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Bài test tiếng Anh ngành ngân hàng và đáp án phần 15

Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
1. Most businesses are started when an entrepreneur is given a vision for a new business
or product by institutional investors.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
2. 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


Ans: A

Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
3. The initial “seed” money usually comes from the entrepreneur or other founders.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 1
Level of Difficulty: Easy
4. The bootstrapping period usually lasts about five years.
A) True
B)

False

Ans: B

Page 1


Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
5. Venture capitalists are individuals or firms that help privately held businesses go public.
A) True
B)

False

Ans: B

Format: True/False


Learning Objective: LO 2
Level of Difficulty: Easy
6. Angel investors are investors who come to the rescue of firms threatened by takeovers.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
7. A significant number of venture capital firms focus on high-technology investments.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
8. A significant number of venture capital firms focus on mature businesses.
A) True
B)

False

Ans: B

Page 2


Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
9. Traditional sources of funding work for new or emerging businesses despite the
presence of only intangible assets.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
10. 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

Ans: A

Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
11. 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

Ans: B

Format: True/False
Learning Objective: LO 2
Level of Difficulty: Easy
12. A venture capitalist may exit an investment by selling common stock in an initial public
offering.
A) True
B)

False

Page 3


Ans: A

Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
13. 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

Ans: B

Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
14. Privately held firms find it easier to attract top management talent and to better
motivate current managers.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
15. 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

Ans: A

Format: True/False
Learning Objective: LO 3
Level of Difficulty: Easy
16. To complete an IPO, a firm will need the services of angel investors, who are experts in
bringing new securities to market.
A) True

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B)

False

Ans: B

Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
17. Underwriting is the risk-bearing part of investment banking.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
18. 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

Ans: A

Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
19. With a firm-commitment underwriting, the investment banking firm makes no
guarantee to sell the securities at a particular price.
A) True
B)

False

Ans: B

Page 5


Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
20. At the closing of a best-efforts offering, the issuing firm delivers the security
certificates to the underwriter and the underwriter delivers the payment for the
securities, net of the underwriting fee, to the issuer.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
21. Underpricing is defined as offering new securities for sale at a price below their true
value.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
22. In a best-efforts offering, the underwriters will suffer a financial loss if the offer price is
set too high.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 4
Level of Difficulty: Easy
23. If the offer price is set too high, the issuing firm will lose under a best-efforts
agreement.
A) True
B)

False

Page 6


Ans: A

Format: True/False
Learning Objective: LO 5
Level of Difficulty: Easy
24. 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

Ans: A

Format: True/False
Learning Objective: LO 6
Level of Difficulty: Easy
25. Bootstrapping and venture capital financing are part of the public market.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 6
Level of Difficulty: Easy
26. 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

Ans: A

Format: True/False
Learning Objective: LO 6
Level of Difficulty: Easy
27. The biggest drawback of private placements involves restrictions on the resale of the
securities.
A) True

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B)

False

Ans: A

Format: True/False
Learning Objective: LO 6
Level of Difficulty: Easy
28. Transactions in which a public company sells unregistered stock to an investor are
called PIPE transactions.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 6
Level of Difficulty: Easy
29. The major disadvantage of a PIPE transaction to issuers is that it slows the firm's access
to capital.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 7
Level of Difficulty: Easy
30. Term loans are defined as business loans with maturities greater than one month but
less than one year.
A) True
B)

False

Ans: B

Page 8


Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: Easy
31. The initial seed money comes from
A) public investors.
B)

investment banks.

C)

the entrepreneur or other founders.

D)

commercial banks.

Ans: C

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: Easy
32. 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.

Ans: A

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: Easy
33. Which one 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.

Ans: D

Page 9


Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
34. Which ONE 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 are true statements.
Ans: D

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
35. Which one of the following statements is NOT true?
A) Approximately $23 billion was invested in venture capital funds in 2010.
B)

The venture capital industry as we know it today emerged in the late 1990s.

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.
Ans: B

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
36. Tactics that venture capitalists use to reduce the risk of their investment include
A) funding the ventures in stages, requiring entrepreneurs to make no personal
investments, syndicating investments, and maintaining in-depth knowledge about
the industry in which they specialize.
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.
Ans: C

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Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
37. Which one 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.
Ans: B

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
38. 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.
None of the above.

D)

Ans: B

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
39. 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.

