Chapter 15: Raising Capital
The quiet period ends ________ calendar days after an IPO.
40
T/F: During the aftermarket period, is it typical for members of the underwriting syndicate to sell securities for less than the offering price.
False
Debt that is issued privately accounts for _____ of all debt. a. over half b. 25 percent c. less than half d. nearly 100 percent
a
Financing from wealthy individuals or private investment groups is referred to as ______ capital. a. venture b. hedge c. stealth d. riskless
a
If a cash offer is a public offer, a(n) ________ is usually involved. a. underwriter b. mortgage broker c. venture capitalist d. commercial bank
a
Many startup companies are now choosing to raise funds through a(n) _____ rather than the traditional venture capital methods. a. ICO b. ECO c. PCO d. CCO
a
The period of time before and after an IPO when communication with the public is limited is known as the ______ period. a. quiet b. red herring c. lockup d. no call
a
Which is true regarding the difference between competitive and negotiated underwriting? a. Competitive underwriting is typically cheaper than negotiated underwriting. b. Both types of underwriting typically come at the similar costs. c. Negotiated underwriting is typically cheaper than competitive underwriting.
a
With the ______ method of selecting a syndicate, the issuing firm offers its securities to the highest bidding underwriter. a. competitive offer b. rights offering c. negotiated offer d. Dutch auction underwriting
a
The available evidence indicates that there are pronounced cycles in which of the following? (Select 2) a. The number of IPOs b. The degree of IPO underpricing c. The length of the quiet period d. The length of the lockup period
a, b
Which of the following are true about the venture capital (VC) market? a. Personal contacts are important in gaining access to the VC market. b. Access to venture capital is very limited. c. It is relatively inexpensive to access VC. d. Any good idea will easily attract VC.
a, b
Whether a firm obtains capital by debt or equity financing depends on _____. a. the firm's growth prospects b. the firm's life-cycle stage c. the name of the firm d. the size of the firm
a, b, d
Which of the following are costs of issuing new securities (select all that apply)? a. The gross spread b. The Green Shoe option c. Economies of scale d. Underpricing
a, b, d
A firm can use a shelf registration if ___. a. it is rated investment grade b. it has never violated the 1934 Securities Act c. its aggregate market value is more than $150 million d. it has not defaulted on debt in the past 3 years e. it has an aggregate equity market value of $100 million or more
a, c, d
In a rights offering, when an existing stockholder is notified that they have been given one right for each share of stock owned, they can do which of the following? a. Order all the rights to be sold b. Keep the rights indefinitely c. Do nothing and let the rights expire d. Subscribe to the full number of entitled shares
a, c, d
The period after a new issue is initially sold to the public is called the ___________.
aftermarket
The costs associated with new issues are known as ___. a. unbearable costs b. flotation costs c. sunk costs d. opportunity costs
b
Possible explanations of the drop in a stock's price after an announcement of a new equity issue are that the announcement is an indication that ___. a. the firm has too much equity b. the firm has too much debt c. management believes the firm is overvalued d. there is too much information available
b, c
Private equity firms provide financing for firms that otherwise would have difficulty raising capital such as _____ firms. a. Fortune 500 b. closely held private c. startup d. distressed
b, c, d
In order to issue a security to the public, management's first step is to ___. a. file a registration statement b. prepare the tombstone advertisement c. obtain board approval d. distribute copies of the prospectus
c
In the 1999-2000 time period, companies missed out on $67 billion because of ___. a. corruption b. taxes c. underpricing d. overpricing
c
T/F: The most difficult part of the underwriting process for an initial public offering is determining the correct offer price.
True
A company must file a registration statement with the SEC unless the _____. a. issue is less than $5 million b. issue is greater than $50 million c. loan matures in 1 year d. loan's maturity exceeds nine months
a
It is impossible to underprice a(n) ______. a. initial public offering b. seasoned equity issue c. rights offering
c
Investment firms that act as intermediaries between the company selling securities and the public are called ______________.
underwriters
The ____________ curse describes how average investors in an IPO receive their full allocation of new shares because those in the know avoided the issue.
winner's
T/F: The partial adjustment phenomenon refers to the fact that firms only raise their IPO offer prices partially.
True
Dilution refers to a loss in _________ shareholders' value. a. new b. existing c. any d. potential
b
In the 1999-2000 time period, companies missed out on $_____ because of underpricing. a. 47 billion b. 67 million c. 30 billion d. 67 billion
d
The number of rights needed to buy one share of stock is found by dividing the _________ shares by the ___________ shares.
old; new
Another name for a rights offering is a(n) ______________ subscription.
privileged
T/F: Any decrease in market value when new shares are issued is attributable to the company using the proceeds to invest in negative NPV projects.
