Question

Q1 Using the company's overall cost of capital to evaluate a project's cash flows is problematic in that the company is a collection of projects, with the possibility that each project has a different level of risk than the other projects currently working for the company.

Select one:

True

False

Q2) The three principal ways in which venture capital companies exit venture-backed companies are

Select one:

a. selling to a strategic buyer, buying out the founder, and offering shares to the public.

b. selling to a strategic buyer, selling to a financial buyer, and buying out the founder.

c. selling to a strategic buyer, selling to a financial buyer, and offering shares to the public.

d. None of the options.

Q3) A company is planning to issue 2.5 million ordinary shares and the underwriting spread is 8%. Following due diligence, the offer price has been set to $20 per share. Suppose that the offer has not been as successful as expected and only 95% of the shares have been sold. In such situation, considering stand-by arrangement, what will be the proceeds available to the underwriter?

Select one:

a. $1 million

b. $1.5 million

c. $3.8 million

d. $2 million

Q4) The use of debt financing

Select one:

a. increases agency costs.

b. decreases agency costs.

c. may both increase and decrease the agency costs.

d. has no effect on agency costs.

Answer 1

1) True

Each project should be discounted with the rate that reflects project's riskiness

2) c. selling to a strategic buyer, selling to a financial buyer, and offering shares to the public.

There are three principal way in which vventure capital companies exit venture-backed companies

- Selling to Strategic buyer in primary market

- Selling to a financial buyer

- Offering shares to public . i.e IPO

3) b. $1.5 million

First of all lets find underwirtter's fee

Underwritter's fee = No of shares issued x (Offer price x 8%)

=2.5 million shares x (20 x 8%)

= 2.5 million shares x 1.6

= $4 million

Now only 95% of shares gotsold, thus remaining 5% shares must have to be purchased by underwritter

Thus shares to be purchased by ubderwritter = 2.5 million x 5%

=0.125 million shares

Price to be paid by underwritter for purchase of shares

= 0.125 million shares x 20

= $2.5 million

Thus cash flow to underwritter = $4 million - $2.5 million

= $1.5 million

4) a. increases agency costs

Use of debt financing increases agency cost because by issuance of debt there will be emmergence of thirt party apart from stock holder and management. That third party is bondholders. All these parties have different goals and thus will increase conflicts