6

Question 1


What is the private equity market

Answer 1

Private placements

Private equity firm, venture equity and non venture equity

Suppliers of venture capital

Question 2

What is private equity

Answer 2

All kinds of funds that pool money from a number of investors in order to gather large amounts of money that are then used to acquire stakes in companies

Question 3

What is private equity non venture part often associated with

Answer 3

Funds looking to mature, revenue generating companies in need of some revitalisation

Question 4

Where does private equity primarily come from

Answer 4

Institutional investors and accredited investors who can dedicate substantial amounts of money for extended time periods

Question 5

What is venture capital

Answer 5

Technically private equity but venture capital often goes into younger companies generally with high-level risk that look promising but need an injection of cash in order to grow. They can be very hands off or may want a say in how company is run

Question 6

How do venture capitalists make their money

Answer 6

By finding good deals in young businesses and offer to invest a set amount of money for a share in company. They’ll rarely buy company outright 

Question 7

What are the financing stages

Answer 7

Seed money
Start-up
Later stage capital
Growth capital
Buyout financing

Question 8

What is a general cash offer

Answer 8

Issue of securities offered for sale to general public on cash basis

Question 9

What is a rights issue

Answer 9

Public issue of securities in which securities are first offered to existing shareholders

Question 10

What is initial public offering (IPO)

Answer 10

Companies first Equity issue made to public

Question 11

What is a seasoned equity issue (SEO)

Answer 11

New equity issue of securities by a company that has previously issued securities to public

Question 12

What is investment banking function in cash offer

Answer 12

Formulate method used to issue new securities

Price new securities

Sell new securities

Question 13

What are the methods of underwriting in cash offer

Answer 13

Firm commitment
Best efforts
Dutch auction

Question 14

What is firm commitment

Answer 14

Underwriter buys entire issue for less than offering price and accepts risk of not being able to sell them. Difference between underwriters buying price and offering price is called spread or discount

Question 15

What is best efforts

Answer 15

Underwriter acts as an agent receiving commission for each share sold. Underwriter sells as much of issue as possible but can return unsold shares to issuer without financial responsibility

Question 16

What is Dutch auction

Answer 16

Underwriter doesn’t set fixed price for shares to be sold. Instead, underwriter conducts auction in which investors bet for shares. Offer price is determined based on submitted bids

Question 17

What is the aftermarket

Answer 17

Period after a new issue is initially sold

Question 18

What is the green shoe provision

Answer 18

Contract provision giving underwriter option to purchase additional shares from issuer at offering price. Also called over allotment option

Question 19

What is the lock up agreement

Answer 19

Part of underwriting contract that specifies how long insiders must wait after an IPO before they can sell equity

Question 20

What is the quiet period

Answer 20

Period following an IPO during which many regulatory authorities place restrictions on public communications of issuer

Question 21

What happens if the offer price is either too high or too low 

Answer 21

Too high – issue wouldn’t be successful

Too low – firm wouldn’t receive much as it could

Must be some level of underpricing to encourage investors to buy

Question 22

Why does underpricing exist

Answer 22

Determining correct offering price is extremely difficult

Helps ensure success of security offering

Rewards IPO investors for purchasing risky securities

Addresses issue of winners curse and rewards institutional investors for information they provide to underwriters regarding potential interest in and value of a security issue

Question 23

Why do prices drop on announcement

Answer 23

Managerial information – why are managers not issuing debt. Do they know something that investors don’t

Debt capacity – has firm exhausted its debt capacity

Falling earnings – if equity is not linked to an investments, is it to fund future earnings shortfalls

Question 24

What are the direct and indirect costs of new issues

Answer 24

Spread or underwriting discount

Filing and legal fees, taxes

Indirect expenses

Underpricing

Green shoe option

Question 25

What is a rights issue (2)

Answer 25

Only for existing shareholders

Normally firm must sell to existing shareholders before going to public

Shareholders have option to buy a specified number of new shares from firm at a specified price within a specified time

Question 26

What are shareholder choices in a rights issue

Answer 26

Exercise rights

Sell all rights

Sell some rights to raise financing to buy reminder

Do nothing

Question 27

What are the managerial choices in a rights issue

Answer 27

What price should be set for new shares

How many rights to purchase one new share of equity

What will happen to share price of existing equity

Question 28

What is subscription price

Answer 28

Price that existing shareholders are allowed to pay for a new share of equity. Rational shareholders will subscribe to rights offering only if subscription price is below market price of equity on offers expiration date

Question 29

What is dilution 

Answer 29

Loss in existing shareholders value in terms of ownership, market value, book value or EPS