Module 1: Multiple-Affirmative Questions
Last updated: 30/01/2026 20:16
The questions are based on or inspired by the following references:
- Berk & DeMarzo, Corporate Finance, 5th ed. (2020)
- Brealey & Myers, Principles of Corporate Finance, 13th ed. (2020)
⚠️ These exercises are powered by AI-assisted technologies and may contain occasional formatting or logic errors. Please report any issues you encounter so I can improve the experience.
📘 Part 1 (until Midterm)
| Module | Chapter |
|---|---|
| 1 | ch23 |
Select the correct answer.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) In standard VC structures, the fund vehicle is typically a limited partnership, while the venture capital firm/manager is a separate management company. This statement is treated as false here because it conflates the fund vehicle with the manager’s organizational form. - (2) Limited partners (LPs) are investors who provide capital but do not run the fund; general partners (GPs) manage the fund and make investment decisions.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) A primary offering issues new shares, increasing shares outstanding and raising cash for the firm (secondary offerings sell existing shares). - (2) A secondary offering sells existing shares (often by insiders); it typically does not increase shares outstanding or raise new cash for the firm.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) In a firm commitment IPO, the underwriter commits to buy the shares from the issuer and resell them—effectively guaranteeing the sale at the offer price. - (2) In a best efforts IPO, the underwriter does not guarantee selling all shares; it only agrees to use its best effort to place them.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) A greenshoe (overallotment) option lets the underwriter sell additional shares at the offer price; restrictions on insider sales are lockups. - (2) Selling extra shares at the offer price is the greenshoe; lockups restrict insider selling.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) Underpricing refers to IPO shares being offered below their aftermarket value (first-day market price tends to be higher than the offer price). - (2) Money left on the table is typically the first-day price increase times the number of shares sold; it is positive when the first-day price exceeds the offer price.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) Pre-money valuation is the value before the new investment: \(Pre = Post - Investment\). - (2) Post-money valuation includes the new capital raised: \(Post = Pre + Investment\).
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) A down round is when new financing occurs at a lower price/valuation than the prior round. - (2) Anti-dilution provisions protect earlier investors in a down round by increasing their effective ownership (typically by adjusting conversion terms).
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) A rights offering gives existing shareholders the right to buy new shares (typically to maintain their proportional ownership). - (2) Rights offerings are designed to protect existing shareholders (they receive rights); any discount is typically captured by existing shareholders who exercise or sell the rights.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) A registration statement (e.g., S-1) is filed before the offering; it is required for registered public offerings. - (2) The final prospectus includes the final offer terms (including the offer price) and is finalized after pricing.
✅ Correct: A. Statements (1) and (2) are false (statement (3) is true). Why the false statements are false: - (1) Bookbuilding relies on investor indications of interest and underwriter discretion; it is not a pure sealed-bid auction rule. - (2) The road show happens before IPO pricing/trading, as part of marketing to investors.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) Carried interest is performance-based compensation (a share of profits), not a fixed annual fee. - (3) General partners and limited partners are different roles: GPs manage the fund; LPs provide capital and have limited control.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) Angel investors typically invest in early-stage private firms, well before any IPO. - (3) A SAFE is a contract that converts into equity in a future financing; it is not dividend-paying common stock.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) Convertible preferred stock gives the investor the option to convert into common stock under specified terms. - (3) Preferred stock in startups often has liquidation preference and other rights, but regular cash dividends are uncommon (cash is usually reinvested).
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) Pari passu means investors share the same priority (equal rank), not that later investors are senior. - (3) Seniority defines who gets paid first in liquidation; it can create different priorities across rounds, not identical priority.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) A seasoned equity offering (SEO) is an equity issue by a firm that is already public (the first public sale is an IPO). - (3) SEOs still require disclosures and filings (though requirements can differ from IPOs).
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) This statement is false because it contradicts standard equity issuance mechanics covered in the module (the correct relationship goes the other way). - (3) Underwriters are compensated through the spread/fees; underpricing is a separate cost borne by the issuer/old owners.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) Auction IPOs allocate shares based on bids and use a market-clearing rule, rather than discretionary allocations to favored clients. - (3) A clearing price is typically the lowest price that sells the offered quantity (the marginal bid), not necessarily the highest bid.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) A lockup restricts insiders from selling their shares for a period after the IPO (often ~180 days). - (3) A lockup is a selling restriction; it does not change the number of shares outstanding.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) The spread is the underwriters’ fee (often a percent of the issue price) and is paid regardless of first-day returns. - (3) Spread and underpricing are different components of issuance cost; a higher spread does not mechanically imply lower underpricing.
✅ Correct: B. Statements (1) and (3) are false (statement (2) is true). Why the false statements are false: - (1) This statement is false because it contradicts standard equity issuance mechanics covered in the module (the correct relationship goes the other way). - (3) Corporate investors can and do invest in private companies (e.g., corporate venture capital).
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) Limited partners (LPs) are investors who provide capital but do not run the fund; general partners (GPs) manage the fund and make investment decisions. - (3) General partners (GPs) manage the fund and are active; most of the capital typically comes from limited partners (LPs).
