Finance ch 15

True or false Underpricing in an IPO is a problem only when the original investors are selling part of their owners

False. Even when not divesting their ownership, original investors suffer when shares are sold below true value. When underpricing occurs, it represents a wealth transfer from existing investors to new investors. It also reduces the capital raised by the company, harming its future growth opportunities.

Private placement

Sales of securities to a limited number of investors without a public offering.

Rights issue

The company offers to sell stock to existing shareholders

Firm commitment

The underwriter agrees to buy the issue from the company at a fixed price.

Complete the passage using the following terms (limited partners, venture capital, private, underwriters, general partners, private equity, corporate ventures, partnership, private, angel investors) Equity capital in young businesses is known as __________, and it is provided by specialist firms, wealthy individuals (known as _______), and by large technology companies that act as ______________. Venture capital funds are organized as __________. The management companies are the ______________, and pension funds and other investors are the ________. Venture capital partnerships are often lumped together with similar partnerships that buy whole companies and take them ________. The general term for these firms is ____________ companies.

Equity capital in young businesses is known as VENTURE CAPITAL, and it is provided by specialist firms, wealthy individuals (known as ANGEL INVESTORS), and by large technology companies that act as CORPORATE VENTURES. Venture capital funds are organized as LIMITED PARTNERSHIP. The management companies are the GENERAL PARTNERS, and pension funds and other investors are the LIMITED PARTNERS. Venture capital partnerships are often lumped together with similar partnerships that buy whole companies and take them PRIVATE. The general term for these firms is PRIVATE EQUITY companies.

True or false Venture capital companies know that managers are more likely to work hard if they can be assured of a good steady salary

False. Venture capitalists believe managers need incentives and that a salary is insufficient motivation

True or false Venture capitalist typically provide first stage financing sufficient to cover all development expenses. Second stage financing is provided by stock issued in a IPO

False. Venture capitalists will usually invest a portion of the operating costs and require managers to also invest. When second stage financing is required, they usually offer to provide this, under the condition they receive additional equity ownership. Generally, even by the second stage a company is not ready for an IPO- selling to the public through the stock exchanges requires that the company meet certain minimum capital requirements, revenue levels, etc, which are not usually true of early stage companies.

True or false Venture capital companies are generally passive investors and are happy to let the companies in which they are invested get on with the job

False. While venture capitalists generally do not manage the company, they remain active in monitoring and advising the company.

True or false Some young companies grow with the aid of equity investment provided by wealthy individuals known as angel investors

True. Angel investors are highly speculative investors, who specialize in funding companies in the earliest stages of their existence

True or false stock price generally falls when the company announces a new issue of shares. This is attributable to the information released by the decision to issue

True. The adage "buy low, sell high" rings true. The signal sent to the market is that the share price must be too high. Thus, the perceived reason for the sale is an overvalued security. If the company declines to sell shares, the market perceives the price to be too low.

True or false Venture capital companies generally advance the money in stages

True. You will only get enough to reach the next key milestone or checkpoint. That gives the venture capitalist the opportunity to evaluate progress and decide whether investing in the next stage is worthwhile.

venture capital

money provided by large investors to finance new products and new businesses that have a good chance to be very profitable