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Ans: C

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: Easy
40. Which ONE of the following statements is true?
A) A typical venture capital fund may generate annual returns of 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) A typical venture capital fund may generate annual returns of 12 percent on the
money that it invests, compared with an average annual return for the S&P 500 of
about 20 percent.
C) A typical venture capital fund may generate annual returns of 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
Ans: A

Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Easy
41. 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) Publicly traded firms find it harder to attract top management talent.
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.
Ans: B

Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Easy
42. Which ONE of the following statements is true?
A) After the IPO, there is a less active secondary market for the firm's shares.
B)
C)

Only smaller amounts of capital can be raised through an IPO than the amount
that can be raised through private sources.
Publicly traded firms find it easier to attract top management talent.

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D)

Going public can enable an entrepreneur to fund a growing business but not
without giving up control.
Ans: C

Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: Medium
43. 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.

Ans: A

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Easy
44. Basic services investment bankers provide when bringing securities to market include
A) Origination
B)

Underwriting

C)

distribution.

D)

All of the above.

Ans: D

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Easy
45. Which one of the following statements is NOT true?
A) Investment bankers provide three basic services when bringing securities to
market—origination, 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.

Page 13


Ans: C

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
46. 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.
Ans: C

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Easy
47. With a best-efforts 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) compensation is based on the number of shares sold.
D)

All of the above.

Ans: D

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
48. Which one of the following statements is NOT true?
A) In a best-efforts offering, the underwriters will suffer a financial loss if the offer
price is set too high.
B) In a best-efforts 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

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true value.
Ans: A

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Easy
49. 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.

Ans: B

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
50. 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
first day of trading.
B) priced between 10 and 15 percent above the price at which they close at the end
of first day of trading.
C) priced between 10 and 15 percent below the price at which they close at the end
of first day of trading.
D) priced between 2 and 5 percent above the price at which they close at the end of
first day of trading.
Ans: C

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Easy
51. Which one of the following statements is NOT true?
A) In a competitive sale, the firm specifies the type and amount of securities it wants
to sell.
B) In a negotiated sale, the issuer selects the underwriter at the beginning of the
origination process.
C) In a general cash offer, management must decide whether to sell the securities on
a competitive or a negotiated basis.
D) For equity securities, competitive sales generally provide the lowest-cost method
of sale.
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Ans: D

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Medium
52. Which one of the following statements is NOT true?
A) Shelf registration gives firms less flexibility in bringing securities to market.
B)
C)

During a two-year window, the firm can take the securities “off the shelf” and sell
them as needed.
Shelf registration allows firms to periodically sell small amounts of securities.

D)

A shelf registration statement can cover multiple securities, and there is no
penalty if authorized securities are not issued.
Ans: A

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Medium
53. Benefits from shelf registration include all EXCEPT:
A) Greater flexibility in bringing securities to market.
B)

Shelf registration allows firms to periodically sell small amounts of securities and
raise capital as needed.
C) A shelf registration statement can cover multiple securities, but there is a penalty
if authorized securities are not issued.
D) Costs associated with selling the securities are reduced because only a single
registration statement is required.
Ans: C

Format: Multiple Choice
Learning Objective: LO 6
Level of Difficulty: Medium
54. Which one of the following statements is NOT true?
A) For many smaller firms and firms of lower credit standing that have limited
access, or no access, to the public markets, the cheapest source of external
funding is often the private markets.
B) Bootstrapping and venture capital financing are not part of the private market.
C)

Bootstrapping and venture capital financing are part of the private market.

D)

Many private companies that are owned by entrepreneurs, families, or family
foundations and are sizable companies of high credit quality prefer to sell their
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securities in the private markets.
Ans: B

Format: Multiple Choice
Learning Objective: LO 6
Level of Difficulty: Medium
55. Which one of the following statements is NOT true?
A) Private placement occurs when a firm sells unregistered securities directly to
investors such as insurance companies, commercial banks, or wealthy
individuals.
B) All corporate debt is sold through the private placement market.
C)

About half of all corporate debt is sold through the private placement market.

D)

Investment banks and money center banks often assist firms with private
placements.
Ans: B

Format: Multiple Choice
Learning Objective: LO 6
Level of Difficulty: Easy
56. Advantages of private placements include:
A) Cost of funds may be lower.
B)

Private lenders are more willing to negotiate changes to a bond contract.

C)

The speed of private placement deals and flexibility in issue size.

D)

All of the above.

Ans: D

Format: Multiple Choice
Learning Objective: LO 6
Level of Difficulty: Medium
57. Which one of the following statements is NOT true?
A) Private equity firms pool money from wealthy investors, pension funds,
insurance companies, and other sources to make investments.
B) Private equity firms invest in more mature companies.
C)

Private equity firms invest in new companies.

