Q&A Hero

Q: 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.

Q: Dienz Pharma plans to issue an IPO on a best-effort basis. The company's investment bank demands a spread of 16 percent of the selling price. The selling price is $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) None of the above

Q: Fortune Hotels issues an IPO on a best-effort basis. The company's investment bank demands a spread of 20 percent of the selling price. Five million shares are issued. The average selling price remains at $31. How much did the investment bank receive? A) $22.0 million B) $27.5 million C) $31.0 million D) None of the above

Q: Fortune Hotels issues an IPO on a best-effort basis. The company's investment bank demands a spread of 20 percent of the selling price. Five million shares are issued. The average selling price remains at $31. What are the net proceeds per share for the issuer? A) $27.50 B) $22 C) $31 D) $24.8

Q: Bethesda Biosys issues an IPO on a best-effort basis. The company's investment bank demands a spread of 18 percent of the selling price. The average selling price remains at $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

Q: 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

Q: 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) None of the above

Q: 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) None of the above

Q: 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

Q: Stump, Inc. a technology firm in Prairie View, Texas, 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

Q: Stump, Inc. a technology firm in Prairie View, Texas, 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) None of the above

Q: Stump, Inc. a technology firm in Prairie View, Texas, 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) None of the above

Q: 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.

Q: The three basic 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) None of the above

Q: Which of the following statements is NOTtrue? A) Investment bankers provide three basic services when bringing securities to marketorigination, 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.

Q: Basic services investment bankers provide when bringing securities to market include A) origination. B) underwriting. C) distribution. D) All of the above

Q: 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.

Q: With a best-effort underwriting A) the investment banking firm makes no guarantee to sell the securities at a particular price. B) the investment banker does not bear the price risk associated with underwriting the issue. C) the compensation is based on the number of shares sold. D) All of the above

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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) None of the above

Q: 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) None of the above

Q: 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) None of the above

Q: 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.

Q: 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) None of the above

Q: 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.

Q: Which of the following statements is 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) All of the above statements are true.

Q: 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.

Q: 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) None of the above

Q: The initial seed money usually comes from A) public investors. B) investment banks. C) the entrepreneur or other founders. D) commercial banks.

Q: Term loans are defined as business loans with maturities greater than one month but less than one year. A) True B) False

Q: The major disadvantage of a PIPE transaction to issuers is that the funding cost is higher as compared to making a public offer. A) True B) False

Q: Transactions, in which a public company sells unregistered stock to an investor, such as a hedge fund or some other institutional investor, are called PIPE transactions. A) True B) False

Q: The biggest drawback of private placements involves restrictions on the resale of the securities. A) True B) False

Q: Private placement occurs when a firm sells unregistered securities directly to investors such as insurance companies, commercial banks, or wealthy individuals. A) True B) False

Q: Bootstrapping and venture capital financing are part of the public market operations of a business. A) True B) False

Q: 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. A) True B) False

Q: If the offer price is set too high, the issuing firm will lose under a best-effort agreement. A) True B) False

Q: In a firm-commitment offering, the underwriters will suffer a financial loss if the offer price is set too high. A) True B) False

Q: Underpricing is defined as offering new securities for sale at a price below their true value. A) True B) False

Q: 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

Q: With a firm-commitment underwriting, the investment banking firm makes no guarantee to sell the securities at a particular price. A) True B) False

Q: In the firm-commitment underwriting, which is more typical, the investment banker guarantees the issuer a fixed amount of money from the stock sale. A) True B) False

Q: Underwriting is the risk-bearing part of investment banking. A) True B) False

Q: To complete an IPO, a firm will need the services of angel investors, who are experts in bringing new securities to market. A) True B) False

Q: To complete an IPO, a firm will need the services of investment bankers, who are experts in bringing new securities to market. A) True B) False

Q: Privately held firms find it easier to attract top management talent and to better motivate current managers. A) True B) False

Q: 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. A) True B) False

Q: A venture capitalist may exit an investment by selling common stock in an initial public offering. A) True B) False

Q: A principal way for venture capitalists to exit is to sell part of the firm's equity back to the entrepreneur. A) True B) False

Q: 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. A) True B) False

Q: 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

Q: A significant number of venture capital firms focus on mature businesses. A) True B) False

Q: A significant number of venture capital firms focus on high-technology investments. A) True B) False

Q: Angel investors are investors who come to the rescue of firms threatened by takeovers. A) True B) False

Q: Venture capitalists are individuals or firms that help privately held businesses by providing funds in the bootstrapping process. A) True B) False

Q: The bootstrapping period usually lasts for at least five years. A) True B) False

Q: The initial seed money usually comes from the entrepreneur or other founders. A) True B) False

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

Q: Most businesses are started when an entrepreneur who has a vision is given seed funding by institutional investors. A) True B) False

Q: How does a just-in-time inventory management work?

