Finance

QCM Theme 06 : The Mechanics of Raising Equity Capital

1) Which of the following is not a common name for a corporation that invests in private companies?

A) Strategic investor

B) Corporate partner

C) Venture partner

D) Strategic partner

Use the information for the question(s) below.

You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would receive 2 million newly issued shares in return.

2) Assuming that this is the venture capitalist's first investment in your firm, what percentage of the firm will the venture capitalist own?

A) 50%

B) 40%

C) 25%

D) 33%

3) When a private equity firm purchases the outstanding equity of a publicly traded firm, thereby taking the company private, the transaction is called a(n)

A) private leveraged transaction.

B) leveraged buyout.

C) cash offer.

D) initial public offering.

4) Which of the following statements regarding firm commitment IPOs is false?

A) If the entire issue does not sell out, the remaining shares must be sold at a lower price and the underwriter must take the loss.

B) The underwriter purchases the entire issue (at a the offer price) and then resells it at a slightly higher price to interested investors.

C) It is the most common underwriting arrangement.

D) The underwriter guarantees that it will sell all of the stock at the offer price.

5) Which of the following is not one of the four characteristics of IPOs that puzzle financial economists?

A) On average, IPOs appear to be underpriced.

B) The long-run performance of a newly public company (three to five years from the date of issue) is superior to the overall market return.

C) The number of issues is highly...