Module 1: True (T) or False (F) Questions
Last updated: 01/08/2025 15:08
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)
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đ Part 1 (until Midterm)
| Chapter | Slides | T/F | MCQ | Numeric | Long |
|---|---|---|---|---|---|
| ch23 | đïž | â | â | đą | đ |
Mark T (True) or F (False) in each of the following sentences.
The sentence is TRUE. Companies tend to go public during bull markets when investor sentiment is high and valuations are favorable, leading to periods of high IPO activity followed by lulls
The sentence is TRUE. The underwriting spread, which is the difference between the price investors pay and the amount the company receives, is typically the largest single expense in an IPO.
The sentence is TRUE. This is a contractual agreement designed to prevent a sudden sell-off by insiders, which could depress the stock price and signal a lack of confidence shortly after the offering.
The sentence is FALSE. Investors in an IPO are not guaranteed to receive shares at the offering price; allocation depends on demand, and the market price can fluctuate immediately after listing.
The sentence is TRUE. Public companies face stringent regulations from bodies like the CVM or SEC, requiring costly and time-consuming periodic financial reporting and disclosures.
The sentence is FALSE. A controlling shareholder does not necessarily lose complete control; mechanisms like dual-class share structures can help them retain significant influence.
The sentence is TRUE. In a Dutch auction, the final price is set at the highest price at which all offered shares can be sold, allowing for a market-driven price discovery process.
The sentence is TRUE. After a security is issued in the primary market (e.g., IPO), all subsequent trading of that security occurs in the secondary market between investors.
The sentence is FALSE. A cash offer typically involves selling new shares to the general public or institutional investors, not exclusively to existing shareholders (that would be a rights offer).
The sentence is TRUE. This regulation aims to prevent the company from providing information that is not included in the official prospectus, ensuring all investors have access to the same data.
The sentence is FALSE: An IPO prospectus is a public document filed with regulatory bodies (like the SEC or CVM) and made available to potential investors.
The sentence is FALSE: The transaction costs of an IPO, including underwriting fees, legal fees, and administrative expenses, are typically substantial, often a significant percentage of the capital raised.
The sentence is FALSE: The stock price reaction to an SEO (Seasoned Equity Offering) is, on average, negative, as it often signals potential dilution or a need for capital that can be interpreted negatively by the market.
The sentence is TRUE. Going public allows shares to be traded easily on an exchange (liquidity) and enables the company to raise large sums of money from a broad base of investors (access to capital).
The sentence is TRUE. Favorable market conditions can lead to higher valuations and greater investor demand, making the timing of an IPO a critical strategic decision.
The sentence is FALSE: While IPOs offer an exit strategy and liquidity, they do not eliminate financial risk; the market value of shares can fluctuate post-IPO, and founders/early investors remain exposed to market conditions.
The sentence is FALSE: An SEO can affect the price of existing shares, often leading to dilution and a potential downward pressure on the stock price.
The sentence is TRUE. During the roadshow, management travels to meet with large institutional investors to market the IPO and generate interest (build the book).
The sentence is TRUE. Public companies must establish independent boards of directors, audit committees, and comply with numerous regulations designed to protect public shareholders.
The sentence is FALSE. The primary market is where newly issued securities are sold for the first time (e.g., in an IPO), while existing shares are traded in the secondary market.
The sentence is FALSE: A greenshoe option allows underwriters to sell more shares than initially planned to cover over-allotments and stabilize the stock price, not fewer.
The sentence is FALSE: The underwriterâs reputation can significantly impact the success of an IPO, as reputable underwriters often attract more investor interest and lend credibility to the offering.
The sentence is FALSE: The process of selling stock to the public for the first time is called an Initial Public Offering (IPO); a seasoned equity offering (SEO) occurs when a company already publicly traded issues additional shares.
The sentence is TRUE. Underwriters and their legal teams conduct a thorough investigation to ensure the information presented in the prospectus is accurate and complete, reducing risks for investors.
The sentence is FALSE. A privately held company must conduct an IPO (or a direct listing) to sell its shares publicly on a stock exchange.
The sentence is FALSE. Underwriters can use mechanisms like the greenshoe option to sell more shares in the open market if the demand is higher.
The sentence is TRUE. The goal of this regulation is to provide potential investors with sufficient and transparent information to make an informed investment decision.
The sentence is TRUE. A syndicate is formed to share the risk and workload of underwriting and distributing the shares of a large offering.
The sentence is TRUE. This is the correct definition of an SEO, which is used by public companies to raise additional equity capital after their initial IPO.
The sentence is FALSE. While bookbuilding helps in price discovery, it does not completely eliminate the risk of underpricing (leaving money on the table) or overpricing (leading to a weak aftermarket performance).
The sentence is FALSE: The underwriterâs spread is the difference between the price paid by investors and the price received by the issuing company, representing the underwritersâ compensation for managing the IPO.
The sentence is TRUE. Companies must file a registration statement for regulatory review and approval before they can sell shares to the public.
