Chapter 18

Question 1

What are the advantages of IPO

Answer 1

1. Increases liquidity and allows founders to harvest wealth
2. permits founders to diversify
3. facilitates raising new corporate cash (challenging to get outsiders to put money in the company when the company is private)
4. establishes a value for the firm
5. facilitates merger negotiations
6. increases potential market (product more well known)

Question 2

when startup companies raise funds how do they raise external capital

Answer 2

issue equity investments

Question 3

what is the SEC job

Answer 3

protect investors from fraudulent issues and regulate public offerings

Question 4

who can participate in a private placement

Answer 4

accredited investors

Question 5

what is a private placement

Answer 5

first external financing for most startups

Question 6

what is a venture capital fund

Answer 6

private placement of equity by a private limited partnership

Question 7

what does it mean to go public

Answer 7

selling some of a companies stock to outside investors and letting the stock trade in public markets

Question 8

What are the disadvantages of IPO

Answer 8

1. cost of reporting (reporting with SEC is expensive)
2. Disclosures (competitors can see company data)
3. Inactive market and/or low price (not many buyers)
4. control (harder for founders to maintain control)
5. managing investor relations is time-consuming

Question 9

what is the process of going public

Answer 9

interview investment banks (underwriters) and then select one to be the lead underwriter

Question 10

what do investment banks do in terms of IPO

Answer 10

1. determine the offer price/ amount of shares
2. sell the shares
3. have their analysts follow the stocks

Question 11

what is a best efforts sale:

Answer 11

the bank does not guarantee that the securities will be sold or that the company will get the cash it needs

Question 12

what are two ways the bank can help a company with IPO

Answer 12

best effort sale and underwritten issue

Question 13

what is an underwritten issue

Answer 13

when a bank agrees to buy the entire issue of stock and then resell the stock to its customers (bank bears risk)

Question 14

are IPOS through bank usually a best effort sale or an underwritten issue

Answer 14

underwritten

Question 15

what are underwriting syndicates

Answer 15

when the banks get a sum o money from a company for an IPO that is large and so banks form groups to minimize the risk each bank faces

Question 16

what is the banking house that sets up the IPO called

Answer 16

lead or managing underwriter

Question 17

what are selling groups

Answer 17

when the sum a bank receives for an IPO is large so even more investment banks are included

Question 18

What are the four primary elements of SEC regulation

Answer 18

1. jurisdiction of IPO
2. registration of new issues
3. prospectus
4. truth in reporting (make sure statements are correct)

Question 19

What is the Road show

Answer 19

after registration of statements for SEC has been filed, the senior management, investment bankers, and lawyers present to potential investors

*only information on registration statement can be given

Question 20

what is book building

Answer 20

when on the roadshow, the investment banker records the number of shares each investor is willing to buy (gage demand for issues)

Question 21

Setting an offer price

Answer 21

when a company determines the price the bank will set for shares

Question 22

What is underpricing and what does it do

Answer 22

when an investment bank underprices shares in order to reduce the risk to the underwriter

underpricing is a way to secure the interest from institutional investors

Question 23

why do companies not object to underpricing

Answer 23

the company wants to create excitement and only a very small percentage is offered to public at that price

Question 24

Jersey T’s is preparing to sell new shares of stock to the general public. As part of this process, the firm just filed the required paperwork with the SEC, which contains the company’s financial, legal, and technical information. What is the name associated with this paperwork?

Answer 24

registration statement

Question 25

what does it mean for a company to go private

Answer 25

entire equity of the publicly held company is purchased by a small group of investors

Question 26

how does going private affect the managers of the company

Answer 26

increase managers ownership

Question 27

what are management buyouts in terms of going private

Answer 27

when the current management group raises financing and acquires all the equity of the company

Question 28

what is a leveraged buyout (LBO) in terms of going private

Answer 28

when the financing to buy the equity involves substantial borrowings

Question 29

what is a private equity fund (PE fund)

Answer 29

where outsider equity in a buyout comes from

Question 30

advantages of going private

Answer 30

• cost savings (don’t have to file with SEC)
• increased managerial incentives
• increased managerial flexibility (don’t have to worry about what investors think)
• increased shareholder oversight and participation
• increased use of financial leverage, which reduces taxes (issuing debt lowers taxes)