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What are PIPE transactions and how do they help firms raise capital?

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Private investment in public equity (PIP...

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A significant number of venture capital firms focus on high-technology investments.

A) True
B) False

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Traditional sources of funding, such as from financial and insurance firms, work for new or emerging businesses despite the presence of only intangible assets.

A) True
B) False

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Why do traditional sources of funding not work for new or emerging businesses?

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New firms cannot resort to traditional s...

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Bethesda Biosys issues an IPO on a best-efforts basis. The company's investment bank requires a spread of 18 percent of the selling price. The average selling price is expected to be $25 per share. Four million shares are issued. What are the net proceeds for the issuer?


A) $82 million
B) $92 million
C) $100 million
D) None of the above

E) None of the above
F) A) and B)

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Which of the following statements is NOT true?


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.

E) A) and B)
F) A) and C)

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Stump, Inc. issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $350,000. The firm's stock price increases 15 percent on the first day. What is the firm's total cost of issuing the securities?


A) $24.9 million
B) $15.35 million
C) $25.25 million
D) None of the above

E) A) and B)
F) C) and D)

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Underwriting is the risk-bearing part of investment banking.

A) True
B) False

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When Geo Corp. went public in September 2008, the offer price was $19.00 per share and the closing price at the end of the first day was $24.70. The firm issued 4 million shares. What was the loss to the company due to underpricing?


A) $13.6 million
B) $20.83 million
C) $20.6 million
D) $22.8 million

E) None of the above
F) B) and C)

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Which of the following statements is true?


A) After the IPO, there is a less active secondary market for the firm's shares.
B) Only smaller amounts of capital can be raised through an IPO than the amount that can be raised through private sources.
C) Publicly traded firms find it easier to attract top management talent.
D) Going public can enable an entrepreneur to fund a growing business but not without giving up control.

E) B) and C)
F) B) and D)

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Pau, Inc. issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm's legal fees, SEC registration fees, and other administrative costs are $270,000. The firm's stock price increases 18 percent on the first day. What is the underpricing cost of issuing the securities to the firm? (Round your intermediate calculations to two decimal places.)


A) $13.60 million
B) $20.60 million
C) $6.94 million
D) $7.57 million

E) A) and B)
F) None of the above

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Benefits from shelf registration include all EXCEPT


A) greater flexibility in bringing securities to market.
B) the ability for firms to periodically sell small amounts of securities and raise capital as needed.
C) a shelf registration statement can cover multiple securities, but there is a penalty if authorized securities are not issued.
D) costs associated with selling the securities are reduced because only a single registration statement is required.

E) A) and C)
F) B) and C)

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Venture capitalists are individuals or firms that help privately held businesses by providing funds in the bootstrapping process.

A) True
B) False

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In a best-effort offering, the underwriter promises to make its "best effort" to sell all securities at a certain price.

A) True
B) False

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The most likely reason that underpricing of new issues occurs more frequently than overpricing is the:


A) Underwriters' desire to reduce the risk of a firm commitment.
B) Demand for a new issue is typically too high.
C) Underwriters earn low rates of return.
D) Issuing firms demand that equity be underpriced.

E) B) and D)
F) B) and C)

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Which of the following statements is NOT true?


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.

E) A) and B)
F) C) and D)

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Advantages of going public include all EXCEPT


A) larger amount of capital can be raised this way than the amount that can be raised through private sources.
B) the cost of going public is less compare to debt financing.
C) going public can enable an entrepreneur to fund a growing business without giving up control.
D) additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost.

E) A) and D)
F) A) and C)

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Which of the following statements is NOT true?


A) Venture capitalists often require an entrepreneur to make a substantial personal investment in the business.
B) Syndication occurs when the originating venture capitalist buys off other venture capitalists involved in the venture.
C) Another factor that reduces risk is the venture capitalist's in-depth knowledge of the industry and technology.
D) The key idea behind staged funding is that each funding stage gives the venture capitalist an opportunity to reassess the management team and the firm's financial performance.

E) B) and D)
F) A) and D)

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Angel investors are investors who come to the rescue of firms threatened by takeovers.

A) True
B) False

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Jasper, Inc. is looking for a five-year term loan of $3 million. The firm will have to pay a premium of 1.5 percent for default risk to its bank and another 0.75 percent for maturity risk. The current prime rate is 7.5 percent. What is the loan rate on this bank loan?


A) 9%
B) 8.25%
C) 9.75%
D) None of the above

E) A) and D)
F) B) and D)

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