chap 15 fin303

The three basic costs associated with issuing stock in an IPO are A) price premium, out-of-pocket expenses, and underpricing. B) underwriting spread, out-of-pocket expenses, and underpricing. C) underwriting spread, price premium, and underpricing. D) None of the above.

b

Why is the total cost of bringing a general cash offer to the market lower than issuing an IPO? a. They do not include a large underpricing b. Underwriting spreads are smaller c. There is less risk involved with a general cash offer than an IPO d. all of the above

d

Which one of the following statements is NOT true? A) Shelf registration gives firms less flexibility in bringing securities to market. B) During a two-year window, the firm can take the securities "off the shelf" and sell them as needed. C) Shelf registration allows firms to periodically sell small amounts of securities. D) A shelf registration statement can cover multiple securities, and there is no penalty if authorized securities are not issued.

a

Advantages of going public include all EXCEPT A) Larger amount of capital can be raised this way than the amount that can be raised through private sources. B) Publicly traded firms find it harder to attract top management talent. C) Going public can enable an entrepreneur to fund a growing business without giving up control. D) Additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost.

b

Which ONE of the following statements is true? A) After the IPO, there is a less active secondary market for the firm's shares. B) Only smaller amounts of capital can be raised through an IPO than the amount that can be raised through private sources. C) Publicly traded firms find it easier to attract top management talent. D) Going public can enable an entrepreneur to fund a growing business but not without giving up control.

c

Provisions that are part of venture capital agreements include A) timing of exit, number of board positions after exit, and what price is acceptable. B) timing of exit, the method of exit, and what price is acceptable. C) the method of exit, number of board positions after exit, and what price is acceptable. D) None of the above.

b

Disadvantages of going public include all EXCEPT A) Managers' tendency to focus on long-term profits. B) The high cost of the IPO itself. C) The costs of complying with ongoing SEC disclosure requirements. D) The transparency that results from this compliance can be costly for some firms.

a

Which ONE of the following statements is true? A) The venture capital industry as we know it today emerged in the late 1960s with the formation of the first venture capital limited partnerships. B) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices. C) A significant number of venture capital firms focus on high-technology investments. D) All of the above are true statements.

d

Which one of the following statements is NOT true? A) In a competitive sale, the firm specifies the type and amount of securities it wants to sell. B) In a negotiated sale, the issuer selects the underwriter at the beginning of the origination process. C) In a general cash offer, management must decide whether to sell the securities on a competitive or a negotiated basis. D) For equity securities, competitive sales generally provide the lowest-cost method of sale.

d

With a best-efforts underwriting A) the investment banking firm makes no guarantee to sell the securities at a particular price. B) the investment banker does not bear the price risk associated with underwriting the issue. C) compensation is based on the number of shares sold. D) All of the above.

d

Bootstrapping is the process by which A) many entrepreneurs raise "seed" money and obtain other resources necessary to start their businesses. B) the entrepreneur often fleshes out his or her ideas and makes them operational. C) most businesses are started by an entrepreneur. D) none of the above.

a

Which ONE of the following statements is true? A) A typical venture capital fund may generate annual returns of 15 to 25 percent on the money that it invests, compared with an average annual return for the S&P 500 of almost 12 percent. B) A typical venture capital fund may generate annual returns of 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 20 percent. C) A typical venture capital fund may generate annual returns of 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 25 percent. D) None of the above

a

Which one of the following statements is NOT true? A) In a best-efforts offering, the underwriters will suffer a financial loss if the offer price is set too high. B) In a best-efforts agreement, the issuing firm will lose if the offer price is set too high. C) If the underpricing is significant, the investment banking firm will suffer a loss of reputation for failing to price the new issue correctly and raising less money for its client than it could have. D) Underpricing is defined as offering new securities for sale at a price below their true value.

a

Which one of the following statements is NOT true? A) PIPE transactions are registered with the SEC. B) PIPE transactions are not registered with the SEC. C) In a PIPE transaction, investors purchase securities (equity or debt) directly from a publicly traded company in a private placement. D) The securities are virtually always sold to the investors at a discount to the price at which they would sell in the public markets.

a

Which ONE of the following statements is true? A) Under federal securities law, they can be resold to investors in the public markets immediately even if they are not registered. B) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC, usually within 90 days of the PIPE closing. C) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC after 90 days of the PIPE closing. D) PIPE transactions involving a healthy firm can also be executed without the use of an investment bank but result in a cost increase of 7 to 8 percent of the proceeds.

