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What is the difference between preference shares issued by a young private company and a mature company?

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Preference shares issued by a young, pri...

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Which of the following statements is FALSE?


A) In recent years, the US investment banking firm of W.R. Hambrecht and Company has attempted to change the IPO process by selling new issues directly to the public using an online auction IPO mechanism called Open IPO.
B) Because of the potential conflict of interest, the underwriter will not make a market in the share after the issue.
C) ASIC requires that companies prepare a prospectus, a document that provides financial and other information about the company to investors, prior to an IPO. Company managers work closely with the underwriters to prepare the prospectus.
D) The lead underwriter is the primary banking firm responsible for managing the deal. The lead underwriter provides most of the advice and arranges for a group of other underwriters, called the syndicate, to help market and sell the issue.

E) All of the above
F) A) and B)

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Which of the following statements regarding firm commitment IPOs is FALSE?


A) The underwriter guarantees that it will sell all of the issue at the offer price.
B) It is the most common underwriting arrangement.
C) The underwriter purchases the entire issue (at the offer price) and then resells it at a slightly higher price to interested investors.
D) 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.

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

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Parafoil Avionics sells 50 million shares in an SEO - 40 million being primary shares issued by the company and 10 million being secondary shares sold by investors in the company. At the time of the sale, Parafoil's shares were selling at $12.50 per share. If the underwriter charges 5% of the gross proceeds as a fee, how much money did existing investors in the company net from the sale?


A) $475 million
B) $125 million
C) $118.75 million
D) $500 million

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

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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. -After the venture capitalist's investment, the post-money valuation of your shares is closest to?


A) $4.0 million
B) $5.0 million
C) $12.5 million
D) $2.5 million

E) All of the above
F) A) and B)

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An entrepreneur founded his company using $200,000 of his own money, issuing himself 200,000 shares. An angel investor bought an additional 100,000 shares for $200,000. The entrepreneur now sells another 400,000 shares to a venture capitalist for $1 million. What is the post-money valuation of the company?


A) $1,140,000
B) $1,000,000
C) $1,750,000
D) $2,000,000

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

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Convex Incorporated sells 10 million shares in an SEO - 6 million being primary shares issued by the company and 4 million being secondary shares sold by investors in the company. At the time of the sale, Convex's shares were selling at $8.00. If the underwriter charges 6% of the gross proceeds as a fee, how much money was raised in the sale?


A) $75.20 million
B) $80.00 million
C) $45.12 million
D) $48.00 million

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

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The main advantages for a firm in going public are greater liquidity, better access to capital, and greater ability of investors to monitor the management of the firm.

A) True
B) False

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Criswell Mining shares trade at $18 per share and there are 200 million shares outstanding. The management would like to raise $100 million in an SEO. If the underwriter charges 5% of gross proceeds, how many shares must it sell?


A) 5.85 million
B) 8.93 million
C) 11.11 million
D) 5.56 million

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

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Which of the following statements regarding best efforts IPOs is FALSE?


A) Often these arrangements have an all-or-none clause: either all of the shares are sold in the IPO, or the deal is called off.
B) If the entire issue does not sell out, the underwriter is on the hook.
C) For smaller IPOs, the underwriter commonly accepts the deal on this basis.
D) The underwriter does not guarantee that the issue will be sold, but instead tries to sell the issue for the best possible price.

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

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Which of the following statements is FALSE?


A) As with IPOs, evidence suggests that companies overperform following a seasoned offering.
B) The one advantage of a cash offer is that the underwriter takes on a larger role and, therefore, can credibly certify the issue's quality.
C) SEO underwriting fees average about 5% of the proceeds of the issue and, as with IPOs, the variation across issues of different sizes is relatively small.
D) Often the value destroyed by the price decline can be a significant fraction of the new money raised with a SEO.

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

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Which of the following statements is FALSE?


A) In Australia, most SEOs of new shares are rights offers.
B) Primary shares are new shares issued by the company.
C) In a cash offer, the firm offers the new shares to existing shareholders.
D) Rights offers protect existing shareholders from underpricing.

E) All of the above
F) B) and C)

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In its IPO, Jillian's Imprints, a small publishing house, offered shares at a price of $8.00 per share. The underwriters of this IPO had a spread of 6.5% per share. If 2 million shares were sold, what funds did Jillian's Imprints receive from the IPO?


A) $17.04 million
B) $14.96 million
C) $16.00 million
D) $5.21 million

E) None of the above
F) All of the above

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What are some of the advantages of going public?

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Going public provides liquidit...

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Which of the following statements is FALSE?


A) Public companies typically have access to much larger amounts of capital through the public markets.
B) The two advantages of going public are greater liquidity and better access to capital.
C) The process of selling shares to the public for the first time is called a seasoned equity offering.
D) By going public, companies give their private equity investors the ability to diversify.

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

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What are the advantages of a rights offer over a cash offer when issuing new shares?


A) It enables a firm to attract new investors from outside its current owners.
B) It enables a firm to access new sources of capital to fund its growth.
C) It enables a firm to attract new investors by offering them a windfall from the difference between the price of the issued shares and the price of shares after the offering.
D) It enables a firm to issue equity without imposing a loss on current shareholders.

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

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The founders and owners of a private company have funded it through the following rounds ofinvestment:  Round  Source  Price  Number of Shares  Class A  Self $1.00200,000 Class B  Angel $1.00300,000 Class C  Venture Capital $1.25400,000\begin{array} { l l c c } \text { Round } & \text { Source } & \text { Price } & \text { Number of Shares } \\\hline\text { Class A } & \text { Self } & \$ 1.00 & 200,000 \\\text { Class B } & \text { Angel } & \$ 1.00 & 300,000 \\\text { Class C } & \text { Venture Capital } & \$ 1.25 & 400,000\end{array} The owners decide to take the company public through an IPO, issuing 1 million new shares. Assuming that they successfully complete the IPO, the net income for the next year is estimated to be $5 million. The price of shares is set using average price-earnings ratios for similar businesses of 17.0. What will be the IPO price per share?


A) $12
B) $22
C) $45
D) $36

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

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Equity investors in a private company usually plan to realise a return on their investment by selling their shares when that company is acquired by another firm or sold to the public in a public offering.

A) True
B) False

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Which of the following statements is FALSE?


A) Several high profile corporate scandals during the early part of the twenty-first century prompted tougher regulations designed to address corporate abuses.
B) The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When investors diversify their holdings, the equity holders of the corporation become more concentrated.
C) Once a company goes public, it must satisfy all of the requirements of public companies.
D) Organisations such as the Australian Securities and Investments Commission (ASIC) , the Australian Securities Exchanges (ASX) , and other regulatory authorities adopted new standards that focused on more thorough financial disclosure, greater accountability, and more stringent requirements for the board of directors.

E) A) and D)
F) All of the above

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Which of the following is an activity typically taken by an underwriter during an IPO of a company?


A) marketing the IPO
B) determining the offer price
C) helping the company with all necessary filings
D) all of the above

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

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