The sentence is TRUE. In a âfirm commitmentâ underwriting, the investment bank purchases the shares from the company and assumes the risk of reselling them to the public.
The sentence is FALSE: Venture capital investors are typically involved in private equity financing of young, growing companies, while a rights offer targets existing shareholders.
The sentence is FALSE: An IPO provides capital and visibility but does not guarantee the achievement of long-term financial goals, which depend on various factors including management, market conditions, and competition.
The sentence is FALSE: A rights offer is a sale of new shares offered specifically to existing shareholders, giving them the ârightâ to purchase new shares to maintain their proportional ownership.
The sentence is FALSE: Underwriters do face risk during an IPO, especially if they guarantee to sell shares at a set price (firm commitment). A greenshoe provision is used to mitigate this risk by allowing them to stabilize the stock price.
The sentence is TRUE. Having publicly traded stock provides a valuable currency that can be used to acquire other companies, which is often more flexible than using cash.
The sentence is FALSE: The liquidity of a private companyâs shares is typically much lower than that of a publicly traded company, as there is no organized market for their frequent trading.
The sentence is TRUE. These are the primary strategic benefits that drive a company to undertake the complex and costly process of going public..
The sentence is FALSE: The transaction costs of an IPO are typically significant, representing a considerable percentage of the gross proceeds raised.
The sentence is FALSE: A cash offer is a type of seasoned equity offering where shares are sold to the general public or institutional investors, not exclusively to existing shareholders.
The sentence is FALSE: The primary market is where new securities are first sold to investors by the issuer; the secondary market is where existing securities are traded among investors.
The sentence is TRUE. The CVM plays a role similar to the SEC in the United States, regulating the issuance and trading of securities to protect investors.
The sentence is FALSE: Institutional investors who buy equity in small private firms are typically called venture capitalists or private equity firms; angel investors are usually wealthy individuals who provide seed funding.
The sentence is TRUE. An IPO provides a clear path to liquidity (an âexitâ), allowing early-stage investors to sell their shares and realize the returns on their initial investment.
The sentence is FALSE: A company that is already publicly traded can and often does conduct seasoned equity offerings (SEOs) to raise additional capital after its IPO.
The sentence is TRUE. Due to uncertainty, speculation, and the expiration of lock-up periods, newly listed stocks often experience significant price swings.
The sentence is TRUE. This structure creates different classes of stock, with one class (typically held by founders) having more votes per share than the class sold to the public.
The sentence is TRUE. It involves fundamental changes to the companyâs structure, governance, and obligations, and is not undertaken lightly as a short-term tactic.
The sentence is FALSE. In a greenshoe option, underwriters sell additional shares to cover over-allotments and can buy shares back from the market only if the price falls below the offer price to stabilize it, but their primary function is to manage over-allotment.
The sentence is TRUE. A primary offering raises new capital for the company, while a secondary offering allows existing large shareholders to sell their shares to the public.
The sentence is FALSE. The stock price of a newly public company is often highly volatile in the first year post-IPO, subject to market fluctuations, earnings reports, and analyst coverage.
The sentence is TRUE. This is the standard formula for calculating a public companyâs total market value and is a key metric used by investors.
The sentence is FALSE. A preliminary prospectus is an initial draft and states that the information is not yet final or complete, as it awaits regulatory approval and final pricing.
The sentence is TRUE. Although public, a newly listed stock may initially have a low trading volume (float), making it difficult to buy or sell large quantities without affecting the price.
The sentence is TRUE. This is a well-documented phenomenon where the offering price is often lower than the price at which the stock first trades in the secondary market, resulting in a positive first-day return.
The sentence is FALSE. IPOs typically involve higher transaction costs (underwriting fees, legal, accounting) compared to traditional bank loans, making them often a more expensive way to raise capital in terms of direct costs.
The sentence is TRUE. The underwriter acts as a crucial intermediary between the issuing company and the investing public.
The sentence is TRUE. These final documents are legally required and must be approved by the regulatory authority before the IPO can proceed.
The sentence is TRUE. By gauging demand from institutional investors at different price points, underwriters can determine an offering price that is likely to be well-received by the market.
The sentence is FALSE: The final offer price of an IPO is typically determined through negotiation between the issuing company and the lead underwriters, often informed by the bookbuilding process and market conditions.
The sentence is FALSE: An over-allotment option (greenshoe) is typically exercised by underwriters if the stock price rises above the offering price in the aftermarket, allowing them to cover their short position.
The sentence is FALSE: The quiet period generally refers to the time before and immediately after an IPO when the company and underwriters are restricted from making public statements that could improperly influence the market for the new shares.
The sentence is FALSE: While IPOs often provide liquidity and can increase wealth, they do not always guarantee an increase in wealth for existing shareholders, as the stock price can fall below the offering price or even its pre-IPO valuation.
The sentence is TRUE. After the IPO is priced, the underwriters allocate the shares to the investors who participated in the bookbuilding process.
The sentence is FALSE: The lock-up period for insiders typically lasts for a longer duration, commonly 90 to 180 days (3 to 6 months), to prevent an immediate flood of shares onto the market.
