finance chapter 15

venture capital

Private financing for relatively new businesses in exchange for equity •Usually entails some hands-on guidance •The company should have an "exit" strategy. Sell the company -VC benefits from proceeds from sale Take the company public - VC benefits from IPO

spread

difference between what the syndicate pays the company and what the security sells for initially in the market

prospectus

A Red Herring is a preliminary _____________

rights

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? __________ offer

term

Direct business loans typically ranging from one to five years are called: ________ loans

resells underwriter

Firm commitment underwriting Issuer sells entire issue to underwriting syndicate. •The syndicate then ________ the issue to the public. •The ____________ makes money on the spread between the price paid to the issuer and the price received from investors when the stock is sold. •The syndicate bears the risk of not being able to sell the entire issue for more than the cost. •Most common type of underwriting in the United States

40

It is common for venture capitalists to receive at least ___ percent of a start-up company's equity in exchange for the venture capital. ___

firm

Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this? ________ commitment

investors

Many VC firms are formed from a group of _________ that pool capital and then have partners in the firm decide which companies will receive financing. •Some large corporations have a VC division.

securities registration prospectus

Selling ___________ to the public- •Management must obtain permission from the Board of Directors. •Firm must file a ___________ statement with the SEC. •The SEC examines the registration during a 20-day waiting period. A preliminary ___________, called a red herring, is distributed during the waiting period. If there are problems, the company is allowed to amend the registration and the waiting period starts over. •Securities may not be sold during the waiting period. •The price is determined on the effective date of the registration.

2971080

The Boat Works decided to go public by offering a total of 135,000 shares of common stock to the public. The company hired an underwriter who arranged a firm commitment underwriting and an initial selling price of $24 a share with a spread of 8.3 percent. As it turned out, the underwriters only sold 122,400 shares to the public. What is the amount paid to the issuer? $__________

board

Trevor is the CEO of Harvest Foods, which is a privately held corporation. What is the first step he must take if he wishes to take Harvest Foods public? Gain ________ approval

best effort company

Underwriter must make their "____________" to sell the securities at an agreed-upon offering price. •The _________ bears the risk of the issue not being sold. •The offer may be pulled if there is not enough interest at the offer price. In this case, the company does not get the capital, and they have still incurred substantial flotation costs. •Not as common as it previously was

syndicate

What is a group of underwriters sharing the risk of selling a new issue of securities. __________

registration

What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public? _________ statement

direct publicly

Which one of the following statements is correct concerning the issuance of long-term debt? _______ placement debt tends to have more restrictive covenants than _________ issued debt.

dutch auction

With _________ ________ underwriting: all successful bidders pay the same price per share.

IPO asymmetric

______ Underpricing- •May be difficult to price an IPO because there isn't a current market price available •Private companies tend to have more _____________ information than companies that are already publicly traded. •Underwriters want to ensure that, on average, their clients earn a good return on IPOs. -Causes the issuer to "leave money on the table"

Shelf

_______ registration- •Permits a corporation to register a large issue with the SEC and sell it in small portions over a two-year period •Reduces the flotation costs of registration •Allows the company more flexibility to raise money quickly

Issuance underpricing green shoe

_________ costs- •Spread •Other direct expenses - legal fees, filing fees, etc. •Indirect expenses -opportunity costs, i.e., management time spent working on issue •Abnormal returns - price drop on existing stock •___________- below market issue price on IPOs •__________ option - cost of additional shares that the syndicate can purchase after the issue has gone to market

Rights number purchase time

_________ offerings- basic concepts •Issue of common stock offered to existing shareholders •Allows current shareholders to avoid the dilution that can occur with a new stock issue •"Rights" are given to the shareholders. Specify ________ of shares that can be purchased Specify ___________ price Specify ______ frame •Rights may be traded OTC or on an exchange.

dutch auctions

_____________ underwriting- •Underwriter accepts a series of bids that include number of shares and price per share. •The price that everyone pays is the highest price that will result in all shares being sold. •There is an incentive to bid high to make sure you get in on the auction but knowing that you will probably pay a lower price than you bid. •The Treasury has used ____________ for years.

syndicate

group of investment bankers that market the securities and share the risk associated with selling the issue

long bonds

types of ______-term debt- •_______- public issue of long-term debt •Private issues Term loans •Direct business loans from commercial banks, insurance companies, etc. •Maturities 1 - 5 years •Repayable during life of the loan Private placements •Similar to term loans but with longer maturity Easier to renegotiate than public issues Lower costs than public issues

underwriters

•Services provided by __________- :Formulate method used to issue securities Price the securities Sell the securities Price stabilization by lead underwriter

decline

•Stock prices tend to __________ when new equity is issued. •Possible explanations for this phenomenon: Signaling and managerial information Signaling and debt usage Issue costs •Since the drop in price can be significant, and much of the drop may be attributable to negative signals, it is important for management to understand the signals that are being sent and try to reduce the effect when possible.