FIN 300 (from hw)

A firm's cost of debt can be obtained by

1. Checking yields on publicly traded bonds 2. Talking to investment bankers

Why are interest rates higher in the private placement market?

1. Companies are willing to pay higher rates because they don't require SEC registration 2. The costs of issuance are lower 3. Private Placements are easier to renogotiate

Potential reasons for stock price declines after an announcement of new equity issues include

1. Debt usage 2. Issue costs 3. Managerial information

What are costs of issuing securities?

1. Gross spread 2. Other Direct Expenses 3. Indirect Expenses 4. Abnormal returns 5. Underpricing 6. Green Shoe Option

The growth rate of dividends can be found using:

1. Security analysts' forecast 2. Historical dividend growth rates

What are possible explanations of the drop in a stock's price after an announcement of a new equity issue?

1. The firm has too much debt 2. Management believes the firm is overvalued 3. There is not enough information publicly available

Whether a firm obtains capital by debt or equity financing depends on

1. The firm's life-cycle stage 2. The firm's growth prospects 3. The size of the firm

When does the large payoff for a venture capital firm usually come?

1. When the company goes public 2. The company is sold to another company

It is common for venture capitalists to receive at least _____ percent of a start-ups company's equity in exchange for the venture capital

40

What is a seasoned equity offering?

A new equity issue of securities by a firm that has previously issued securities to the public

Why can the cost of debt be observed?

Because it is the interest rate the firm must pay on new loans

When computing taxable income, a company (can/cannot) deduct interest paid on debt

Can

WACC is used to discount _____________

Cash flows

Is it easier to estimate cost of debt or cost of equity?

Cost of debt

What is the most difficult part of the underwriting process for an IPO?

Determining the correct offer price (If the price is too high, the offer won't sell and if the price is too low, existing shareholders bear the cost)

True or False: During the aftermarket period, it is typical for members of the underwriting syndicate to sell securities for less than the offering price

False

True or False: Underpricing benefits pre-issue shareholders

False

True or False: Dividends to common stockholders are fixed

False. They are not fixed

A syndicate can best be defined as

Group of underwriters sharing the risk of selling a new issue of securities.`

Many startup companies are now choosing to raise funds through _____ rather than the traditional venture capital methods.

ICO

What is the winner's curse?

It is the idea that the winners in certain auctions may have overestimated the value of the good, thus ending up worse than the losers

What is the JOBS Act?

Law intended to encourage funding of the US small business by easing various securities regulations

For equity, book values are almost always ______ than market values

Lower

Direct private long-term financing typically has ____ restrictive covenants than public issues of debt

More

What are rights offerings?

New issues sold to existing shareholders

Are dividends tax detuctible?

No

Are dividends to common stockholders guranteed?

No

Should projects always be discounted at the firm's overall cost of capital?

No

When does underpricing occur?

Occurs with smaller issues in order to attract investors

Access to venture capital is very limited and it is estimated that only _____ company is funded for every 100 proposals received.

One

In the world of start-up companies, OPM stands for

Other People's Money

Dividends to _______ stockholders are fixed

Preferred

Most debt is ______ issued

Privately (More than 50%)

What is the Sherman Antitrust Act?

Prohibits certain business activities that federal government regulators deem to be anti-competitive, and requires the government to investigate

Fatou currently owns 2,500 shares of Mariner, Incorporated. She has just been offered the opportunity to purchase additional shares in the company, prior to the shares being offered to the general public. What is this type of an offer called?

Rights offer

Which act sets for the federal regulation for all new interstate securities issues?

The Securities Act of 1933

What is the Securities Act of 1934?

The basis for regulating outstanding securities

The discount rate for the firm's projects equals _____ _______ ___ _______ for the firm as a whole when all projects have the same risk as the current firm

The cost of capital

A company must file a registration statement with the SEC unless

The issue is less than $5 million or it matures within 9 months

What is the competitive offer method of selecting a syndicate?

The issuing firm offers its securities to the highest bidding underwriter

When is the aftermarket?

The period after a new issue is initially sold to the public

Are interest rates higher in the private placement market or in the public debt market?

The private placement market

If the project's beta is less than the firm's overall beta what will happen?

The project's cash flows will be discounted too severely and it will most likely be rejected when it should be accepted

True or False: All IPOs are cash offers

True

True or False: Under US law, a corporation's interest payments are deductible for tax purposes

True

What is used as a kind of insurance for the investment banks?

Underpricing

Cheung Software has decided to go public and has hired an investment firm to handle the offering. The investment firm's role is to be a(n):

Underwriter

Investment firms that act as intermediaries between the company and the public are called _________

Underwriters

An IPO is also referred to as an

Unseasoned New Issue

Financing from wealthy individuals or private investment groups is referred to as

Venture Capital

Is the MV cost of debt similar to the book value cost of debt?

Yes

Is the coupon interest paid on bonds tax deductible?

Yes