Exam 15: How Firms Raise Capital

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A) In a best-effort offering, the underwriters will suffer a financial loss if the offer price is set too high.
B) In a best-effort agreement, the issuing firm will lose if the offer price is set too high.
C) If the underpricing is significant, the investment banking firm will suffer a loss of reputation for failing to price the new issue correctly and raising less money for its client than it could have.
D) Underpricing is defined as offering new securities for sale at a price below their true value.

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A) In a competitive sale, the firm specifies the type and amount of securities it wants to sell.
B) In a negotiated sale, the issuer selects the underwriter at the beginning of the origination process.
C) In a general cash offer, management must decide whether to sell the securities on a competitive or a negotiated basis.
D) For equity securities, competitive sales generally provide the lowest-cost method of sale.

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A) timing of exit, number of board positions after exit, and what price is acceptable.
B) timing of exit, the method of exit, and what price is acceptable.
C) the method of exit, number of board positions after exit, and what price is acceptable.
D) None of the above

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Going public has a number of potential a...

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A) managers' tendency to focus on long-term profits.
B) the high cost of the IPO itself.
C) the costs of complying with ongoing SEC disclosure requirements.
D) the transparency that results from this compliance can be costly for some firms.

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A) Shelf registration gives firms less flexibility in bringing securities to market.
B) During a two-year window, the firm can take the securities "off the shelf" and sell them as needed.
C) Shelf registration allows firms to periodically sell small amounts of securities.
D) A shelf registration statement can cover multiple securities, and there is no penalty if authorized securities are not issued.

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A) origination.
B) underwriting.
C) distribution.
D) All of the above

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A) $96.00 million
B) $78.75 million
C) $80.64 million
D) None of the above

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A) Investment bankers provide three basic services when bringing securities to market-origination, underwriting, and distribution.
B) During the origination phase, the investment banker helps the firm determine whether it is ready for an IPO.
C) Origination is the risk-bearing part of investment banking.
D) Origination includes giving the firm financial advice and getting the issue ready to sell.

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A) Private placement occurs when a firm sells unregistered securities directly to investors such as insurance companies, commercial banks, or wealthy individuals.
B) In private placements, there are no restrictions on the resale of the securities.
C) About half of all corporate debt is sold through the private placement market.
D) Investment banks and money center banks often assist firms with private placements.

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A) Private equity firms pool money from wealthy investors, pension funds, insurance companies, and other sources to make investments.
B) Private equity firms invest in more mature companies.
C) Agency problems tend to be more in firms owned by private equity investors than in public firms.
D) Private equity investors focus on firms that have stable cash flows because they use a lot of debt to finance their acquisitions.

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A) The venture capital industry as we know it today emerged in the late 1960s with the formation of the first venture capital limited partnerships.
B) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices.
C) A significant number of venture capital firms focus on high-technology investments.
D) All of the above statements are true.

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A) General cash offer does not include a large underpricing
B) Underwriting spreads are smaller in case of general cash offer
C) There is less risk involved with a general cash offer than an IPO
D) All of the above

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