CHAPTER 15

        1.        Which of the following is/are accurate regarding the costs of issuing securities?

                I. Substantial economies of scale exist as related to issuance size

                II. Underpricing for best efforts offers is typically larger than for firm commitments

                III. The costs of underpricing can exceed direct issuance costs

                IV. The total costs involved with seasoned issues are typically higher than for IPOs

        A)    I and III only

        B)    II and IV only

        C)    I, II, and III only

        D)    II, III, and IV only

        E)     I, II, III, and IV

        2.     To finance expansion into Japan, General Motors sells 1,000,000 shares of common stock to investors at large. This is an example of a(n) __________________.

        A)        private placement

        B)        seasoned new issue

        C)    rights offer

        D)        Regulation A offering

        E)     initial public offering

        3.        Which of the following is accurate regarding choosing a venture capitalist?

        A)        Small venture capital firms will typically be less flexible than larger venture capital firms

        B)    The exit strategy, or how a venture capitalist will cash out, is not a major consideration in choosing a venture capitalist

        C)        Since there are typically venture capitalists that finance different stages of the life of a business, the financial strength of any individual venture capital firm is not really a concern

        D)    A venture capitalist may be able to help a firm in ways other than by helping with financing by providing contacts with potentially important suppliers and customers

        E)     It is generally not necessary to consider how successful a venture capitalist has been with similar firms in the past since each firm is unique and even the ability to obtain venture capital doesn't necessarily assure success will follow

        4.        ____________ is an agreement in which the underwriter is allowed to purchase additional shares of an offering at the subscription price.

        A)        Standby underwriting

        B)    Firm commitment underwriting

        C)    Best efforts underwriting

        D)    A Green Shoe provision

        E)     An oversubscription privilege

        5.     The underwriter's compensation in a firm commitment issue is/are

        A)        up-front, direct fees

        B)    the spread

        C)    the amount by which the shares are underpriced

        D)    fees earned from joining the syndicate

        E)     only the income earned on the Green Shoe provision

        6.        What would be wrong with eliminating the SEC from the security-issuance process?

        7.        Suppose you are the chief financial officer of a small computer software development firm. Your firm needs $10 million to exploit investment opportunities that will allow it to retain its position in the software market. What type(s) of security(ies) might be most appropriate for your firm? What type(s) of offerings might be most appropriate? (Assume your firm is past the venture capital stage.)

        8.        _____________, the underwriter agrees to purchase the entire issue of a public offering, and then attempts to resell the issue.

        A)    In standby underwriting

        B)    In firm commitment underwriting

        C)    In best efforts underwriting

        D)    By exercising a Green Shoe provision

        E)     By exercising an oversubscription privilege

        9.        According to the figures in the text and those we looked at in class, on average, IPOs

        A)    are brought to the market in waves

        B)    are overpriced

        C)    have the same flotation costs as seasoned issues

        D)    are handled on a firm-commitment basis if the issue size is very small

        E)     are a profitable investment and you should buy shares in any IPO that hits the market

        10.   An general cash offer is an offering of debt or equity securities to fewer than 40 investors.

        A)    True

        B)    False

        11.        ____________ is an agreement in which the underwriter is legally bound only to attempt to sell the securities in a public offering for the firm.

        A)        Standby underwriting

        B)    Best efforts underwriting

        C)    Firm commitment underwriting

        D)    A Green Shoe provision

        E)     An oversubscription privilege

        12.   First stage financing is also commonly known as ______________.

        A)    seed money

        B)        mezzanine level financing

        C)        balcony level financing

        D)        vulture capital

        E)     a university endowment fund

        13.   A firm faces direct costs of 8.0% of the amount of cash raised in financing a new project. How much needs to be raised if initial project outlays total $6 million?

        A)    $ 5.520 million

        B)    $ 6.480 million

        C)    $ 6.522 million

        D)    $ 6.640 million

        E)     $ 6.750 million

        14.        Financing for new, often high-risk ventures is called ____________.

        A)        venture capital

        B)    an initial public offering

        C)    a private placement

        D)    a term loan

        E)     a seasoned issue

        15.   An important difference between a term loan and long-term bond is that

        A)    a term loan typically has higher issuance costs than does a public bond issue

        B)    a term loan tends to be more difficult to renegotiate than a bond issue is

        C)        banks usually fund long-term bonds while term loans are provided by insurance companies and pension funds

        D)    it is easier to sell a public issue of long-term bonds than it is to obtain a bank term loan

        E)     a direct term loan avoids the cost of Securities and Exchange Commission registration

        16.        Which of the following are qualifications required for a firm to use Rule 415?

                I. The issuer must not have had a violation of the Securities Act of 1934 in the past four years

                II. The company must be rated investment grade

                III. The aggregate market value of the firm's outstanding stock must be more than $150 million

                IV. The firm cannot have defaulted on its debt in the past three years

        A)    I only

        B)    II only

        C)    I, II, III and IV

        D)    I and III only

        E)     II, III and IV only

        17.   The BangBang Drum Company recently raised several million dollars in an initial public offering. BangBang received $22.00 per share from the underwriter, the offering price was $25.00 per share, and the market price rose to $28.00 on the day of the offering. The initial return investors earned on the stock was ______.

        A)    12.0 percent

        B)    13.6 percent

        C)    24.0 percent

        D)    27.3 percent

        E)     30.0 percent

        18.        Which of the following correctly describes the sequence of events in a new issue?

        A)    Filing of registration statement; approval of the board of directors; distribution of prospectus; sale of securities

        B)        Approval of the board of directors; distribution of prospectus; filing of a registration statement; sale of securities

        C)    Filing of registration statement; distribution of prospectus; approval of the board of directors; sale of securities

        D)        Approval of the board of directors; filing of a registration statement; distribution of prospectus; sale of securities

        E)        Approval of the board of directors; distribution of prospectus; sale of securities; filing of a registration statement

        19.        Which of the following is NOT true about venture capital?

        A)        Venture capital can be an incredibly expensive source of financing

        B)        Venture capitalists often actively participate in running the firm

        C)        Venture capitalists will typically demand several seats on the company's board of directors

        D)        Venture capitalists typically will demand up to 30 percent of the equity in the company they finance

        E)        Venture capitalists frequently hold voting preferred stock giving them various priorities in the event the company is sold or liquidated

        20.        Empirical evidence suggests that, on average, the shares in initial public offerings have not been significantly underpriced.

        A)    True

        B)    False

Answer Key

        1.     C    

        2.     B     

        3.     D    

        4.     D    

        5.     B     

        6.     The question asks students to imagine how new issues would occur in a world without the SEC. This leaves things wide open and really challenges students to employ economic reasoning. Would the quality of information provided to investors decline? Would firms find it worthwhile to misrepresent themselves? Would private "rating/certification" agencies for new equity issues arise? The possibilities for expansion of this question are endless.

        7.        Better students will recognize that this firm is likely to (a) be in the early stages of its life-cycle, (b) entail a significant amount of risk, and (c) consist primarily of "non-equipment" assets (patents, human capital, etc.). As such, common equity is probably called for. Other issues that might be addressed include (a) is the firm currently publicly traded? (the question doesn't specify), (b) is loss of control a fear?, (c) is it more appropriate to use a "best efforts" rather than a "firm commitment" offering?, and (d) will the market be receptive to yet another software firm?

        8.     B     

        9.     A    

        10.   B     

        11.   B     

        12.   A    

        13.   C    

        14.   A    

        15.   E     

        16.   E     

        17.   A    

        18.   D    

        19.   D