Chapter 1 Finance

Parker had a brilliant idea and started a firm. The firm is in its earliest stages of the lifecycle. Parker then decides to raise outside equity capital. Which source of funding will Parker most likely rely on? A Angel investors B Venture capital firms C Private equity firms D Institutional investors E Corporate investors

A

Which of the following outlines the correct sequence of a traditional IPO process? A Formation of underwriters and syndicates, SEC filings, Valuation B Formation of underwriters and syndicates, Valuation, SEC filings C SEC filings, Formation of underwriters and syndicates, Valuation D SEC filings, Valuation, Formation of underwriters and syndicates E Valuation, SEC filings, Formation of underwriters and syndicates

A

Coaching Actuaries is going public using an auction IPO. The following are the bids: Price ($)Price ($) Number of SharesNumber of Shares10.00200,0009.75100,0009.50275,0009.2530,0009.00150,0008.75200,0008.5050,0008.2530,000 Assume Coaching Actuaries would like to sell 1 million shares in its IPO. Let XX be the amount of capital raised and YY be the number of shares sold to those who bid 8.50. Determine XX and YY. A X=$8,500,000;Y=5,000 B X=$8,500,000;Y=45,000 C X=$8,750,000;Y=5,000 D X=$8,750,000;Y=45,000 E X=$10,000,000;Y=50,000

B

Which of the following is/are advantages of going public? I Greater liquidity II Less regulations III Better access to capital A I and II only B I and III only C II and III only D I, II, and III E None of (A), (B), (C), and (D) are correct

B

Which of the following statements regarding SEC filings is/are true? I. The SEC requires companies to prepare a registration statement that provides its financial and other information to investors prior to an IPO. II. The red herring circulates to investors before the stock is offered. III. The red herring contains all the details of the IPO, including the number of shares offered and the offer price.

B I & II

Determine which of the following statements regarding the mechanics of an IPO is TRUE. A When underwriters provide a firm commitment, they often intentionally overprice the IPO. B The over-allotment allocation is also known as red herring. C If the issue is a success and the price rises above the IPO offer price, the underwriters will exercise the greenshoe provision. D During a lock-up period following an IPO, the new shareholders cannot sell their shares. E In an IPO, the service fee charged by underwriters is known as the management fee.

C

To estimate its company's value, Silveroar's investment bankers use data they have collected on comparable companies that have recently gone public: Company Company Price/Earnings Price/Earnings Price/Revenues Price/Revenues Paddlemore 20.0x 1.3x Titanark 19.7x 1.2x Ice Navigation 20.6x 0.7x Rushcorp 23.7x 0.8x Mean 21.0x 1.0x Silveroar had earnings of $16 million and revenues of $350 million during the most recent fiscal year. Assume that Silveroar will have 15 million outstanding shares after the IPO. Estimate the IPO price for Silveroar using the price/earnings ratio and price/revenues ratio. A Between $21.01 to $30.33 per share B Between $21.33 to $30.33 per share C Between $22.40 to $23.33 per share D Between $23.40 to $23.33 per share E Between $25.28 to $30.33 per share

C

Which of the following statements regarding equity financing is/are TRUE? I Angel investors typically invest in convertible notes. II Venture capitalists invest in more mature firms than private equity investors. III Private equity firms use more debt to finance purchases than other investors. A I Only B I and II Only C I and III Only D II and III Only E I, II, and III

C

Which of the following statements regarding the valuation in a traditional IPO process is/are true? I. The only way to set the initial price range for the offer price is by estimating the present value of future cash flows. II. Once an initial price range is set, the underwriters try to determine what the market thinks of the valuation by using a greenshoe provision. III. The underwriters undergo a process called book building where they adjust the share price to customer demand so that the IPO is most likely to succeed. A I only B II only C III only D I, II, and III E None of (A), (B), (C), and (D) are correct

C

You are given: Company DOTA has 10 million shares outstanding, and the company is about to issue 5 million new shares in an IPO. The IPO price has been set at $12 per share. The underwriting spread is 7%. The IPO is a success, and the share price rises to $25 the first day of trading. Let XX be the amount that the company raised from the IPO and YY be the market value of the company after the IPO. A X=$55.8million;Y=$125million B X=$55.8million;Y=$250million C X=$55.8million;Y=$375million D X=$60million;Y=$250million E X=$60million;Y=$375million

C

Christian invested $50,000 to start a company and received 3,000,000 shares of Series A common stock. Since then, the company has been through 3 additional funding rounds of financing: RoundAmount of Money RaisedPrice per Share Series B$2,000,000$2,000,000$1.00$1.00 Series C$1,125,000$1,125,000$1.50$1.50 Series D$1,200,000$1,200,000$4.00$4.00 If the company is now worth $39,325,000$39,325,000, determine the value of the Series C shares now. A Less than $4.4million B At least $4.4million but less than $4.6million C At least $4.6million but less than $4.8million D At least $4.8million but less than $5.0million E At least $5.0million

D

Company XYZ recently raised $4 million with a pre-money valuation of $10 million. If the company is looking to raise another $7 million and avoid a down round, determine the largest fraction of the firm the company can offer investors. A 1/6 B 1/5 C 1/4 D 1/3 E 1/2

D

Determine which of the following statements about equity financing is FALSE. A Convertible notes allow angel investors to convert into equity at a discount when the company finances with equity for the first time. B Venture capital firms are run by their general partners. C General partners in venture capital firms are also called venture capitalists. D The annual management fee that venture capital firms typically charge is known as carried interest. E A leveraged buyout is a transaction in which private equity firms initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereby taking the company private. In most cases, the private equity firms use debt as well as equity to finance the purchase.

