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Rob's e2700 Notes

✏️ Equity Practice

Some warmup multiple choice practice questions.

✏️ When a firm raises capital, the ____ refers to the value of the shares outstanding prior to a new funding round and the ____ is the value of the whole firm (old plus new shares) at the funding round price.

  1. inside value; underwritten value
  2. cash value; rights value
  3. underwritten value; rights value
  4. pre-money valuation; post-money valuation
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D

✏️ “Book building” refers to:

  1. A company using a number of underwriters, venture capitalists, and angel investors to finance an IPO.
  2. The process in which investors place binding bids in an auction process which sets the price of shares at the highest price possible for all shares to be purchased.
  3. The process in which customers provide nonbinding indications of their demand early in the IPO process.
  4. A method of raising seasoned equity in which the firm offers new shares only to existing shareholders.
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C

✏️ A(n) ____ is the process by which an already-public firm issues new shares.

  1. auction IPO
  2. seasoned equity offering
  3. syndicate offering
  4. post-money valuation
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B

✏️ A rights offer is:

  1. A seasoned equity offering in which the firm offers new shares only to existing shareholders.
  2. The right to purchase a security at the underwriter’s purchase price.
  3. Is an exit strategy that involves the acquisition by another firm.
  4. An option which allows an underwriter to issue 15% more shares in an IPO.
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A

✏️ In an auction IPO

  1. all winning bidders pay the same price.
  2. all winning bidders pay the price they bid.
  3. all winning bidders pay the average bid price.
  4. only the bidders who bid exactly the winning price are awarded any shares of the stock.
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A

✏️ An advantage of going public is:

  1. Improved liquidity for the equity investors.
  2. That the company must meet SEC reporting requirements, making the company more efficient.
  3. Increased financial disclosure, greater accountability, and more stringent requirements for the board of directors.
  4. Investor’s increased ability to monitor the company’s management due to the dispersion of ownership.
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A

✏️ Jerome Lloyd’s eight grandchildren each owned equal shares of the company he started, the Lloyd Company, which produces lawn and garden tools. In order to raise money for expansion, the company recently went through an IPO. As the pre-IPO shareholders, the Lloyd grandchildren are not allowed to sell their shares for 180 days after the IPO. This is known as a

  1. lockup provision.
  2. book building provision.
  3. red herring.
  4. rights offer.
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A

✏️ Which of the following statements is consistent with the fact that there is a negative reaction to an SEO issuance?

  1. A firm that is concerned about the interest of its existing stockholders will tend to issue only stock that is undervalued.
  2. A firm that is concerned about the interest of its existing stockholders will tend to issue only stock that is overvalued.
  3. On average, a firm’s stock price increases by 5% when the company announces an SEO.
  4. On average, a firm will only issue additional shares of stock if the stock is undervalued by at least 7%, so that the firm can recoup the issuance costs.
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B

✏️ Aaron has developed and patented donut-making equipment that allows bakeries to automate making fresh donuts in a much smaller space than was previously needed. Aaron needed $1.2 million to start the production of this new equipment. His brother-in-law invested $600,000 and now owns 50% of the stock in the business. Aaron’s brother-in-law would be known as

  1. a secondary investor.
  2. a seasoned investor.
  3. an angel investor.
  4. a strategic investor.
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C

✏️ A(n) ____ designs the structure of an IPO, markets the IPO, and assists with the necessary filings for an IPO.

  1. underwriter
  2. angel investor
  3. seasoned investor
  4. convertible stockholder
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A