Chapter 20: Raising Capital

Which one of these applies to the after market period? A. The red herrings are distributed. B. Underwriters generally only sell shares at or above the offer price. C. Book building is conducted. D. The lead underwriter determines the offer price. E. Underwriting negotiations are completed.

B. Underwriters generally only sell shares at or above the offer price.

In a best efforts offering the investment bank makes its money primarily by earning: A. the spread between the buying and offering price. B. a commission on each share sold. C. a negotiated percentage of the offering price. D. a flat fee charged for services rendered. E. the difference between the offer price and the warrant price.

B. a commission on each share sold.

Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for this financing, venture capitalists generally receive: A. the personal financial guarantees of all current owners. B. an equity position and board of director positions. C. the right to set the offer price in any future initial public offering. D. the protection provided by a court-appointed trustee. E. a government-funded guarantee of repayment for all funds provided.

B. an equity position and board of director positions.

The first public equity issue offered by a company is commonly referred to as a(n): A. initial private offering. B. initial public offering. C. secondary offering. D. seasoned new issue. E. registered issue.

B. initial public offering.

Dilution commonly refers to the: A. increase in stock value due to wider ownership of stock. B. loss in existing shareholder's value. C. loss in new shareholder's equity. D. splitting of a single share of stock into multiple shares. E. issuance of debt in order to repurchase shares.

B. loss in existing shareholder's value.

The market for venture capital refers to the: A. private financial marketplace for servicing small, young firms. B. corporate bond market. C. market for selling unsubscribed rights. D. market for selling seasoned equity securities. E. market for all private issues.

A. private financial marketplace for servicing small, young firms.

In a typical deal, the venture capitalist will receive at least ______ percent of the equity of financed firm. A. 5 B. 20 C. 40 D. 50 E. 75

C. 40

The green shoe provision is used to: A. cover oversubscriptions. B. address unsold shares. C. provide additional reward to investment bankers for a risky issue. D. provide funding to investment bankers for unsold shares. E. reduce the number of shareholders.

A. cover oversubscriptions.

Empirical evidence suggests that upon announcement of a seasoned equity issue, current stock prices generally: A. decrease perhaps because the issue reflects management's view the stock is overvalued. B. remain fairly constant since an efficient market anticipates a new equity issue. C. decrease perhaps because the issues are associated with positive NPV projects. D. increase because the market supply is always less than demand. E. increase because underwriters exercise their green shoe option.

A. decrease perhaps because the issue reflects management's view the stock is overvalued.

Assuming everything else is constant, when a stock goes ex-rights the stock price should: A. decrease since the stockholder is losing an option. B. increase since the corporation no longer has the right to force the stockholder to convert. C. remain the same since an efficient market would anticipate this change. D. remain constant as shareholder value is unaffected by a rights offering. E. decrease by the amount of the tax applicable to the right.

A. decrease since the stockholder is losing an option.

Direct expenses of an IPO include the: A. gross spread plus other direct expenses. B. gross spread and underpricing. C. abnormal returns and underpricing. D. Green Shoe option and the abnormal returns. E. gross spread, Green Shoe option, and other direct expenses.

A. gross spread plus other direct expenses.

Venture capitalists will frequently: A. hold voting preferred stock which grants them priorities over common stockholders in the event of a sale or liquidation. B. hold voting common stock which grants them priorities over preferred stockholders in the event of a sale or liquidation. C. hold nonvoting preferred stock. D. hold nonvoting common stock. E. not hold any significant amount of stock.

A. hold voting preferred stock which grants them priorities over common stockholders in the event of a sale or liquidation.

Venture capitalists are: A. intermediaries that raise funds from outside investors. B. investors who take a hands-off approach to investment management. C. generally interested in primarily long-term investments. D. easily contacted and tend to assist with most requests received. E. generally granted a maximum of 25 percent of a firm's equity.

A. intermediaries that raise funds from outside investors.

Corporations primarily use the shelf registration method of security sales because: A. preregistered securities can be quickly brought to market. B. SEC registration is avoided. C. their stock is rated as junk. D. they are issuing securities to the general public for the first time. E. they are doing a private offering.

A. preregistered securities can be quickly brought to market.

An equity issue sold to the firm's existing stockholders is called a: A. rights offer. B. general cash offer. C. private placement. D. restricted placement. E. direct placement.

A. rights offer.

To determine the value of a rights offering, the stockholder needs to know the following two pieces of information in addition to the current stock price, the: A. subscription price and the number of rights needed to acquire a new share. B. amount of new equity to be raised and the number of rights needed to acquire a new share. C. amount of new equity to be raised and the standby fee. D. detachment date and the subscription price. E. the number of rights needed to acquire a new share and the number of shares currently owned.