D

Determine which of the following statements regarding equity financing for private companies is TRUE. A Angel financing often occurs at such an early stage in the business that it is difficult to assess a value for the firm. Angel investors often circumvent this problem by holding equity. B A venture capital firm is a general partnership that specializes in raising money to invest in the private equity of young firms. C A venture capital firm is run by the limited partners. D Private equity firms often initiate their investment by finding a publicly traded firm and purchasing the outstanding equity, thereby taking the company private in a transaction called a leveraged buyout. E Corporate investors will only invest ​in companies for the financial return that they will earn on their investments.

D

Taner invested $750,000 to start a company and received 1,000,000 shares of Series A common stock. Since then, the company has been through one additional funding round of financing: Round Round Price Per Share Price Per Share Number of Shares Number of Shares Series B $1.25 1,000,000 Taner is considering raising even more capital from a venture capitalist. The venture capitalist has agreed to invest $4 million in exchange for 40% ownership of the company. Let X X be the post-money valuation for the venture capitalist's funding round, and Y Y be the price per share for the venture capitalist's funding round. Determine X X and Y Y . A X=$6million;Y=$2.80 B X=$6million;Y=$3.00 C X=$10million;Y=$2.80 D X=$10million;Y=$3.00 E X=$10million;Y=$3.20

D

Dan invested $100,000 to start a company and received 1,000,000 shares of Series A common stock. Since then, the company has been through three additional funding rounds of financing: Round Round Price Per Share Price Per Share Number of Shares Number of Shares Series B $0.75 500,000 Series C $1.25 300,000 Series D $3.50 200,000 Let X X be the pre-money valuation for the Series D funding round, Y Y be the post-money valuation for the Series D funding round, and Z Z be the percentage of the firm that Dan owns after the last funding round. Determine X X , Y Y , and Z Z . A X=$2.25million;Y=$2.50million;Z=50% B X=$2.25million;Y=$7.00million;Z=50% C X=$2.80million;Y=$3.50million;Z=40% D X=$6.30million;Y=$7.00million;Z=40% E X=$6.30million;Y=$7.00million;Z=50%

E

Determine which of the following statements regarding IPO puzzles is TRUE. A The average IPO seems to be priced too high. B The number of IPOs is solely driven by the demand for capital. C The cost of an IPO is typically lower compared to the cost of other security issues such as bonds. D The fees for IPOs seem to be sensitive to the difference in issue sizes. E In the subsequent 3-5 years after their IPOs, newly listed firms appear to underperform.

E

Determine which of the following statements regarding venture capital financing terms is TRUE. A When a company founder decides to sell equity to outside investors for the first time, it is common practice for private companies to issue common stock to raise capital. B The preferred stock issued by young companies typically pay regular cash dividends to the owner. C If the company runs into financial difficulties, the common stockholders have a senior claim on the assets of the firm relative to any preferred stockholder. D It is uncommon for investors in later rounds to demand seniority over investors in earlier rounds. E If things are not going well and the firm raises new funding at a lower price than in a prior round, it is referred to as a "down round."

E

Over the years, a firm has raised money through the following rounds of financing: Series Series Multiplier for Liquidation Preference Multiplier for Liquidation Preference Number of Shares Number of Shares Price per Share Price per Share A 500,000 $0.50 B 1.5x 300,000 $1.00 C 3x 200,000 $1.75 Each series has a higher seniority over the earlier series. Suppose the firm liquidates after the Series C financing. Determine how the proceeds will be divided if the firm is sold at $2,000,000. A Series A gets $1.05million; Series B gets $0.45million ;Series C gets $0.50million B Series A gets $1.05million Series B gets $0.50million Series C gets $0.45million C Series A gets $0.45million Series B gets $0.50million Series C gets $1.05million D Series A gets $0.50million Series B gets $1.05million Series C gets $0.45million E Series A gets $0.50million Series B gets $0.45million Series C gets $1.05million

E

Which of the following statements is/are true? The shares sold in a primary offering are existing shares that are sold by current shareholders. For smaller IPOs, the underwriter commonly accepts the deal on a firm commitment IPO basis. In a best-efforts IPO, the underwriter guarantees that it will sell all of the stock at the offer price. A I only B II only C III only D II and III only E None of (A), (B), (C), and (D) are correct

E