D)

Private equity investors focus on firms that have stable cash flows because they
use a lot of debt to finance their acquisitions.
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Ans: C

Format: Multiple Choice
Learning Objective: LO 7
Level of Difficulty: Medium
58. Private equity firms improve the performance of firms in which they invest by:
A) making sure that the firms have the best possible management teams.
B)
C)
D)

closely monitoring each firm's performance and providing advice and counsel to
the firm's management team.
facilitating mergers and acquisitions that help improve the competitive positions
of the companies in which they invest.
All of the above.

Ans: D

Format: Multiple Choice
Learning Objective: LO 6
Level of Difficulty: Medium
59. Which one of the following statements is NOT true?
A) PIPE transactions are registered with the SEC.
B)

PIPE transactions are not registered with the SEC.

C)

In a PIPE transaction, investors purchase securities (equity or debt) directly from
a publicly traded company in a private placement.
D) The securities are virtually always sold to the investors at a discount to the price
at which they would sell in the public markets.
Ans: A

Format: Multiple Choice
Learning Objective: LO 6
Level of Difficulty: Medium
60. Which ONE of the following statements is true?
A) Under federal securities law, they can be resold to investors in the public markets
immediately even if they are not registered.
B) As part of the PIPE contract, the company often agrees to register the restricted
securities with the SEC, usually within 90 days of the PIPE closing.
C) As part of the PIPE contract, the company often agrees to register the restricted
securities with the SEC after 90 days of the PIPE closing.
D) PIPE transactions involving a healthy firm can also be executed without the use
of an investment bank but result in a cost increase of 7 to 8 percent of the
proceeds.
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Ans: B

Use the following to answer questions 61-63:
IPO pricing: 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.
Reference: Ref 15-1
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
61. What is the underpricing spread?
A) $51 million
B)

$15 million

C)

$66 million

D)

None of the above.

Ans: B
Feedback:
Underwriter's gross spread ($22 – $17) =$5 per share.
Number of shares outstanding = ($66 million/$22 per share) = 3 million.
Underwriting cost = ($5 per share x 3.0 million shares) = $15.0 million
Reference: Ref 15-1
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
62. What is the underpricing on this issue?
A) $9,900,000
B)

$24,900,000

C)

$15,000,000

D)

None of the above.

Ans: A

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Feedback:
Stock price at end of first day = $22(1.15) = $25.30
First-day underpricing = ($25.30 - $22) = $3.30 per share.
Total underpricing = ($3.30 per share x 3,000,000 shares of stock) = $9,900,000
Reference: Ref 15-1
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
63. 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

Ans: C
Feedback:
Total cost to the firm of selling the IPO
= $25,250,000

= $15,000,000 + $350,000 + $9,900,000

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
64. IPO pricing: 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?
A) $13.6 million
B)

$20.6 million

C)

$6.96 million

D)

$7.57 million

Ans: C
Feedback:
Stock price at end of first day = $19.30 × (1.18) = $22.78
First-day underpricing = ($22.78 – $19.30) = $3.48 per share.
Total underpricing = ($3.48 per share x 2,000,000 shares of stock) = $6,960,000

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Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
65. IPO pricing: 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)

$6.96 million

D)

None of the above.

Ans: A
Feedback:
Underwriter's gross spread ($19.30 – $12.50) =$6.80 per share.
Number of shares outstanding = ($38.6 million/$19.30 per share) = 2 million.
Underwriting cost = ($6.80 per share x 2.0 million shares) = $13.6 million
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
66. IPO pricing: 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) $13.6 million
B)

$20.83 million

C)

$20.6 million

D)

None of the above

Ans: B

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Feedback:
Stock price at end of first day = $19.30(1.18) = $22.78
First-day underpricing = ($22.78 – $19.30) = $3.48 per share.
Total underpricing = ($3.48 per share x 2,000,000 shares of stock) = $6,960,000
Underwriter's gross spread ($19.30 - $12.50) =$6.80 per share.
Number of shares outstanding = ($38.6 million/$19.30 per share) = 2 million.
Underwriting cost = ($6.80 per share x 2.0 million shares) = $13.6 million
Total cost to the firm of selling the = $13,960,000 + $270,000 + $6,960,000
IPO
= $20,830,000
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
67. IPO underpricing: 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

Ans: D
Feedback:
Change in price on first day = $24.70 – $19.00 = $5.70
Number of shares outstanding = 4.0 million
Loss due to underpricing = $5.70 × 4,000,000 = $22.8 million
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
68. IPO: Bethesda Biosys issues an IPO sold on a best-efforts basis. The company's
investment bank demands a spread of 18 percent of the offer price, which is set at $25
per share. Four million shares are issued. However, the bank was overly optimistic and
eventually is able to sell the stock for only $23 per share. What are the proceeds for the
issuer?
A) $74 million
B)

