FIN 357 Ch 15: Raising Capital

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

venture

Which of the following are costs of issuing new securities? The Green Shoe option Economies of scale The gross spread Underpricing

- gross spread - other direct expenses - indirect expenses - abnormal returns - underpricing - green shoe option

Private equity firms provide financing for firms that otherwise would have difficulty raising capital such as _____ firms.

-startup -distressed -closely held private

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

1

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

Most debt is ___.

privately issued

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

the number of new shares

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

underpricing

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

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

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

crowdfunding

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

purchases

It is impossible to underprice a(n) ______.

rights offering

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

1

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

True

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

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

ICO (initial coin offering)

The period after a new issue is initially sold to the public is called the ___________. (Enter one word in the blank.)

aftermarket

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

avoided

Dilution refers to a loss in _________ shareholders' value.

existing

A rights offering grants _____.

existing shareholders the right to buy new shares

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

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 right expire

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

unseasoned new issue

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

standby

The difference between the price the issuer receives and the offering price is ___.

the gross spread

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

without marketing and other help from an underwriter

Which of the following are true about the venture capital (VC) market?

-access to VC is very limited -personal contacts are important in gaining access to the VC market

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

Internet

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

A right is basically a ___.

call option

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

competitive offer

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

dilution

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

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

quiet

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

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

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

Competitive underwriting is typically cheaper than negotiated underwriting

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

Underpricing

The flotation costs are the costs associated with ___________ issues.

new

A firm can use a shelf registration if ___. it is rated investment grade it has an aggregate equity market value of $100 million or more it has never violated the 1934 Securities Act it has not defaulted on debt in the past 3 years its aggregate market value is more than $150 million

- company must be rated investment grade - firm cannot have defaulted on its debt in the past 3 years - aggregate market value of the firm's outstanding stock must be more than $150m - firm must not have violated the Securities Act of 1934 in the past 3 years

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 Keep the rights indefinitely Order all the rights to be sold

- do nothing and let the rights expire - subscribe to the full number of entitled shares - order all the rights to be sold

The available evidence indicates that there are pronounced cycles in which of the following? The number of IPOs The degree of IPO underpricing The length of the lockup period The length of the quiet period

-number of IPOs -the degree of IPO underpricing

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 the firm has too much equity there is too much information available management believes the firm is overvalued

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

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

_______ 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 (other people's money)

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

True

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, buy, purchases, purchase, assumes, or assume

A Green Shoe provision is used to ___.

cover excess demand and oversubscriptions

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

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

dribble

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

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

initial coin offering

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

initial public offering

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

life-cycle stage

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

managerial information

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

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 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

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

privileged

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 large payoff for a venture capital firm typically comes when the company is either sold to another company or goes __________.

public

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

rights are issued by the firm

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 __________. (Enter one word in the blank.)

underwriters