E2: Equity financing

Question 1

Define venture capital

Answer 1

Equity investments in new private companies

Question 2

What are the two types of IPOs?

Answer 2

Primary offering: new shares are sold to raise additional cash

Secondary offering: existing shareholders cash in by selling part of their equity holdings

Question 3

What are the costs assosciated with IPOs?

Answer 3

Admin (legal etc), Direct (Spread for underwriters) and Underpricing (money left on the table, hidden cost where a security is fundamentally undervalued)

Question 4

What do smaller, newer companies rely on on to fund venture capital?

Answer 4

Family / friends and bank loans (sometimes angel investors)

Question 5

How do venture capital firms operate?

Answer 5

Identify promising start-ups, financing their operations in exchange for a large sum of the firm’s stock, actively working with the company as they grow.

Question 6

Case study: when was venture capitalism booming?

Answer 6

During the dotcom bubble, when it burst it slumped. On its way back up now

Question 7

Typically, venture capital funds are a limited private partnership with a fixed life of…

Answer 7

10 years

Question 8

who is the general partner in a venture capital fund? what do they do?

Answer 8

the management company of the venture capital firm-> make and oversee the investments, receiving a fixed fee and share of profits

Question 9

who are the limited partners in a venture capital fund?

Answer 9

pension and mutual funds and other wealthy private investors

Question 10

What is the investment policy for venture capital firms?

Answer 10

• accepting high uncertainty if there is a slight chance a company could go big
• identify failed investments early and accept the loss rather than chasing it.

Question 11

Describe the two ways in which venture capitalists may cash in on their investments

Answer 11

• sell their shares to a larger firm
• or if entrepreneurs want to keep control of company they may just sell on stock market

Question 12

Name some benefits/ motives of IPOs

Answer 12

• main: raise new capital
• enable shareholders to cash out

Question 13

What is an underwriter?

Answer 13

firms that buy an issue of securities from a company and resell it to the public and also provide financial advice (eg Goldman Sachs)

Question 14

What must you do in order to initiate an IPO?

Answer 14

• prepare registration statement (firms current and historic state and proposed projects)
• prospectus publication
• arrange road show for potential investors
• build a book of likely orders (Can help decide issue price)

Question 15

when is a stock under-priced during an IPO?

Answer 15

when it closes at a price higher than the issuing price

Question 16

When else can a company issue shares?

Answer 16

• general cash / public offer (by an already public company)
• rights issue / privileged sub (issues offered first or only to current stockholders)

Question 17

How do you calculate the value of a rights offering?

Answer 17

Subtract the new share price from the old share price

Question 18

How do you work out the value of a single share?

Answer 18

divide the market value by the number of shares

Question 19

What is a green shoe option?

Answer 19

option that allows underwriters to buy additional stock from company at the IPO

Question 20

what is the best-effort basis?

Answer 20

underwriter promises to sell as much as poss but can’t guarantee selling all

Question 21

What is an all-or-none arrangement?

Answer 21

• either the entire issue is sold at the offering price, or the deal is called off and the issuing company recieves nothing

Question 22

What is money left on the table?

Answer 22

• represents additional funds the company would have raised