A. subscription price and the number of rights needed to acquire a new share.

Green Shoe options generally last ____ days and benefit ____. A. 30; the issuer B. 30; the underwriting syndicate C. 60 days; the underwriting syndicate D. 60 days; the issuer E. 90 days; both the issuer and the underwriting syndicate

B. 30; the underwriting syndicate

The price at which offered securities are sold in a Dutch auction underwriting is determined by the: A. lead underwriter. B. bidders. C. SEC. D. issuing firm. E. venture capitalists.

B. bidders.

An equity issue up to $1 million offered in small increments to a large number of people via the Internet is most commonly referred to as: A. an initial public offering. B. crowdfunding. C. a web-based issue. D. a private placement. E. a syndicated issue.

B. crowdfunding.

Which type(s) of dilution are relevant to a firm's shareholders when the firm's shares are issued with rights? A. dilution of percentage ownership B. dilution of stock price per share C. dilution of both book value per share and earnings per share D. dilution of both percentage ownership and book value per share E. dilution of both stock price per share and earnings per share

B. dilution of stock price per share

Under the _______ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _______ method, the underwriter does not purchase the shares but merely acts as an agent. A. best efforts; firm commitment B. firm commitment; best efforts C. negotiated offer; competitive offer D. competitive offer; negotiated offer E. seasoned; unseasoned

B. firm commitment; best efforts

Dream Makers has expended almost all of its start-up funds and is seeking venture capital to begin manufacturing. Which type of financing is it seeking? A. mezzanine financing B. first-round financing C. bridge financing D. seed money financing E. second-round financing

B. first-round financing

The first equity issue offered to the general public by a firm is a: A. rights offer. B. general cash offer. C. restricted placement. D. direct placement. E. seasoned offering.

B. general cash offer.

Which one of these characteristics is least applicable to term loans? A. avoidance of SEC registration B. maturity in excess of five years C. direct business loan arrangement D. more restrictive covenants than publicly issued debt E. lower distribution costs than a public issue

B. maturity in excess of five years

Potential investors primarily obtain detailed information regarding a new issue by reading the: A. SEC's comment letter. B. red herring. C. letter of commitment. D. registration statement. E. rights offering.

B. red herring.

Which type of offering will generally incur the lowest direct issue costs as a percentage of gross proceeds? A. small-sized IPO B. straight bonds C. SEO D. large-sized IPO E. convertible bonds

B. straight bonds

Oversubscription is most commonly the result of: A. unsuccessful book building. B. under-pricing. C. exercising the Green Shoe option. D. a negotiated, rather than a competitive underwriting. E. unexercised rights.

B. under-pricing.

Which one of these statements related to debt financing is correct? A. Debt issues of any type, unlike equity issues, do not require SEC registration. B. Commercial banks specialize more in private placements than in term loans. C. Private placements generally have longer maturities than term loans. D. The majority of debt issues are public issues. E. Public debt issues generally have more restrictive covenants than private issues.

C. Private placements generally have longer maturities than term loans.

Which one of the following statements is true concerning a rights offering? A. The subscription price is generally greater than the market price. B. The subscription price must be greater than the ex-rights price. C. The subscription price is generally less than the market price. D. The ex-rights price is generally higher than the rights-attached price. E. The market price tends to increase on the ex-rights date.

C. The subscription price is generally less than the market price.

A registration statement is effective on the 20th day after filing unless: A. the SEC is backlogged with statements. B. a tombstone ad is issued indicating its demise. C. a letter of comment suggesting changes is issued by the SEC. D. a syndicate can be formed sooner. E. the issue exceeds $50 million in which case the wait period is 30 days.

C. a letter of comment suggesting changes is issued by the SEC.

Which one of the following is not one of the four main functions provided by underwriters? A. assumption of some market risk B. responsibility for marketing securities C. auditing the financial statements D. certifying the value of an offering E. establishing the offer price

C. auditing the financial statements

Shareholders who have rights are always: A. better off if they exercise the rights rather than selling them. B. better off if they sell their rights rather than exercising them. C. in the same financial position if they sell or if they exercise their rights. D. able to purchase one new share for each right they own. E. financially disadvantaged any time a rights offer is made, regardless of any action they take.

C. in the same financial position if they sell or if they exercise their rights.

Debt capacity is often offered as a reason for a stock price to decline when additional equity securities are issued. The primary reason that supports this argument is that: A. the high issue costs of a debt offering must be paid by the shareholders. B. an additional equity issue reduces the debt capacity of a firm. C. management feels the probability of default has risen, which limits the firm's debt capacity and thus an equity issue is necessary. D. unless additional debt is issued in the future, stock dividends will tend to decline after the new securities are issued. E. additional equity is only issued when a firm cannot meet its current debt obligations, thereby signaling the firm is on the verge of bankruptcy.

