FINA 3313 FINAL REVIEW: How Corporations Raise Venture Capital and Issue Securities

(T/F): Equity capital in young businesses is known as venture capital and it is provided by venture capital firms, wealthy individuals, and investment institutions such as pension funds.

TRUE

(T/F): Issue costs for debt are considerably lower than issue costs for equity securities.

TRUE

An investor exercises the right to buy one additional share at $20 for every five shares held. How much should each share be worth after the rights issue if they previously sold for $50 each?

$50 x 5 + $20 x 1 = New Price x (5 + 1) New Price = $270 / 6 = $45 per share

Which one of these terms applies to a public company offering new shares to the general public? A. Rights offer B. Initial public offering C. Venture capital offer D. General cash offer

B. Initial public offering

A major purpose of the prospectus is to: A. inform investors of the security's rate of return. B. advise investors of the security's potential risks. C. distribute stock warrants to prospective investors. D. list the security's dividend payment dates.

B. advise investors of the security's potential risks.

When securities are issued under a rights issue: A. existing shareholders have the opportunity to expand their holdings. B. shares are offered to the public at a discount. C. the existing shares will increase in price. D. current shareholders have the right to resell their stock to the issuer.

A. existing shareholders have the opportunity to expand their holdings.

When underwriters issue securities on a best efforts basis, they: A. sell as much of the stock as possible, but with no guarantee. B. submit a bid for purchase, which the issuer compares to other bids. C. buy the entire issue from the firm. D. guarantee that the issuer will be charged the minimum spread.

A. sell as much of the stock as possible, but with no guarantee.

The most likely reason that underpricing of new issues occurs more frequently than overpricing is that: A. underwriters want to reduce the risk of a firm commitment. B. the demand for a new issue is typically too high. C. underwriters earn low rates of return. D. issuing firms demand that equity be underpriced.

A. underwriters want to reduce the risk of a firm commitment.

In return for providing funds, venture capitalists generally require: A. collateral equal in value to the funds provided. B. first right to all of the firm's assets. C. an equity position in the firm. D. ownership of the entire firm.

C. an equity position in the firm.

A secondary offering IPO occurs when: A. new shares are sold to provide the company with additional funds. B. the second public issue of equity becomes available. C. the company's founders or venture capitalists market a portion of their shares. D. not all of the shares in a primary IPO were sold.

C. the company's founders or venture capitalists market a portion of their shares.

The most important function of an underwriter is to: A. assess the firm's capital needs. B. approve the prospectus before distribution to the public. C. provide private placement of the firm's debt. D. buy the securities issue from the firm and resell the securities to the public.

D. buy the securities issue from the firm and resell the securities to the public.

Issue costs for equity are higher than those for debt for all of the following reasons except: A. equity issues have higher administrative costs. B. underwriting stock is riskier than underwriting bonds. C. equity issues involve significantly more time to sell. D. equity issues have no economies of scale.

D. equity issues have no economies of scale.

A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue.

Loss in value = .03 x $1 billion = $30 million

(T/F): A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.

TRUE

(T/F): In a rights offering, the shares are priced at a substantial discount to current market value, which ensures that the shareholders will either exercise the rights themselves or sell them to other investors.

TRUE

(T/F): The SEC requires the sale of a private placement to be limited to a small number of knowledgeable investors.

TRUE

(T/F): Underwriters usually play a triple role—first providing the company with procedural and financial advice, then buying the stock, and finally reselling it to the public.

TRUE

(T/F): When a public company makes a general cash offer of debt or equity, it essentially follows the same procedure used when it first went public.

TRUE

(T/F): When securities are issued under a firm commitment, the underwriter bears the risk of low sales.

TRUE