Exam Prep How Firms Raise Capital Chapter 15

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 15 How Firms Raise Capital

1) Most businesses are started when an entrepreneur is given seed funding by institutional investors.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

2) The process by which many entrepreneurs raise seed money and obtain other resources necessary to start their businesses is often called bootstrapping.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

3) The initial seed money usually comes from the entrepreneur or other founders.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

4) The bootstrapping period usually lasts for at least five years.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Industry/Sector Perspective

8) A significant number of venture capital firms focus on mature businesses.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

10) 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.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

11) A principal way for venture capitalists to exit is to sell part of the firm's equity back to the entrepreneur.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

12) A venture capitalist may exit an investment by offering common stock to the public.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

13) The amount of equity capital that can be raised in the public equity markets is typically smaller than the amount that can be raised through private sources.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

14) Privately held firms find it easier to attract top management talent and to better motivate current managers.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

15) To complete an IPO, a firm will need the services of investment bankers, who are experts in bringing new securities to market.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

16) To complete an IPO, a firm will need the services of angel investors, who are experts in bringing new securities to market.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

17) Underwriting is the risk-bearing part of investment banking.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

18) In the firm-commitment underwriting, which is more typical, the investment banker guarantees the issuer a fixed amount of money from the stock sale.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

19) With a firm-commitment underwriting, the investment banking firm makes no guarantee to sell the securities at a particular price.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

21) Underpricing is defined as offering new securities for sale at a price below their true value.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

22) In a firm-commitment offering, the underwriters will suffer a financial loss if the offer price is set too high.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

23) If the offer price is set too high, the issuing firm will lose under a best-effort agreement.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

24) A general cash offer is a sale of debt or equity, open to all investors, by a registered public company that has previously sold stock to the public.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

25) Bootstrapping and venture capital financing are part of the public market operations of a business.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

26) Private placement occurs when a firm sells unregistered securities directly to investors such as insurance companies, commercial banks, or wealthy individuals.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

27) The biggest drawback of private placements involves restrictions on the resale of the securities.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

28) PIPE transactions refer to transactions in which a public company sells unregistered stock to a hedge fund or some other institutional investor.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

29) The major disadvantage of a PIPE transaction to issuers is that the funding cost is higher as compared to making a public offer.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

30) Term loans are defined as business loans with maturities greater than one month but less than one year.

Learning Objective: LO 7

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

31) The initial seed money for a start-up usually comes from:

A) public investors.

B) investment banks.

C) the entrepreneur or other founders.

D) commercial banks.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

32) Bootstrapping is the process by which:

A) many entrepreneurs raise seed money and obtain other resources necessary to start their businesses.

B) the entrepreneur often fleshes out his or her ideas and makes them operational.

C) most businesses are started by an entrepreneur.

D) an entrepreneur starts a company with large amount of capital and without relying on money other than outside investments.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

33) Which of the following statements is NOT true?

A) The process by which many entrepreneurs raise seed money and obtain other resources necessary to start their businesses is often called bootstrapping.

B) Most businesses are started by an entrepreneur who has a vision for a new business or product and a passionate belief in the concept's viability.

C) The initial seed money usually comes from the entrepreneur or other founders.

D) The seed money is spent on developing an initial public offering.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

34) Which of the following statements is NOT true?

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) Venture capital firms tend to manage one fund at a given time.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

35) Which of the following statements is NOT true?

A) Venture capitalists bear a substantial amount of risk when they fund a new business.

B) Venture capitalists' sole function is to provide financing for new firms.

C) Modern venture capital firms tend to specialize in a specific line of business, such as hospitality, food manufacturing, or medical devices.

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

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

36) Tactics that venture capitalists use to reduce the risk of their investment include:

A) funding the ventures in stages, requiring entrepreneurs to take charge of all important business decisions.

B) funding the ventures completely in the beginning, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize.

C) funding the ventures in stages, requiring entrepreneurs to make personal investments, syndicating investments, and maintaining in-depth knowledge about the industry in which they specialize.

D) funding the ventures in stages, and without any in-depth knowledge about the industry.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

37) 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) A 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.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

38) Provisions that are part of venture capital agreements include:

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) the method of exit, number of board positions after exit, and timing of exit.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

39) The three principal ways in which venture capital firms exit venture-backed companies are:

A) selling to a strategic buyer, buying out the founder, and offering stock to the public.

B) selling to a strategic buyer, selling to a financial buyer, and buying out the founder.

