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MLF4Ch.14-Angel Investor: Wealthy individuals who buy Equity in small private firms (entrepreneurs, lawyers, doctors,etc.)
CharacterisƟcs: Technologies that they understand./close to where they live./very early stage companies./less than $1million.
Venture capital firms: a limited partnership that specializes in raising money to invest in private equity of young firms
-Benefit of VC: provides substanƟal capital for young companies./performs a key monitoring role./have experience. /quality VC’s
send a strong signal to the market.//
They use their control to protect their investments, so they may therefore perform a key
nurturing and monitoring role for the firm
-Costs of VC: must give up part of the ownership of the firm in return for the money you need to grow./VC’s also oŌen demand a
great deal of control.
-Which of the following statements regarding exit strategies is FALSE? A :Roughly 25% of venture capital exits from 2001-2005
occurred through mergers or acquisiƟons.
B.An important consideraƟon for investors in private companies is their exit strategy, or how they
will eventually realize the return from their investment.
C.
An alternaƟve way to provide liquidity to its investors is for the company to become a
publicly traded company.
D.
OŌen large corporaƟons purchase successful
start−up companies. In such a case, the acquiring company purchases the outstanding stock of the private company, allowing all investors to cash
out.
-Advantages of Going Public: Access to a larger supply of capital through the public market| Greater liquidity and diversificaƟon.
-Disadvantages of Going Public: Loss of control for current owners|The equity holders become more widely dispersed making it
difficult to monitor management|The firm must saƟsfy all of the requirements of public companies (SEC filings,etc.)| Info on the
firm's financial health is public|The firm must face direct and indirect costs of issuing equity.
-You have started a company and are in luck—a venture capitalist has offered to invest. You own 100% of the company with 5.70
million shares. The VC offers $1.22 million for 855,000 new shares.
a. What is the implied price per share? Price=1,220,000/855,000= $1.43 per share
b. What is the post-money valuaƟon? 5,700,000+855,000=6,555,000 Post-Money ValuaƟon= $1.43 per share x 6,555,000 shares=
9,373,650
c. What fracƟon of the firm will you own aŌer the investment? FracƟonal Ownership= 5,700,000/6,555,000 = 86.96%
-Which of the following is NOT a reason why
an IPO is aƩracƟve to the managers of a private company?
It reduces the complexity
of requirements regulaƟng the company's management.
-Which of the following best describes
those shares sold when a company goes public which raises new capital?
Primary Offering.
-What is the major reason that
underwriters tend to offer stocks in an IPO at a price that is below that which the market will pay?
to reduce their exposure to losses from unsold stock
-Which of the following statements is FALSE?
The shares that are sold in the IPO may either be new shares that raise new capital,
known as a secondary offering, or exisƟng shares that are sold by current shareholders (as part of their exit strategy), known as a
primary offering.
-Which of the following statements regarding best efforts IPOs is FALSE? If the enƟre issue does not sell out, the underwriter is on
the hook.
-Which of the following statements regarding firm commitment IPOs is FALSE? The underwriter purchases the enƟre issue (at an
offer price) and then resells it at a slightly higher price to interested investors
-As part of the registraƟon statement
, the preliminary prospectus circulates to investors before the stock is offered. This
preliminary prospectus is also called a(n)_. Red Herring
-Your investment bankers
price your IPO at $16.50 per share for 12.0 million shares. If the price at the end of the first day of trading
is $18.30 per share,
a. What was the percentage underpricing? Underpricing= 18.30-16.50= 1.80| Percentage of underpricing= 1.80/16.50=10.9%
b. How much money did the firm miss out on due to underpricing? Forgone Money= 1.80 x 12=21.6
-Smith Brothers, Inc
.,sold 7 million shares in its IPO, at a price of $19.15 per share. Management negoƟated a fee (the underwriƟng
spread) of 10.2% on this transacƟon. What was the dollar cost of this fee? IPO Value= 19.15*7=134.1|underwriƟng Fees=
134.1*0.102=13.68
-The firm you founded currently has 18 million shares,
of which you own 9 million. You are considering an IPO where you would
sell 4 million shares for $24.50 each. If all of the shares sold are primary shares, how much will the firm raise? What will be your
percentage ownership of the firm aŌer the IPO?
Amount Raised=4*24.50=98|Your Ownership=9/22=0.409=40.9
-
The firm you founded currently has 18 million shares,
of which you own 9 million. You are considering an IPO where you would
sell 4 million shares for $24.50 each. If all of the shares sold are from your holdings, how much will the firm raise? What will be your
percentage ownership of the firm aŌer the IPO? Your Ownership= (9-4)/18=0.2778=27.78%
-How does the total cost of issuing stock for the first Ɵme compare to the costs of other securiƟes?
substanƟally larger than the
costs for most other securiƟes
-Which of the following is
a notable puzzle in IPOs?
The number of IPOs is highly cyclical.