The sentence is FALSE: While developed markets might have more stable overall conditions, the volatility of newly issued stock prices in IPOs can be high in any market, regardless of development status, due to novelty and speculative interest.
The sentence is TRUE. While many IPOs are underpriced leading to a first-day that is positive, their long-term performance is uncertain and depends on the companyâs execution and the broader market environment.
The sentence is TRUE. If the price is too high, the stock may perform poorly. If itâs too low (underpriced), the company âleaves money on the table.â
The sentence is TRUE. This is their primary function as underwriters: they use their expertise and network to value the company, market the issue, and distribute the shares.
The sentence is TRUE. It is a critical marketing effort where management presents the companyâs story to institutional investors to build the âbookâ of orders for the stock.
The sentence is FALSE. The issuing company does not receive money from a secondary market stock sale; the proceeds go to the selling shareholder, as it involves trading existing shares among investors.
The sentence is TRUE. After a company goes public, analysts from investment banks begin to cover the stock, providing research and recommendations that increase its exposure to investors.
The sentence is TRUE. Forming a syndicate allows investment banks to distribute a large offering more widely and share the financial risk associated with the deal.
The sentence is TRUE. Public companies are subject to extensive disclosure and governance rules to protect public investors, which do not apply to private firms.
The sentence is FALSE. Listing on a stock exchange is not optional for companies conducting an IPO, as it is the primary venue for public trading and liquidity for the shares.
The sentence is FALSE. In a Dutch auction, all winning bidders pay the same price, which is the lowest successful bid, not necessarily the highest price they were willing to pay.
The sentence is TRUE. It has become the dominant method for pricing IPOs globally because it allows underwriters to gauge real-time market demand.
The sentence is TRUE. By holding shares with superior voting rights, founders can retain control over strategic decisions even with a minority of the total equity.
The sentence is TRUE. An IPO converts illiquid, concentrated holdings into publicly traded shares that early investors can sell, allowing them to reinvest the capital into other assets and diversify their portfolios.
The sentence is FALSE. CVM (and other regulatory bodies like the SEC) requires public companies to continuously disclose their financial results and other material information after the IPO.
The sentence is TRUE. A positive first-day return generates good publicity and can create sustained buying interest in the aftermarket.
The sentence is FALSE. In high-demand IPOs, institutional investors and preferred clients of the underwriting banks often receive priority in share allocations over retail investors.
The sentence is FALSE. A common practice for early investors (like venture capitalists) is to exit their investment (sell their shares) within a few years after the IPO, as it provides liquidity for their prior investment.
The sentence is FALSE. A company does not always have to conduct an IPO to raise equity capital; it can also do so through private placements, venture capital, angel investors, or debt financing.
The sentence is FALSE. A rights offer involves selling new shares exclusively to existing shareholders, giving them the option to buy more shares to maintain their proportional ownership.
The sentence is FALSE. Going public does not eliminate financial risks; instead, it introduces new ones such as market volatility, increased regulatory scrutiny, and public pressure on performance.
The sentence is TRUE. This is a standard feature of IPOs designed to promote price stability in the aftermarket by preventing an immediate and large supply of shares from insiders.
The sentence is TRUE. When a company issues new equity, the total number of shares increases, causing the ownership stake of existing shareholders to decrease proportionally unless they participate in the new offering.
The sentence is FALSE: Venture capitalists often demand board seats and significant control rights to protect their investment and guide the companyâs strategic direction.
The sentence is FALSE: A SAFE is an investment contract, not a debt instrument, and it typically does not accrue interest or require regular payments; its purpose is to convert into equity at a future financing round.
The sentence is FALSE: Private equity firms primarily invest in existing, more mature privately held firms or take publicly traded companies private through leveraged buyouts (LBOs), differing from the early-stage focus of angel investors or venture capitalists.
The sentence is FALSE: While an IPO raises capital for the issuing company, the main purpose of a stock exchange listing is to provide a public market for the secondary trading of existing shares among investors, offering liquidity to shareholders.
The sentence is FALSE: The âWinnerâs Curseâ indicates that investors who receive full allocation often do so because demand from others was low, implying they may have overestimated the value of the shares, leading to poorer performance.
The sentence is FALSE: Holders of preferred stock with liquidation preference are typically paid a minimum amount before any payments are distributed to common stockholders in a liquidation event.
The sentence is FALSE: A seed round, especially with angel investors, often involves convertible notes or SAFEs (Simple Agreements for Future Equity) rather than immediate common stock, or preferred stock without full voting rights.
The sentence is FALSE: Private equity firms typically hold their investments for medium to long terms to implement operational improvements and achieve significant value creation before exiting.
The sentence is FALSE: Venture capital firms specifically target early-stage, high-growth potential companies, even if they are pre-revenue, seeking significant returns on innovative but higher-risk ventures.
The sentence is FALSE: While corporate investors seek financial returns, they often invest in private companies for corporate strategic objectives (e.g., access to new technology, markets, or talent), in addition to or sometimes even prioritized over purely financial returns.
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