C) selling to a strategic buyer, selling to a financial buyer, and offering stock to the public.

D) selling to a strategic buyer, buying out the funder, and selling to a financial buyer.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

40) A typical venture capital fund may generate annual returns of:

A) 15 to 25 percent on the money that it invests, compared with an average annual return for the S&P 500 of almost 12 percent.

B) 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 20 percent.

C) 12 percent on the money that it invests, compared with an average annual return for the S&P 500 of about 25 percent.

D) 5 to 10 percent on the money that it invests, compared with an average annual return for the S&P 500 of almost 4 percent.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

41) Advantages of going public include all EXCEPT:

A) 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 in comparison with debt financing.

C) going public can enable an entrepreneur to fund a growing business.

D) additional equity capital can usually be raised through follow-on seasoned public offerings at a low cost.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

42) 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 at the expense of giving up control.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

43) Disadvantages of going public include all EXCEPT:

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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

44) All of the following about a firm-commitment underwriting is true EXCEPT:

A) the investment banker guarantees the issuer a fixed amount of money from the stock sale.

B) the investment banker actually buys the stock from the firm.

C) the issuer bears the risk that the resale price might be lower than the price the underwriter pays.

D) the underwriter bears the risk that the resale price might be lower than the price the underwriter pays.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

45) With a best-effort underwriting, the:

A) investment banking firm guarantees to sell the securities at a particular price.

B) investment banker bears the price risk associated with underwriting the issue.

C) compensation is based on the price of the securities sold.

D) underwriters do not want to accept the risk of guaranteeing the offering price.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

46) 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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

47) Basic services provided by investment bankers bringing securities to market do NOT include:

A) origination.

B) underwriting.

C) distribution.

D) confirmation.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

48) 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.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

49) The three costs associated with issuing stock in an IPO are:

A) price premium, out-of-pocket expenses, and underpricing.

B) underwriting spread, out-of-pocket expenses, and underpricing.

C) underwriting spread, price premium, and underpricing.

D) price premium, out-of-pocket expenses, and underwriting spread.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

50) Data from the marketplace show that the shares sold in an IPO are typically:

A) priced between 2 and 5 percent below the price at which they close at the end of the first day of trading.

B) priced between 10 and 15 percent above the price at which they close at the end of the first day of trading.

C) priced between 10 and 15 percent below the price at which they close at the end of the first day of trading.

D) priced between 2 and 5 percent above the price at which they close at the end of the first day of trading.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

51) 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 underpricing spread?

A) $51 million

B) $15 million

C) $66 million

D) $30 million

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

52) 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 underpricing on this issue?

A) $9,900,000

B) $24,900,000

C) $15,000,000

D) $9,000,000

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

53) 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) $9.9 million

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

54) 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

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

55) 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 underwriting cost?

A) $13.6 million

B) $20.6 million

C) $6.94 million

D) $38.6 million

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

56) 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 total cost of issuing the securities to the firm?

A) $13,606,000

B) $20,818,000

C) $20,610,000

D) $6,948,000

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

57) When Geo Corp. went public, 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

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

58) 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) $102 million

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

59) Fortune Hotels issues an IPO on a best-effort basis. The company's investment bank requires a spread of 20 percent of the selling price. Five million shares are issued. The average selling price is expected to be $31. What are the net proceeds per share for the issuer?

A) $27.50

B) $22

C) $31

D) $24.8

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

60) Fortune Hotels issues an IPO on a best-effort basis. The company's investment bank requires a spread of 20 percent of the selling price. Five million shares are issued. The average selling price is expected to be $31. How much did the investment bank receive?

A) $22.0 million

B) $27.5 million

C) $31.0 million

D) $20.0 million

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

61) Dienz Pharma plans to issue an IPO on a best-effort basis. The company's investment bank requires a spread of 16 percent of the selling price. The selling price is expected to be $32 per share. Three million shares are issued. What are the proceeds for the issuer?

A) $96.00 million

B) $78.75 million

C) $80.64 million

D) $90.00 million

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

62) 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.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

63) A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment of 500,000 shares priced to the public at $50 a share. The underwriter's spread is 12 percent. In addition, the underwriter charges $600,000 in legal fees. On the first day of trading, the firm's stock closed at $61. What were the total costs of the issue?

A) $3,000,000

B) $3,600,000

C) $8,500,000

D) $9,100,000

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

64) Which of the following statements is NOT true?

