Chapter 15

Question 1

Define venture capital?

Answer 1

Money invested to finance a new firm

VC organisations are dedicated to this type of investment

Question 2

Note

Answer 2

Success of new firms depends heavily on managers, tf SHs are keen to provide incentives for managers (eg. by buying preferred stock)
Restrictions can be placed on management by VC company and then funds dispersed as firm succeeds

Question 3

6 stages of a firms growth from nothing to going public?

Answer 3

1) SEED MONEY: low level financing provided to prove new idea
2) START-UP: early stage firms that need funding for expenses associated with marketing and product development
3) FIRST ROUND: early sales and manufacturing funds
4) SECOND ROUND: working capital for early stage firms that are selling
5) THIRD ROUND: also called Mezzanine financing, it is expansion money for a newly profitable firm
6) FOURTH ROUND: also called bridge financing, it is intended to finance the firms ‘going public’ process

Question 4

What is a venture capitalist?

Answer 4

Investment firms that makes venture investment, providing capital for start-up or expansion
They look for higher rates of return, and bring managerial expertise to the firm

Question 5

What are business angels?

Answer 5

Private investors with huge amounts of personal capital, who look to invest in business ignored by FIs for being too risky

Question 6

Read

Answer 6

Bit below business angels

Question 7

Point regarding riskiness of VC?

Answer 7

High uncertainty tf need to identify losers early on; don’t throw good money after bad!
RofR roughly 13%/year

Question 8

What is the IPO?

Answer 8

First offering of stock to the public

Question 9

What is a primary offering?

Answer 9

New shares are sold to raise additional cash for the firm

Question 10

What is a secondary offering?

Answer 10

Existing shareholder decides to cash in by selling part of their holdings

Question 11

See

Answer 11

page 4 ‘motives for IPO’

Question 12

4 steps of an IPO?

Answer 12

1) Select underwriters
2) Form registration statement, take key info from it and make prospectus
3) (optional) Road show
4) Once have go ahead from SEC, stock is issued at agreed price

Question 13

Role of underwriters? (3)

Answer 13

• provide firm with financial advice
• buy the issue
• resell issue to public

Question 14

What are blue-sky laws?

Answer 14

Laws in each state that the issues must comply with that regulates the sales of securities

Question 15

What does a prospectus do?

Answer 15

It provides key info on the issuing of securities

Question 16

What is a road show?

Answer 16

A talk to potential investors to gauge interest/max WTP for shares etc.

Question 17

What is a spread?

Answer 17

The difference between the public-offer price and the price paid by the underwriter (normally roughly 7%)

Question 18

What is underpricing and why is it done?

Answer 18

When the underwriter sells shares below the true value to ensure they all sell

Question 19

Way an underwriter can reduce their risk?

Answer 19

They can sell on a ‘best-effort’ basis tf can return stock to firm that they can’t sell (if v. risky)

Question 20

Explain the largest cost of an IPO?

Answer 20

Usually it is underpricing of stock, roughly 17.9% in US and more elsewhere; it effectively transfers wealth from original SHs to the new ones (eg. Ebay from $18 to $47 in one day after IPO)

Question 21

See and learn

Answer 21

US bookbuilding method page 6 v important

Question 22

Way of gauging share price to sell at for an IPO?

Answer 22

Open auction: investors submit their bids stating how many shares and at what price and highest bidders get the shares (reduces underpricing costs)

Question 23

Define general cash offer?

Answer 23

Sale of securities to investors by an already public company

Question 24

How can a shelf registration reduce hassle for firms wrt gaining finance?

Answer 24

It allows firms to file one registration statement for several issues of the same security

Question 25

Define private placement?

Answer 25

Sale of securities to limited (max 35) investors with no IPO

Avoids SEC registration hassle but then more difficult to resell!

Question 26

Read bottom of notes ch15

Answer 26

now

Question 27

Define rights issues?

Answer 27

Issues of securities offered only to current stockholders (also called privileged subscriptions/issues)

Question 28

see and understand bits mentioned in bottom of notes for slides

Answer 28

now