the quiet period requirement.
C) are prevented from entering orders for less than 1,000 shares.
D) are more apt to receive shares if the IPO is under allocated.
E) would have to pay a premium based on their small order size.
34) If a firm commitment IPO is overpriced then the:
A) investors in the IPO may consider suing the underwriters.
B) Green Shoe provision will probably be utilized.
C) stock price will generally increase on the first day of trading.
D) issuing firm is guaranteed to be successful in the long term.
E) issuing firm receives less money than it probably should have.
35) All of the following are supporting arguments in favor of IPO underpricing except which
one?
A) Helps prevent the “winner’s curse”
B) Rewards institutional investors who share their market value opinions
C) Reduces potential lawsuits against underwriters
D) Diminishes underwriting risk
E) Provides better returns to issuing firms
36) When a firm announces an upcoming seasoned stock offering, the market price of the firm’s
existing shares tends to:
A) increase.
B) decrease.
C) remain constant.
D) respond, but the direction of the response is not predictable as shown by past studies.
E) decrease momentarily and then immediately increase substantially within an hour following
the announcement.
37) The total direct costs of underwriting an equity IPO:
A) tend to increase on a percentage basis as the total proceeds of the IPO increase.
B) are generally between 7 and 9 percent, regardless of the issue size.
C) tend to be less than the direct costs of issuing bonds on a percentage of proceeds basis.
D) exclude the gross spread.
E) can be as low as 5.5 percent and as high as 25 percent of gross proceeds.
38) Which one of the following statements is correct concerning the direct costs of issuing
securities?
A) Domestic bonds are generally more expensive to issue than equity IPOs.
B) The gross spread as a percentage of proceeds is the same for similar-sized IPOs and SEOs.
C) A seasoned offering is always more expensive on a percentage basis than an IPO.
D) There tends to be substantial economies of scale when issuing any type of security.
E) The costs of issuing convertible bonds tend to be less on a percentage basis than the costs of
issuing straight debt.
39) Shares of PLS United have been selling with rights attached. Tomorrow, the stock will sell
independent of these rights. Which one of the following terms applies to tomorrow in relation to
this stock?
A) Pre-issue date
B) Aftermarket date
C) Declaration date
D) Holder-of-record date
E) Ex-rights date
40) The date on which a shareholder is officially listed as the recipient of stock rights is called
the:
A) issue date.
B) offer date.
C) declaration date.
D) holder-of-record date.
E) ex-rights date.
41) A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed
portion of an issue is called a(n) ________ underwriting.
A) standby
B) best efforts
C) firm commitment
D) direct fee
E) oversubscription