b

Which one of the following statements is NOT true? A) Approximately $23 billion was invested in venture capital funds in 2010. B) The venture capital industry as we know it today emerged in the late 1990s. C) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices. D) A significant number of venture capital firms focus on high-technology investments.

b

Which one of the following statements is NOT true? A) For many smaller firms and firms of lower credit standing that have limited access, or no access, to the public markets, the cheapest source of external funding is often the private markets. B) Bootstrapping and venture capital financing are not part of the private market. C) Bootstrapping and venture capital financing are part of the private market. D) Many private companies that are owned by entrepreneurs, families, or family foundations and are sizable companies of high credit quality prefer to sell their securities in the private markets.

b

Which one of the following statements is NOT true? A) Private placement occurs when a firm sells unregistered securities directly to investors such as insurance companies, commercial banks, or wealthy individuals. B) All corporate debt is sold through the private placement market. C) About half of all corporate debt is sold through the private placement market. D) Investment banks and money center banks often assist firms with private placements.

b

Which one of the following statements is NOT true? A) Venture capitalists often require an entrepreneur to make a substantial personal investment in the business. B) Syndication occurs when the originating venture capitalist buys off other venture capitalists involved in the venture. C) Another factor that reduces risk is the venture capitalist's in-depth knowledge of the industry and technology. D) The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the firm's financial performance.

b

All of the following about a firm-commitment underwriting is true EXCEPT: A) The investment banker guarantees the issuer a fixed amount of money from the stock sale. B) The investment banker actually buys the stock from the firm. C) The issuer bears the risk that the resale price might be lower than the price the underwriter pays. D) The underwriter bears the risk that the resale price might be lower than the price the underwriter pays.

c

Benefits from shelf registration include all EXCEPT: A) Greater flexibility in bringing securities to market. B) Shelf registration allows firms to periodically sell small amounts of securities and raise capital as needed. C) A shelf registration statement can cover multiple securities, but there is a penalty if authorized securities are not issued. D) Costs associated with selling the securities are reduced because only a single registration statement is required.

c

Data from the marketplace show that the shares sold in an IPO are typically A) priced between 2 and 5 percent below the price at which they close at the end of first day of trading. B) priced between 10 and 15 percent above the price at which they close at the end of first day of trading. C) priced between 10 and 15 percent below the price at which they close at the end of first day of trading. D) priced between 2 and 5 percent above the price at which they close at the end of first day of trading.

c

Tactics that venture capitalists use to reduce the risk of their investment include A) funding the ventures in stages, requiring entrepreneurs to make no personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize. D) None of the above.

c

The initial seed money comes from public investors. investment banks. the entrepreneur or other founders. commercial banks.

c

The three principal ways in which venture capital firms exit venture-backed companies are A) selling to a strategic buyer, buying out the founder, and offering stock to the public. B) selling to a strategic buyer, selling to a financial buyer, and buying out the founder. C) selling to a strategic buyer, selling to a financial buyer, and offering stock to the public. D) None of the above.

c

Which one of the following statements is NOT true? A) Investment bankers provide three basic services when bringing securities to market—origination, underwriting, and distribution. B) During the origination phase, the investment banker helps the firm determine whether it is ready for an IPO. C) Origination is the risk-bearing part of investment banking. D) Origination includes giving the firm financial advice and getting the issue ready to sell.

c

Which one of the following statements is NOT true? A) Private equity firms pool money from wealthy investors, pension funds, insurance companies, and other sources to make investments. B) Private equity firms invest in more mature companies. C) Private equity firms invest in new companies. D) Private equity investors focus on firms that have stable cash flows because they use a lot of debt to finance their acquisitions.

c

33. Which one of the following statements is NOT true? A) The process by which many entrepreneurs raise "seed" money and obtain other resources necessary to start their businesses is often called bootstrapping. B) Most businesses are started by an entrepreneur who has a vision for a new business or product and a passionate belief in the concept's viability. C) The initial "seed" money usually comes from the entrepreneur or other founders. D) The seed money is spent on developing an initial public offering.

d

Advantages of private placements include: A) Cost of funds may be lower. B) Private lenders are more willing to negotiate changes to a bond contract. C) The speed of private placement deals and flexibility in issue size. D) All of the above.

d

Basic services investment bankers provide when bringing securities to market include A) Origination B) Underwriting C) distribution. D) All of the above.

d

Private equity firms improve the performance of firms in which they invest by: A) making sure that the firms have the best possible management teams. B) closely monitoring each firm's performance and providing advice and counsel to the firm's management team. C) facilitating mergers and acquisitions that help improve the competitive positions of the companies in which they invest. D) All of the above.

d