Principles of Finance - Chapter 15 and Smartbook

A new equity issue by a publicly traded firm is known as a(n) ___.

seasoned equity offering

(Select all that apply) 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?

Do nothing and let the rights expire Subscribe to the full number of entitled shares Order all the rights to be sold

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

True or false: The most difficult part of the underwriting process for an initial public offering is determining the correct offer price.

True

(Select all that apply) Which of the following are true about the venture capital (VC) market?

-Personal contacts are important in gaining access to the VC market. -Access to venture capital is very limited.

(Select all that apply) Which of the following are explanations of underpricing?

-Underpricing is a kind of insurance for the investment banks. -Underpricing occurs with smaller issues in order to attract investors.

(Select all that apply) A firm can use a shelf registration if ___.

-it is rated investment grade -it has not defaulted on debt in the past 3 years -its aggregate market value is more than $150 million

A stock typically goes ex rights _____ trading day(s) before the holder-of-record date.

1

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

1 (or one)

The quiet period ends _____ calendar days after an IPO.

40

In the 1999-2000 time period, companies missed out on $_____ because of underpricing.

67 billion

Which is true regarding the difference between competitive and negotiated underwriting?

Competitive underwriting is typically cheaper than negotiated underwriting.

With the ______ method of issuing securities, the offering price is determined by submitted bids.

Dutch auction

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

False

A contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price is called a _____ provision.

Green Shoe

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

ICO

Crowdfunding typically uses which of the following to raise small amounts of capital from a large number of people?

Internet

_______ value dilution is more important than ______ value dilution.

Market; Book

Since most banks will not loan to startup companies with no assets, most startup ventures need _____.

OPM

When is a new issue usually priced?

On the effective date of the registration statement.

Early-stage venture capital funding is generally classified as _____ A or B.

Series

Traditional negotiated cash offers include all but which of the following?

Shelf cash offers

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

The Securities Act of 1933

Which act regulates securities already outstanding?

The Securities Act of 1934

(Select all that apply) Which of the following are costs of issuing new securities?

The gross spread Underpricing The Green Shoe option

True or false: 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

True or false: Interest rates are higher in the private placement market than in the public debt market.

True

True or false: The partial adjustment phenomenon refers to the fact that firms only raise their IPO offer prices partially.

True

Which new issue cost results from a stock initially being sold for less than its true value?

Underpricing

______ helps new shareholders earn a higher return on the shares they buy.

Underpricing

One reason for underpricing is that it serves as _____ for investment banks.

a type of insurance

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

aftermarket

The initial sale of a token on a digital currency platform is called _____.

an initial coin offering

A firm uses a tombstone advertisement to ___.

announce a new security issue

Dilution of the ownership of existing shareholders can be ______ with a rights offering.

avoided

The subscription price must be _____ (below/above) the market price of the stock in a rights offer.

below

Firm commitment underwriting is the type of underwriting in which the underwriter _____ the entire issue.

buys (or buy, purchases, assumes)

Examples of nontraditional cash offers include ___.

competitive firm cash offers and shelf cash offers

A Green Shoe provision is used to ___.

cover excess demand and oversubscriptions

The practice of raising small amounts of capital from a large number of people is called _____.

crowdfunding

A rights offering provides the main benefit of avoiding _____ , or loss in value, of ownership for existing shareholders.

dilution

(Select all that apply) Private equity firms provide financing for firms that otherwise would have difficulty raising capital such as _____ firms.

distressed closely held private startup

A shelf registration allows firms to issue new equity securities using the ______ method.

dribble

On the _____ date of the registration statement, a price is determined and selling efforts can fully begin.

effective

Dilution refers to a loss in _________ shareholders' value.

existing

A rights offering grants _____.

existing shareholders the right to buy new shares

A standby underwriting arrangement in conjunction with a rights offering gives the ___.

firm an alternative avenue of sale to ensure the success of the rights offering

The costs associated with new issues are known as ___.

flotation costs

A venture capitalist will most likely experience a big payoff with a successful startup company when the start-up _____.

goes public

According to a study by Lee, Lockhead, Ritter and Zhao, direct expenses across all offerings are ______ for equity offers than for debt offers.

greater

The first public equity issue made by a firm is called a(n) ___.

