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
