Ch,15 theory

Question 1

Why do venture capitalists often provide funding in stages?
Multiple Choice
To make sure that the entrepreneurs they support work hard on their projects.
To counter the high risk of failure in new ventures.
It is traditional.
To limit funds available at each stage.
To ensure success at each stage.

Answer 1

To counter the high risk of failure in new ventures.

Question 2

Which of the following is the best definition of a lockup agreement?

The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.

Situation where the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.

An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.

The purchase of securities from the issuing company by an investment banker for resale to the public.

Answer 2

The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.

Question 3

Individuals who invest their own money in start-up ventures are sometimes called ________.
Multiple Choice
Vendors.
Creditors.
Angels.
Bookies.
Financiers.

Answer 3

Angels.

Question 4

What is the first thing management must do if they wish to issue new debt or equity?

Multiple Choice
Hire an investment dealer.
Issue a prospectus.
Obtain approval from the appropriate securities commission.
Obtain approval from the board of directors.
Put an advertisement in a newspaper.

Answer 4

Obtain approval from the board of directors

Question 5

The costs of selling securities are called ________.
Multiple Choice
Flotation costs
Underpricing.
Spreads.
Syndicate fees.
Underwriting fees.

Answer 5

Flotation costs

Question 6

Which of the following is the best definition of an overallotment option?

Multiple Choice
The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell stock.

The purchase of securities from the issuing company by an investment banker for resale to the public.

An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.

Situation where the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.

Answer 6

An underwriting provision that permits syndicate members to purchase additional shares at the original offering price.

Question 7

Which of the following is the best definition of a prospectus?

Multiple Choice
Legal document describing details of the issuing corporation and the proposed offering to potential investors.

The creation and sale of securities on public markets.

A new issue of securities by a firm that has already issued securities in the past.

A preliminary prospectus distributed to prospective investors in a new issue of securities.

A company’s first equity issue made available to the public. Also an unseasoned new issue.

Answer 7

Legal document describing details of the issuing corporation and the proposed offering to potential investors.

Question 8

The term holder-of-record date is a period on which existing shareholders on company records are designated as the recipients of stock rights.

Answer 8

True

Question 9

Crowdfunding

Answer 9

ask for money from large amount of people)

Question 10

What are the stages of development of a firm

Answer 10

seed stage
start-up stage
expansion stage
acquisition/buyout stage
turnaround stage

Question 11

All companies on the Toronto Stock Exchange come under the ____________________

Answer 11

Ontario Securities Commission’s (OSC) jurisdiction

Question 12

Selling securities to the public-steps

Answer 12

Step 1: Management obtains permission from the Board of Directors

Step 2: Firm prepares and distributes copies of a preliminary prospectus (red herring) to the OSC and to potential investors

Step 3: Once the prospectus is approved, the price is determined, and security dealers begin selling the new issue (primary market

Question 13

what are some alternative issue methods?

Answer 13

General Cash Offer – New securities offered for sale to the general public on a cash basis (IPO, SEO)
Rights Offer – New securities are first offered to existing shareholders (pre-emptive rights).

Question 14

SEO

Answer 14

Seasoned Equity Offering. A new issue for a company that has previously issued securities to the public

Question 15

syndicate

Answer 15

forming a group of underwriters that market the securities and share the risk associated with selling the issue

Question 16

shelf offer

Answer 16

shares that a company is keeping and will sell in a few months or years. You keep them and you don’t need to ask for permission to issue them in the future.

Question 17

Firm Commitment Underwriting

Answer 17

A.k.a. “bought deal” where issuer firm sells entire issue to underwriting syndicate
The syndicate then resells the issue to the public
The underwriter 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
Usually carried out for high quality offerings and involves smaller offer price discount and smaller underwriting fee

Question 18

Best-effort underwriting

Answer 18

Underwriter must make their “best effort” to sell the securities at an agreed-upon offering price
Underwriter agrees, for a commission, to sell as much of the issue as possible, but does not guarantee to sell the entire issue – issuing company bears the risk of the issue not being sold
The offer may be pulled if there is not enough interest at the offer price.