$92 million

C)

$100 million

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D)

None of the above

Ans: A
Feedback:
Gross proceeds from offer = $25.00 x 4,000,000 = $100,000,000
Underwriting spread = $100,000,000 x 0.18 = $18,000,000
Proceeds to issuer = ($23 x $4,000,000) – $18,000,000 = $74 million
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
69. IPO: Fortune Hotels issues an IPO sold on a best-efforts basis. The company's
investment bank demands a spread of 20 percent. Five million shares are issued.
However, the bank was overly optimistic and could not sell at the offer price of $31. If
the net proceeds to the issuer were $110 million, what was the per share price at which
the shares were sold?
A) $27.50
B)

$22

C)

$31

D)

None of the above

Ans: A
Feedback:
Number of shares issued = 5 million
Net Proceeds to issuer = $110 million
Underwriting spread = 20%
Gross proceeds from offer = $110,000,000 / 0.80 = $137.5 million
Selling price per share = $137.5 million / 5 million = $27.50
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
70. IPO: Fortune Hotels issues an IPO sold on a best-efforts basis. The company's
investment bank demands a spread of 20 percent. Five million shares are issued.
However, the bank was overly optimistic and could not sell at the offer price of $31. If
the net proceeds to the issuer is $110 million, how much did the investment bank
receive?
A) $22.0 million
B)

$27.5 million

Page 23


C)

$31.0 million

D)

None of the above

Ans: B
Feedback:
Number of shares issued = 5 million
Net proceeds to issuer = $110 million
Underwriting spread = 20%
Gross proceeds from offer = $110,000,000 / 0.80 = $137.5 million
Proceeds to underwriter = $137.5 million × 0.20 = $27.5 million
Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: Medium
71. IPO: Dienz Pharma issues an IPO sold on a best-efforts basis. The company's
investment bank demands a spread of 16 percent of the selling price. The offer price is
set at $32 per share. Three million shares are issued. However, the bank was able to see
the shares at $26.25 per share. What are the proceeds for the issuer?
A) $96.00 million
B)

$78.75 million

C)

$66.15 million

D)

None of the above

Ans: C
Feedback:
Number of shares issued = 3 million
Gross proceeds from issue = ($26.25 × 3,000,000) = $78,750,000
Underwriting spread = $78,750,000 x 0.16 = $12,600,000
Proceeds to issuer = $78,750,000 – $12,600,000 = $66.15 million
Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: Medium
72. General cash offering: Star Corporation, an auto fuel cell maker, is planning a new
plant and needs to raise $30 million to finance it. The company plans to raise the money
through a general cash offering priced at $23.50 a share. Star's underwriters charge a 6
percent spread. How many shares does the company have to sell to achieve its goal?
A) 1,358,081 shares
B)

1,276,596 shares

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C)

1,200,000 shares

D)

None of the above

Ans: A
Feedback:
Underwriter's spread = 6 %
Price per share the firm gets = 23.50*(1 – 0.06) = $22.09
Therefore, to raise $30 million, the company needs to issue:
$30,000,000 / $22.09 = 1,358,081 new shares
Format: Multiple Choice
Learning Objective: LO 7
Level of Difficulty: Medium
73. Bank lending: Jasper, Inc., is looking for a five-year term loan of $3 million. Its bank
is willing to make the loan. The firm will have to pay a premium of 1.5 percent for
default risk and another 0.75 percent for maturity risk. The current prime rate is 7.5
percent. What is the loan rate on this bank loan?
A) 9%
B)

8.25%

C)

9.75%

D)

None of the above

Ans: C
Feedback:
Prime rate = PR = 7.5%
Maturity risk premium = MAT = 0.75%
Default risk premium = DRP = 1.5%
Cost of loan = k = PR + DRP + MAT = 7.5% + 1.5% = 0.75% = 9.75%
Format: Multiple Choice
Learning Objective: LO 7
Level of Difficulty: Medium
74. Bank lending: Suppose two firms want to borrow money from a bank for a period of
10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm
B's credit standing is prime + 2. The current prime rate is 5.75 percent, the 30-year
Treasury bond yield is 4.35 percent, the three-month Treasury bill yield is 3.54 percent,
and the 10-year Treasury note yield is 4.24 percent. What are the appropriate loan rates
for each customer?
A) 6.45%, 7.75%

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