True
A right is basically a ___. a. call option b. put option
a
A rights offering grants _____. a. existing shareholders the right to buy new shares b. existing shareholders the right to receive a fixed dividend c. new shareholders the right to buy new shares at old prices d. existing shareholders the right to convert their shares into debt
a
An initial public offering (IPO) is also referred to as a(n) ___. a. unseasoned new issue b. seasoned new issue c. leveraged buyout d. rights offering
a
Most debt is ___. a. privately issued b. issued through the SEC c. issued with stock shares attached d. publicly issued
a
Potential reasons for stock price declines after the announcement of new equity issues include debt usage, issue costs, and _____. a. managerial information b. investor attraction c. media attention d. insurance requirements
a
Since most banks will not loan to startup companies with no assets, most startup ventures need _____. a. OPM b. EVA c. POM
a
An investment bank that underwrites a security issue by buying the securities for less than the offering price and accepting the risk that the securities won't sell is using the ______ method. a. best efforts b. firm commitment c. general cash offering d. competitive offer
b
The available evidence indicates that there are pronounced cycles in the degree of IPO underpricing and the _____. a. length of the quiet period b. number of IPOs c. length of the lockup period
b
The first public equity issue made by a firm is called a(n) ___. a. rights offering b. initial public offering c. red herring d. initial dividend offering
b
The subscription price must be ____________ (below/above) the market price of the stock in a rights offer.
below
The market for venture capital refers to the _____. a. financial market reserved only for new firms b. market for initial public offerings c. private financial marketplace for new or distressed firms d. bond market for new firms
c
To take advantage of a rights offering, a shareholder may order some or all of the rights to be sold, exercise the right, or _____. a. keep the rights indefinitely b. exchange the right at a local bank for cash c. let the right expire
c
An agreement in an underwriting contract that prohibits insider shares from being sold immediately following an IPO is called a _______ period. a. peaceful b. respite c. quiet d. lockup
d
In a direct listing, a firm arranges for its stock to be listed on an exchange _____. a. through a crowdfunding company b. through a Green Shoe company c. with daily assistance from an underwriter d. without marketing and other help from an underwriter
d
In a(n) _______________ listing, a firm arranges for its stock to be listed on an exchange without marketing and other help from an underwriter.
direct
The flotation costs are the costs associated with __________ issues.
new
A stock typically goes ex rights __________ trading day(s) before the holder-of-record date.
one
Access to venture capital is very limited and it is estimated that only ___________ company is funded for every 100 proposals received.
one
The large payoff for a venture capital firm typically comes when the company is either sold to another company or goes __________.
public
A firm commitment offer is one in which the underwriter ____________ the entire offer.
purchases
The type of underwriting that requires the underwriter to purchase unsubscribed shares is known as ____________ underwriting.
standby
A standby underwriting arrangement in conjunction with a rights offering gives the ___. a. firm an alternative avenue of sale to ensure the success of the rights offering b. company a way to cancel the offering c. stockholders the right to buy unsold shares d. firm an alternate investment banker if there is a conflict between the issuer and the agent
a
When average investors in an IPO receive their full allocation of new shares because the smart money avoided the issue, they fall victim to ____. a. the Green Shoe effect b. the efficient market theory c. the winner's curse d. the law of diminishing returns
c
A venture capitalist will most likely experience a big payoff with a successful startup company when the start-up _____. a. files for bankruptcy protection b. goes public c. pays back the venture capitalist in full d. sells its first product or service
b
The main difference between an ordinary call option and a right is that _____. a. calls closely resemble warrants b. rights are issued by the firm c. calls are issued by the firm
b
______ helps new shareholders earn a higher return on the shares they buy. a. The best efforts method b. Underpricing c. The Green Shoe provision d. The Dutch auction method
b
_______ value dilution is more important than ______ value dilution. a. Book; market b. Market; book c. Historic; accounting d. Accounting; market
b
Which of the following are important considerations when choosing between venture capitalists? a. SEC affiliation b. Financial strength c. Exit strategy d. Tombstones e. Style
b, c, e
A Green Shoe provision is used to ___. a. provide an incentive to banks to underwrite a risky issue b. give an incentive to investors to purchase a risky issue c. cover excess demand and oversubscriptions d. dispose of excess shares of stock
c
A shelf registration allows firms to issue new equity securities using the ______ method. a. free throw b. three-point c. dribble d. traveling
c
Crowdfunding typically uses which of the following to raise small amounts of capital from a large number of people? a. Investment banks b. Commercial banks c. Internet
c
Dilution of the ownership of existing shareholders can be ______ with a rights offering. a. accomplished b. defended c. avoided d. maintained
c
How a firm raises capital depends on the size of the firm, its growth prospects, and its _____. a. inflation rate b. employee skill level c. life-cycle stage
c
The funds to be raised divided by the subscription price is the equation for _____. a. dividend income valuation b. prospectus determination c. the number of new shares
c
The lockup period in an underwriting contract _____. a. prohibits communication with the public b. expires after one business day c. prohibits insider shares from being sold immediately following an IPO d. is the time of first issuance of the red herring
c
The _____ phenomenon refers to the fact that most firms may raise their IPO offer prices, but they typically do not move the price high enough. a. cheap selling b. red herring c. tombstone d. partial adjustment
d
The initial sale of a token on a digital currency platform is called _____. a. a coin-commitment offering b. an interest-only offering c. a penny launch d. an initial coin offering
d
Which new issue cost results from a stock initially being sold for less than its true value? a. Hubris pricing b. The Green Shoe option c. Inherent discounting d. Underpricing
d
A rights offering provides the main benefit of avoiding ___________, or loss in value, of ownership for existing shareholders.
dilution