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.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

65) Which of the following statements is NOT true of shelf registration?

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.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

66) 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.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

67) Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $30 million to finance it. The company plans to raise the money through a general cash offering priced at $23.50 a share. Star's underwriters charge a 6 percent spread. How many shares does the company need to sell to achieve its goal? (Round your final answer to the nearest unit of share.)

A) 1,358,081 shares

B) 1,276,596 shares

C) 1,200,000 shares

D) 1,080,473 shares

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

68) Why is the total cost of bringing a general cash offer to the market lower than an IPO?

A) General cash offer includes a large underpricing.

B) Underwriting spreads are larger with a general cash offer.

C) There is more risk involved with a general cash offer than an IPO.

D) There is a higher cost of distributing the shares in an IPO.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

69) Which of the following statements is NOT true?

A) For firms that have limited access to the public capital markets, the cheapest source of external funding is often the private markets.

B) Bootstrapping and venture capital financing are not part of the private market.

C) The biggest drawback of private placements involves restrictions on the resale of the securities.

D) Many private companies that are owned by entrepreneurs, families, or family foundations and are sizable companies of high credit quality prefer to sell their securities in the private markets.

Learning Objective: LO 1, 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

70) Which of the following statements is NOT true?

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.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

71) Disadvantages of private placements include:

A) lower cost of funds.

B) more willingness among private lenders to negotiate changes to a bond contract.

C) the speed of private placement deals and flexibility in issue size.

D) Private placements do not have to be registered with the SEC.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

72) Which of the following statements is NOT true?

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 non-public 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.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

73) Private equity firms improve the performance of firms in which they invest by NOT:

A) making sure that the firms have the best possible management teams.

B) closely monitoring each firm's performance and providing advice and counsel to the firm's management team.

C) facilitating mergers and acquisitions that help improve the competitive positions of the companies in which they invest.

D) replacing the management team.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

74) Which of the following statements is NOT true of PIPE transactions?

A) PIPE transactions are registered with the SEC.

B) PIPE transactions give issuers faster access to capital.

C) In a PIPE transaction, investors purchase securities (equity or debt) directly from a publicly traded company in a private placement.

D) The securities are virtually always sold to the investors at a discount to the price at which they would sell in the public markets.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

75) Which of the following statements is true of PIPE transactions?

A) Under federal securities law, they can be resold to investors in the public markets immediately even if they are not registered.

B) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC, usually within 90 days of the PIPE closing.

C) As part of the PIPE contract, the company often agrees to register the restricted securities with the SEC after 90 days of the PIPE closing.

D) PIPE transactions involving a healthy firm can also be executed without the use of an investment bank but result in a cost increase of 7 to 8 percent of the proceeds.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

76) 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) 9.25%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

77) Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm B's credit standing is prime rate plus 2 percent. The current prime rate is 5.75 percent, the 30-year Treasury bond yield is 4.35 percent, the three-month Treasury bill yield is 3.54 percent, and the 10-year Treasury note yield is 4.24 percent. What are the appropriate loan rates for both the firms?

A) 6.45% for Firm A, 7.75% for Firm B

B) 6.45% for Firm A, 8.45% for Firm B

C) 5.75% for Firm A, 8.45% for Firm B

D) 5.75% for Firm A, 7.75% for Firm B

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

78) Marigold Corp. wants to borrow money from Howard Bank for a period of five years. The firm's credit standing calls for a premium of 1.5 percent over the prime rate. The current prime rate is 6.5 percent, the 30-year Treasury bond yield is 5.375 percent, the three-month Treasury bill yield is 3.525 percent, and the 5-year Treasury note yield is 4.25 percent. What is the appropriate loan rate for this customer?

A) 8.725%

B) 7.225%

C) 6.500%

D) 10.025%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

79) Castle Co. needs to borrow $10 million for process improvement upgrades. Management decides to sell 20-year bonds. They determine that the 3-month Treasury bill rate is 2.75 percent, the firm's credit rating is A, and the yield on 20-year Treasury bonds is 1.80 percent higher than that for 3-month Treasury bills. Bonds with an A rating are selling for 50 basis points above the 20-year Treasury bond rate. What is the loan rate for this transaction?

A) 4.55%

B) 5.05%

C) 7.75%

D) 9.55%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

81) What are the advantages and disadvantages of going public?

Learning Objective: LO 3

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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

Learning Objective: LO 6

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

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