FIN 321 Ch 14

Which of the following statements regarding best efforts IPOs is​ FALSE? For smaller​ IPOs, the underwriter commonly accepts the deal on this basis. The underwriter does not guarantee that the stock will be​ sold, but instead tries to sell the stock for the best possible price. If the entire issue does not sell​ out, the underwriter is on the hook. Often these arrangements have an all−or−none ​clause: either all of the shares are sold in the​ IPO, or the deal is called off.

If the entire issue does not sell​ out, the underwriter is on the hook.

Which of the following statements is​ FALSE? In a cash​ offer, a firm offers the new shares only to existing shareholders. Before an​ IPO, the company prepares the final registration statement and final prospectus containing all the details of the​ IPO, including the number of shares offered and the offer price. Before the offer price is​ set, the underwriters work closely with the company to come up with a price range that they believe provides a reasonable valuation for the firm. Once the issue price​ (or offer​ price) is​ set, underwriters may invoke another mechanism that allows them to sell extra shares of more successful offerings—the over−allotment allocation.

In a cash​ offer, a firm offers the new shares only to existing shareholders.

Which of the following is NOT a reason why an IPO is attractive to the managers of a private​ company? It gives access to large amounts of capital in the IPO. It gives access to much larger amounts of capital through the public markets in subsequent offerings. It gives its private equity investors the opportunity to diversify. It reduces the complexity of requirements regulating the​ company's management.

It reduces the complexity of requirements regulating the​ company's management.

Which of the following statements regarding exit strategies is​ FALSE? An important consideration for investors in private companies is their exit​ strategy, or how they will eventually realize the return from their investment. Roughly​ 25% of venture capital exits from 2001−2005 occurred through mergers or acquisitions. An alternative way to provide liquidity to its investors is for the company to become a publicly traded company. Often large corporations purchase successful start−up companies. In such a​ case, the acquiring company purchases the outstanding stock of the private​ company, allowing all investors to cash out.

Roughly​ 25% of venture capital exits from 2001−2005 occurred through mergers or acquisitions.

Which of the following is NOT one of the four characteristics of IPOs that puzzle financial​ economists? The costs of the IPO are very​ high, and it is unclear why firms willingly incur such high costs. On​ average, IPOs appear to be underpriced. The long−run performance of a newly public company​ (three to five years from the date of​ issue) is superior to the overall market return. The number of issues is highly cyclical.

The long−run performance of a newly public company​ (three to five years from the date of​ issue) is superior to the overall market return.

Dusty Corporation is issuing an IPO with an issue price of​ $15 per share that is expected to raise about​ $100 million. Which of the following is likely to be​ true? The cost of the IPO to Dusty will be about​ $7 million. The stock will perform very well in the three to five years after the issue. The price of the stock will be less than​ $15 at the close of the first trading day. None of the above is likely to happen.

The cost of the IPO to Dusty will be about​ $7 million.

Which of the following statements is​ FALSE? The lead underwriter usually makes a market in the stock by matching buyers and sellers and assigns an analyst to cover it. The green shoe option restricts an underwriter to issue more stock at the IPO offer price. Underwriters appear to use the information they acquire during the book−building stage to intentionally underprice the​ IPO, thereby reducing their exposure to losses. In most​ cases, the existing shareholders are subject to a 180−day ​lockup; they cannot sell their shares for 180 days after the IPO. Once the lockup period​ expires, they are free to sell their shares.

The green shoe option restricts an underwriter to issue more stock at the IPO offer price.

Which of the following is NOT a reason why an investor would choose to invest in new and growing firms as a limited partner in a venture capital firm rather than making those investments directly by​ themselves? A venture capital firm generally has a wide range of expertise among its general partners. The investor will have a direct say in how the companies that the venture capital firm funds will be run. The investments of venture capital firm are more diversified than the investments of a single individual. Venture capital firms use their control of the companies they invest in to protect those investments.

The investor will have a direct say in how the companies that the venture capital firm funds will be run.

Which of the following is a notable puzzle in​ IPOs? The number of IPOs is highly seasonal. The number of IPOs is highly cyclical. The number of IPOs is highly underestimated. The number of IPOs is almost the same every year.

The number of IPOs is highly cyclical.

Which of the following statements is​ FALSE? After deciding to go​ public, managers of the company work with an​ underwriter, an investment banking firm that manages the offering and designs its structure. The shares that are sold in the IPO may either be new shares that raise new​ capital, known as a secondary​ offering, or existing shares that are sold by current shareholders​ (as part of their exit​ strategy), known as a primary offering. In an​ IPO, a firm offers a large block of shares for sale to the public for the first time. Many​ IPOs, especially the larger​ offerings, are managed by a group of underwriters.

The shares that are sold in the IPO may either be new shares that raise new​ capital, known as a secondary​ offering, or existing shares that are sold by current shareholders​ (as part of their exit​ strategy), known as a primary offering.

Which of the following statements regarding firm commitment IPOs is​ FALSE? The underwriter guarantees that it will sell all of the stock at the offer price. If the entire issue does not sell​ out, the remaining shares must be sold at a lower price and the underwriter must take the loss. The underwriter purchases the entire issue​ (at an offer​ price) and then resells it at a slightly higher price to interested investors. It is the most common underwriting arrangement.

The underwriter purchases the entire issue​ (at an offer​ price) and then resells it at a slightly higher price to interested investors.

Which of the following statements is NOT true regarding angel​ investors? They are typically arranged as limited partnerships. These investors are frequently friends or acquaintances of the entrepreneur. For many start−​ups, the first round of outside private equity financing is often obtained from them. Because their capital investment is often large relative to the amount of capital already in place at the​ firm, they typically receive a sizable equity share in the business in return for their funds.

They are typically arranged as limited partnerships.

Which of the following statements is NOT true regarding venture​ capitalists? They might invest for strategic objectives in addition to the desire for investment returns. They use their control to protect their​ investments, so they may therefore perform a key nurturing and monitoring role for the firm. Firms offer limited partners a number of advantages over investing directly in start−ups themselves as angel investors. They can provide substantial capital for young companies.

They might invest for strategic objectives in addition to the desire for investment returns.

Nature's Bounty, an organic seed​ company, is seeking to grow from a small company selling seeds in local markets into a company that sells seeds across several states. The funding for this expansion comes from a wealthy individual who uses his considerable inherited wealth to fund a variety of eco−friendly businesses. Which of the following best describes the​ individual's relationship with​ Nature's Bounty? a corporate investor a venture capitalist an institutional investor an angel investor

an angel investor

Which of the following best describes those shares sold when a company goes public which raise new​ capital? preliminary offering tertiary offering primary offering secondary offering

primary offering

As part of the registration​ statement, the preliminary prospectus circulates to investors before the stock is offered. This preliminary prospectus is also called​ a(n) ________. 10−K filing IPO filing red herring blue whale

red herring

How does the total cost of issuing stock for the first time compare to the costs of other​ securities? about the same as the cost for most other securities substantially less than the costs for most other securities substantially larger than the costs for most other securities substantially less than the cost for a few other securities

substantially larger than the costs for most other securities

What is the major reason that underwriters tend to offer stocks in an IPO at a price that is below that which the market will​ pay? to gain from the rise in value of any stocks they hold after the IPO to increase their spread to reduce their exposure to losses from unsold stock to benefit from greenshoe provisions

to reduce their exposure to losses from unsold stock

Which of the following best describes a limited partnership that specializes in raising money to invest in the private equity of young​ firms? institutional investors family investors corporate investors venture capital firms

venture capital firms