C. management feels the probability of default has risen, which limits the firm's debt capacity and thus an equity issue is necessary.

Negotiated offers generally: A. are used as a last resort. B. involve an underwriting syndicate. C. result in higher issue costs than do competitive offers. D. involve only large issuers. E. reduce the probability an issue will be successful.

C. result in higher issue costs than do competitive offers.

If current shareholders want to acquire one share of stock under a rights plan they must: A. acquire new shares of stock that are being issued with rights attached. B. simply pay a registration fee plus the subscription price per share requested. C. submit the number of rights required plus the subscription price. D. inform the issuer and submit the market price per share desired. E. exchange their current shares for new shares that have rights attached.

C. submit the number of rights required plus the subscription price.

In comparison to debt issuance expenses, the total direct costs of equity issues are: A. considerably less. B. the same. C. minimally less. D. considerably greater. E. minimally greater.

D. considerably greater.

All of the following are major requirements needed to qualify for shelf registration except: A. having a current rating of investment grade. B. having outstanding stock with a market value in excess of $150 million. C. not defaulting on debt in the past three years. D. having no violations of the Securities Act of 1933 in the past three years. E. having no violations of the Securities Exchange Act of 1934 in the past three years.

D. having no violations of the Securities Act of 1933 in the past three years.

A firm commitment arrangement with an investment banker occurs when the: A. syndicate is in place to handle the issue. B. spread between the buying and selling price is less than one percent. C. issue is solidly accepted in the market as evidenced by a large price increase. D. investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them. E. investment banker sells as much of the security as the market can bear without a price decrease.

D. investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.

A standby underwriting arrangement in conjunction with a rights offering provides the: A. issuer with methods to cancel the offering should they so desire. B. issuer with an alternate investment banker if a conflict between the issuer and the original investment banker arises. C. investment banker with an oversubscription privilege to ensure profits are earned. D. issuer with an alternative avenue of sale to ensure success of the rights offering. E. investment bankers with a means of withdrawing from their firm offer.

D. issuer with an alternative avenue of sale to ensure success of the rights offering.

Management's first step in any issue of securities to the public is to: A. file a registration form with the SEC. B. distribute copies of the preliminary prospectus. C. distribute copies of the final prospectus. D. obtain approval from the board of directors. E. prepare the tombstone advertisement.

D. obtain approval from the board of directors.

Which one of the following services is least apt to be offered to a corporation by an investment bank? A. formulating a method to issue new securities B. pricing of new securities C. facilitating a merger D. providing checking account management E. selling new securities

D. providing checking account management

Arguments offered as explanations, with or without market evidence, as to why most U.S. equity issues are sold without rights include all of the following except: A. underwriters buy at an agreed upon price and bear some risk of selling the issue. B. cash proceeds are available sooner in underwriting and the issue is available to a wider market. C. underwriters certify that the offering price is consistent with the true value of the issue. D. the underwritten offer price is generally set 48 hours prior to the offering while the rights price must be set much further in advance. E. underwriters tend to increase the stock price through their sales efforts.

D. the underwritten offer price is generally set 48 hours prior to the offering while the rights price must be set much further in advance.

Empirical evidence suggests that new equity issues are generally: A. priced efficiently by the market. B. overpriced by investor excitement concerning a new issue. C. overpriced resulting from SEC regulation. D. underpriced, in part, to counteract the winner's curse. E. underpriced resulting from SEC regulation.

D. underpriced, in part, to counteract the winner's curse.

A preliminary prospectus contains: A. exactly the same information as the final prospectus except for the SEC approval. B. the same information as the final prospectus but has bold red letters on the cover. C. only a brief synopsis of the final prospectus. D. only a description of how the funds raised will be used. E. information very similar to the final prospectus but excludes the selling price.

E. information very similar to the final prospectus but excludes the selling price.

A company must file a registration statement with the SEC providing various financial and company information in order to sell new securities to the public. This registration statement does not need to be filed if the: A. issue is less than $50 million. B. securities are loans that mature in one year or less. C. issue is less than $2.5 million. D. securities are valued at less than $5 million and are being sold on the Internet. E. securities are loans that mature within 9 months.

E. securities are loans that mature within 9 months.

One argument against the use of shelf-registration is: A. that it is limited to only technology and manufacturing firms which provides those industries with a market advantage. B. that it provides an unfair advantage to debt issues. C. that it unfairly increases the market price of the registered security. D. the ability to use the dribble method in conjunction with the shelf-registration. E. the age of the information disclosure.

E. the age of the information disclosure.

Security issues that are governed by Regulation A are: A. distributed solely among current company employees and directors. B. sold in full to a single purchaser. C. those that only include securities currently held by corporate insiders. D. limited such that only current shareholders can purchase them. E. valued at less than $5 million.

E. valued at less than $5 million.