-Which of the following is
NOT one of the four characterisƟcs of IPOs that puzzle financial economists?
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
MLF5:
The chief advantage of debt financing over financing through raising equity capital is that the former does not dilute the
current owner's share of the business.=>TRUE
2. Which of the following is usually a form of public debt? => A BOND ISSUE
3. In terms of public offerings of bonds, what is an indenture? => formal contract that specifies the firm obligation to the bondholders.
4. What is a prospectus? => .a memorandum that must be produced to describe the details of a bond offering
5. Smithfield Enterprises issues debt with a maturity of 7 years. In the case of bankruptcy, holders of this debt may only claim those
assets of the firm that are not already pledged as collateral on other debt. Which of the following best describes this type of
corporate debt? => A NOTE
6. Gepps Cross Industries issues debt with a maturity of 25 years. In the case of bankruptcy, holders of this debt may only claim
those assets of the firm that are not already pledged as collateral on other debt. Which of the following best describes this type of
corporate debt?=> A DEBENTURE
7. Athelstone Realty issues debt with a maturity of 20 years. In the case of bankruptcy, holders of this debt may claim the property
held by Athelstone Realty. Which of the following best describes this type of corporate debt? => mortgage BOND
8.A company that deals mainly with the financing and distribution of music, issues debt with a maturity of 15 years. In the case of
bankruptcy, holders of this debt will have claim to the intellectual property of Clearview. Which of the following best describes this
type of corporate debt? Asset- backed bond
9. Which of the following statements is FALSE?A. Because more than one debenture might be outstanding, the bondholder's priority
in claiming assets in the event of default, known as the bond's seniority, is important./ B. In the event of default, the assets not
pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior
debt has been paid off./ C.When a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt, the
new debt is known as a subordinated debenture.//D.Most debenture issues contain clauses restricting the company from issuing new
debt with equal or lower priority than existing debt.
10. What is a bond's seniority?// the bondholder's priority in claiming assets in the event of default
11. Which of the following statements regarding the private debt market is FALSE? A.Private debt has the disadvantage of being
illiquid. //B.The public debt market is larger than the private debt market.
C. Private debt has the advantage that it avoids the cost of registration. D. Bank loans are an example of private debt
—
debt that is
not publicly traded.
17. Bonds with a high risk of default generally offer high yield=> TRUE
18.
The credit spread of a bond shrinks if it is perceived that the probability of the issuer
=> FALSE
20. Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds?=> U.S.
Treasury securities are widely regarded to be risk−free.
22. A corporate bond which receives a BBB rating from Standard & Poor's is considered AN INVESTMNET GRADE BOND
MLF 6:1.
According to researchers Modigliani and Miller, with perfect capital markets, the total value of a firm should not depend on
its capital structure.=>true
2.
With perfect capital markets, because different choices of capital structure offer a benefit to investors, the capital structure affects
the value of a firm. => FALSE
3. By adding leverage, the returns on a firm are split between debt holders and equity holders, but equity holder risk increases
because
=>
interest payments have first priority
4.
In a setting where there is no risk that a firm will default, leverage
INCREASED
the risk of equity.
5
. Consider two firms
, Firm X and Firm Y,
that have identical assets that generate identical cash flows. Firm Y is an all−equity firm,
with 1 million shares outstanding that trade for a price of
$24 per share
. Firm X has 2 million shares outstanding and $12 million in
debt at an interest rate of 5%. According to MM Proposition I, the stock price for Firm X is closest to
=> 24-12=12/ 2(M shares
outstanding)=$6
14. A bankruptcy process is complex, time−consuming, and costly. The costs of bankruptcy include costs of hiring legal experts,
appraisers, and auctioneers
15. Aside
from direct costs of bankruptcy
, a firm may also incur other indirect costs such as
loss of customers and loss of
supplies.
16
. The presence of financial distress
costs can explain why firms choose debt levels that are too low to exploit the interest tax
shield =>
TRUE
17. Differences in the magnitude of financial distress costs and volatility of cash flows across industries do not impact the choice of
leverage.=> FALSE
18. The tradeoff theory of optimal capital structure weighs the benefits of debt against the costs of
FINANCIAL DISTRESS
19. The Tradeoff Theory suggests that a firm should choose a debt level where the tax savings from increasing leverage are just
offset by the increased probability of incurring the costs of financial distress.
20. Firms in industries such as real estate tend to have LOW distress costs because of a large proportion of tangible asset
CHAPTER 15:
Term Loan: a bank loan that lasts for a specific term.
//
Syndicated Bank Loan: a single loan that is funded by
a
group of banks rather than a single bank.
Revolving Line of Credit (Revolver): a credit
commitment for a specific time period up to
some
limit, typically two to three years, which a company can
use as needed.
Asset-Backed Line of Credit: a type of credit
commitment, in which the borrower secures a line of
credit by pledging an asset as
collateral.
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