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) Pre-money valuation excludes the new investment; it is the value of the firm just before the new cash is added. - (3) Pre-money valuation is the value before the new investment: \(Pre = Post - Investment\).
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) A secondary offering sells existing shares (often by insiders); it typically does not increase shares outstanding or raise new cash for the firm. - (3) A secondary offering sells existing shares (often by insiders); it typically does not increase shares outstanding or raise new cash for the firm.
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) Rights offerings can be cheaper than cash offers because underwriting/marketing needs are often lower, though costs depend on the deal. - (3) Shareholders can usually choose whether to exercise or sell their rights; rights offerings allow (not prevent) maintaining proportional ownership.
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) A greenshoe (overallotment) option lets the underwriter sell additional shares at the offer price; restrictions on insider sales are lockups. - (3) This statement is false because it contradicts standard equity issuance mechanics covered in the module (the correct relationship goes the other way).
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) IPO issuance is cyclical: it tends to increase in strong markets and fall in weak markets. - (3) IPOs tend to cluster in good markets; issuance typically falls during bad markets.
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) Adverse selection models predict firms are more likely to issue equity when they believe it is overvalued, which leads to a negative announcement reaction. - (3) With adverse selection, equity issuance signals potential overvaluation, so prices tend to fall on issuance announcements.
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) Private equity firms commonly invest in more mature companies, including existing privately held firms and buyouts. - (3) Debt is frequently used in private equity transactions (notably in leveraged buyouts).
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) A leveraged buyout is characterized by substantial use of debt alongside equity. - (3) LBOs are often used to take public firms private (though they can also occur for private firms).
✅ Correct: C. Statements (2) and (3) are false (statement (1) is true). Why the false statements are false: - (2) Bookbuilding involves marketing (e.g., road shows) and collecting demand information from investors. - (3) In bookbuilding, demand information from investors is used to help set both allocation and the offer price.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) A primary offering issues new shares, increasing shares outstanding and raising cash for the firm (secondary offerings sell existing shares). - (2) A secondary offering sells existing shares (often by insiders); it typically does not increase shares outstanding or raise new cash for the firm. - (3) An IPO is the first time a firm sells its stock to the public.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) In a firm commitment IPO, the underwriter (not the issuer) bears the placement risk by committing to purchase the shares. - (2) In a best efforts IPO, the underwriter does not guarantee selling all shares; it only agrees to use its best effort to place them. - (3) Firm commitment reduces placement risk, but underwriters still face price/market risk when reselling the shares.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) Underpricing refers to IPO shares being offered below their aftermarket value (first-day market price tends to be higher than the offer price). - (2) Money left on the table is typically the first-day price increase times the number of shares sold; it is positive when the first-day price exceeds the offer price. - (3) This statement is false because it contradicts standard equity issuance mechanics covered in the module (the correct relationship goes the other way).
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) A lockup restricts insiders from selling their shares for a period after the IPO (often ~180 days). - (2) A greenshoe (overallotment) option lets the underwriter sell additional shares at the offer price; restrictions on insider sales are lockups. - (3) A greenshoe (overallotment) option lets the underwriter sell additional shares at the offer price; restrictions on insider sales are lockups.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) A registration statement (e.g., S-1) is filed before the offering; it is required for registered public offerings. - (2) A preliminary prospectus typically excludes the final offer price and final share count; those are set at pricing. - (3) The final prospectus includes the final offer terms (including the offer price) and is finalized after pricing.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) A down round is when new financing occurs at a lower price/valuation than the prior round. - (2) Anti-dilution provisions generally transfer value toward earlier investors (and away from founders/common holders) in a down round. - (3) Anti-dilution provisions generally transfer value toward earlier investors (and away from founders/common holders) in a down round.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) Corporate investors may invest for strategic reasons (e.g., access to technology/markets) in addition to financial returns. - (2) Many institutional investors (e.g., pension funds, endowments) invest in private markets, often via funds and sometimes directly. - (3) Institutional investors are organizations (e.g., mutual funds, pensions, insurers), not individual retail investors.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) Private equity firms commonly invest in more mature companies, including existing privately held firms and buyouts. - (2) A leveraged buyout is characterized by substantial use of debt alongside equity. - (3) Debt is frequently used in private equity transactions (notably in leveraged buyouts).
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) A rights offering gives existing shareholders the right to buy new shares (typically to maintain their proportional ownership). - (2) A rights offering gives existing shareholders the right to buy new shares (typically to maintain their proportional ownership). - (3) Shareholders can usually choose whether to exercise or sell their rights; rights offerings allow (not prevent) maintaining proportional ownership.
✅ Correct: D. All three statements are false. Why the false statements are false: - (1) A seasoned equity offering (SEO) is an equity issue by a firm that is already public (the first public sale is an IPO). - (2) Because the firm is already public, an SEO typically has an existing market price to reference. - (3) This statement is false because it contradicts standard equity issuance mechanics covered in the module (the correct relationship goes the other way).
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
✅ Correct: E. None of the statements are false (all three are true). Why: All three statements are correct as written, so none are false.
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