initial public offering

A company must file a registration statement with the SEC unless the _____.

issue is less than $5 million

To take advantage of a rights offering, a shareholder may order some or all of the rights to be sold, exercise the right, or _____.

let the rights expire

An agreement in an underwriting contract that prohibits insider shares from being sold immediately following an IPO is called a _______ period.

lockup

Dilution is defined as a(n) ____.

loss in existing shareholders' value

Potential reasons for stock price declines after the announcement of new equity issues include debt usage, issue costs, and _____.

managerial information

Later stages of venture capital funding are referred to as _____-level financing because it is the level just above the ground floor.

mezzanine

When compared with the total direct expenses of an equity issue, total direct expenses for debt issuance are ______.

much lower

The flotation costs are the costs associated with _____ issues

new

The available evidence indicates that there are pronounced cycles in the degree of IPO underpricing and the _____.

number of IPOs

In order to issue a security to the public, management's first step is to ___.

obtain board approval

The number of rights needed to buy one share of stock is found by dividing the _____ shares by the _____ shares.

old; new

In the world of start-up ventures, OPM stands for ____.

other people's money

Debt that is issued privately accounts for _____ of all debt.

over half

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.

partial adjustment

Most debt is ___.

privately issued

Another name for a rights offering is a(n) _____ subscription.

privileged

The lockup period in an underwriting contract _____.

prohibits insider shares from being sold immediately following an IPO

The period of time before and after an IPO when communication with the public is limited is known as the ______ period.

quiet

The preliminary prospectus, which contains much of the information found in the registration statement and is distributed to potential investors, is called a ___.

red herring

The SEC requires a _____ statement which is a document that discloses all material information concerning the corporate making a public offering.

registration

A document required by the SEC for new public issues that contains the issuing firm's financial information, financial history, and details of the existing business is known as the ___.

registration statement

Cash offers are offered to the general public and _____ offers are offered first to existing shareholders.

rights

The main difference between an ordinary call option and a right is that _____.

rights are issued by the firm

It is impossible to underprice a(n) ______.

rights offering

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

seasoned

The very early stage of venture capital financing is referred to as the "_____ money," or ground floor, stage.

seed

The type of underwriting that requires the underwriter to purchase unsubscribed shares is known as _____ underwriting. (Enter one word in the blank.)

standby

(Select all that apply) 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 ___.

the firm has too much debt management believes the firm is overvalued

(Select all that apply) Whether a firm obtains capital by debt or equity financing depends on _____.

the firm's life-cycle stage the firm's growth prospects the size of the firm

The funds to be raised divided by the subscription price is the equation for _____.

the number of new shares

When average investors in an IPO receive their full allocation of new shares because the smart money avoided the issue, they fall victim to ____.

the winner's curse

An advertisement used after the registration waiting period to announce a new securities issue is called a ___.

tombstone

In the 1999-2000 time period, companies missed out on $67 billion because of ___.

underpricing

If a cash offer is a public offer, a(n) ________ is usually involved.

underwriter

Investment firms that act as intermediaries between the company selling securities and the public are called _____.

underwriters

A Dutch auction underwriting is also known as a(n) ___.

uniform price auction

An initial public offering (IPO) is also referred to as a(n) ___.

unseasoned new issue

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

venture

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

In a direct listing, a firm arranges for its stock to be listed on an exchange ______.

without marketing and other help from an underwriter

(Select all that apply) The available evidence indicates that there are pronounced cycles in which of the following?

The degree of IPO underpricing The Number of IPOs

In the ______ method of issuing securities, the underwriting syndicate avoids the risk of unsold securities.

best efforts

Under the ______ method, the underwriter sells as many shares as possible but may or may not sell all of the new shares.

best efforts

A right is basically a ___.

call option

The difference between general cash offers and rights offers is that ___.

cash offers are offered to the general public and rights offers are offered first to existing shareholders

With the ______ method of selecting a syndicate, the issuing firm offers its securities to the highest bidding underwriter.

competitive offer

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.

firm commitment

How a firm raises capital depends on the size of the firm, its growth prospects, and its _____.

life-cycle stage

Direct private long-term financing typically has _____ (less/more) restrictive covenants than public issues of debt.

more