Q: Explain working capital trade-off.

Q: What are some strategies that financial managers can follow in managing their working capital accounts?

Q: Which of the following is a short-term financing instrument? A) Accounts payable B) Bank loans with a maturity of less than 1 year C) Commercial paper D) All of the above

Q: A firm sells $125,000 of its accounts receivable to factors at 3 percent discount. The firm's average collection period is one month. What is the dollar cost of the factoring service? A) $3,000 B) $4,500 C) $3,750 D) $4,250

Q: Storm Electronics has set up a formal line of credit of $2 million with First Kentucky Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 60 basis points on the unused balance. The firm borrowed $1,500,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to two decimal places. A) 7.50% B) 6.45% C) 6.25% D) 7.15%

Q: Trend, Inc. has just set up a formal line of credit of $5 million with First National Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 7.5 percent on the loan, and in addition, the firm will pay an annual fee of 50 basis points on the unused balance. The firm borrowed $2,300,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to one decimal place. A) 8.5% B) 7.2% C) 9.0% D) 8.1%

Q: Gibbs, Inc. has just set up a formal line of credit of $1 million with First National Bank. The line of credit is good for up to five years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 50 basis points on the unused balance. The firm borrowed $600,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to 2 decimal places. A) 8.00% B) 7.25% C) 6.58% D) 8.25%

Q: Maggie's Bistro is borrowing $375,000. The loan requires an 8 percent compensating balance, and the effective interest rate on the loan is 10.326 percent. What is the stated APR on this loan? Round your final percentage answer to 1 decimal place. Do not round your intermediate calculations. A) 10.0% B) 9.5% C) 7.4% D) 8.5%

Q: Good Homes Furnishings is borrowing $225,000. The loan requires a 10 percent compensating balance, and the effective interest rate on loan is 8.25 percent. What is the stated APR on this loan? Round your final percentage answer to two decimal places. Do not round your intermediate calculations. A) 10.00% B) 11.11% C) 7.43% D) 8.25%

Q: Sun Prairie Traders borrowed $63,000 at an APR of 10 percent. The loan called for a compensating balance of 10 percent. What is the effective interest rate on the loan? Round your final percentage answer to two decimal places. A) 10.00% B) 11.11% C) 8.00% D) 12.50%

Q: Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 percent. The loan calls for a compensating balance of 8 percent. What is the effective interest rate for this company? Round your final percentage answer to two decimal places. A) 9.24% B) 8.50% C) 8.00% D) 16.50%

Q: Which of the following statements is NOT true? A) Firms using maturity matching strategy fund all working capital needs with long-term borrowing. B) Long-term financing strategy relies on long-term debt to finance both capital assets and working capital. C) All permanent working capital and fixed assets are funded with long-term debt when firms use a maturity matching strategy. D) Firms using a maturity matching strategy fund all seasonal working capital needs with short-term borrowing.

Q: Which of the following statements about short-term funding strategy is true? A) All seasonal working capital needs and a portion of permanent working capital and fixed assets are funded with short-term debt. B) The downside to this strategy is that a portion of a firm's long-term assets must be periodically refinanced over their working lives. C) It can take advantage of an upward-sloping yield curve and lower a firm's overall cost of funding. D) All of the above

Q: Which of the following statements about maturity matching strategy is true? A) All seasonal working capital needs are funded with short-term borrowing. B) As the level of sales varies seasonally, short-term borrowing fluctuates with the level of seasonal working capital. C) All fixed assets are funded with long-term financing. D) All of the above

Q: Rocky Corp. has daily sales of $18,100. The financial manager determined that a lockbox would reduce the collection time by 2.2 days. Assuming the company can earn 6 percent interest per year, what are the savings from the lockbox? Round your final answer to the nearest dollar. A) $3,621 B) $2,389 C) $39,820 D) $1,100

Q: Porter Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.3 days. The firm's sales on average are $41,250 a day, with the average check being $165. The bank charges $0.39 per processed check. Assume that there are 270 business days in a year and the opportunity cost of funds is 5 percent. What will the firm's savings be from using the lockbox? A) $3,427.50 B) $975.50 C) $2,632.50 D) $94,875.00

Q: Which of the following statements about collection time is NOT true? A) Collection time, or float, is the time between when a customer makes a payment and when the cash becomes available to the firm. B) Collection time can be broken down into three components. C) Delivery time or mailing time is not part of the collection time. D) Processing delay is one of the components of the collection time.