Investment Risk and Investor Types Quiz
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Questions and Answers

When is a company considered ready for investment?

  • When they lack a management structure
  • When they have low potential for profitable operations
  • When they have achieved substantial size (correct)
  • When they are small in size

    • What is a requirement for a company to be considered investment ready?

  • Size that is too small
  • Inefficient management structure
  • Lack of potential for profitable operations
  • Regular production of financial reports (correct)

    • What happens when a venture capital company sells its shares through an IPO?

  • They retain full ownership
  • They face low risks
  • They lose complete control of the company (correct)
  • They can't sell any shares

    • Why are shares of private firms difficult for shareholders to sell?

    <p>Because they are illiquid</p> Signup and view all the answers

    Who has the day-to-day management responsibility in public companies?

    <p>The board of directors and professional management team</p> Signup and view all the answers

    Which type of investors can be shareholders of public companies?

    <p>Households and fund managers</p> Signup and view all the answers

    What do shareholders of public companies have some say in?

    <p>Strategic decisions only</p> Signup and view all the answers

    What is a key difference between angels and institutional investors?

    <p>Angels invest more money.</p> Signup and view all the answers

    What is a characteristic of a risky investment according to the text?

    <p>Minimal track record but potential for high returns.</p> Signup and view all the answers

    What is a role of a Venture Capital Fund Manager?

    <p>Raising capital from investors and working closely with company management.</p> Signup and view all the answers

    How do Fund Managers spread the risk of loss?

    <p>By investing in a number of new businesses.</p> Signup and view all the answers

    What is a key determinant of the success of a VC fund according to the text?

    <p>The success of the companies within the portfolio.</p> Signup and view all the answers

    Who are typical sources of capital for Venture Capital Fund Managers?

    <p>Super funds, insurance companies, banks, and wealthy individuals.</p> Signup and view all the answers

    What is a responsibility of VC Fund managers towards new businesses they invest in?

    <p>Provide networking opportunities and support growth.</p> Signup and view all the answers

    What is a common reason why companies use private placements?

    <p>To raise capital quickly without the costs of an IPO</p> Signup and view all the answers

    In private placements, who negotiates the price and quantity of shares offered?

    <p>Investors</p> Signup and view all the answers

    What type of investors are usually involved in private placements?

    <p>Institutional investors like venture capital firms</p> Signup and view all the answers

    What is a common feature of private placements regarding share price?

    <p>Shares can be offered at a discount to market price</p> Signup and view all the answers

    What is the primary purpose of dividend re-investment plans (DRPs)?

    <p>To automatically reinvest dividends in additional shares</p> Signup and view all the answers

    Why are dividend re-investment plans considered a convenient option for investors?

    <p>To compound returns over time without any effort</p> Signup and view all the answers

    Which type of investors are typically required to participate in private placements?

    <p>Accredited investors meeting certain financial criteria</p> Signup and view all the answers

    What is the main focus of Fundamental Analysis?

    <p>Calculating the present value of future cash flows</p> Signup and view all the answers

    What does a company's P/E ratio represent?

    <p>Share price divided by earnings per share</p> Signup and view all the answers

    Which financial metric is commonly used in conjunction with the P/E ratio?

    <p>Dividend yield</p> Signup and view all the answers

    What does a high P/E ratio relative to the market or industry average suggest?

    <p>Optimism about the firm's future prospects</p> Signup and view all the answers

    In terms of P/E ratios, why are ratios between 5 and 20 mentioned as historical norms?

    <p>Depicting varying growth expectations</p> Signup and view all the answers

    What type of approach involves analyzing financial statements and market data using ratios like dividend yield and P/E ratios?

    <p>Bottom-up approach</p> Signup and view all the answers

    Which measure is a firm's P/E ratio typically based on?

    <p>Per share basis, not total earnings</p> Signup and view all the answers

    What is a possible outcome for a company with a high PE ratio if it does not meet high expectations for earnings?

    <p>The stock price will need to decrease</p> Signup and view all the answers

    What term is often used to describe companies with high PE ratios that need to substantially increase their earnings?

    <p>Price to perfection</p> Signup and view all the answers

    What is one of the limitations mentioned when using PE ratios based on predicted EPS?

    <p>Trailing ratio from previous EPS</p> Signup and view all the answers

    What purpose do Industry PEs serve when comparing individual shares?

    <p>Benchmark comparison</p> Signup and view all the answers

    How can a forecast of future earnings be used when PE ratios are stable?

    <p>To estimate a future share price</p> Signup and view all the answers

    What does the variable 'E' stand for in the context of EPS estimation?

    <p>Estimated EPS</p> Signup and view all the answers

    What assumption is made about changes in earnings when estimating future share prices?

    <p>The changes are permanent</p> Signup and view all the answers

    What assumption is made regarding the PE Ratio when estimating future share prices?

    <p>'PE' Ratio is unaffected by changed earnings</p> Signup and view all the answers

    What is the term used for risk-free activities in financial markets?

    <p>Arbitrage</p> Signup and view all the answers

    What is a disadvantage of going public mentioned in the text?

    <p>Continuing owners experience dilution of company ownership</p> Signup and view all the answers

    Which of the following is an advantage of going public according to the text?

    <p>Increase in perceived value from the public</p> Signup and view all the answers

    What is a step in the IPO process as per the text?

    <p>Performing due diligence to verify prospectus claims</p> Signup and view all the answers

    What can strict regulatory compliance requirements for public companies result in?

    <p>Time-consuming and costly processes</p> Signup and view all the answers

    Why might going public result in increased pressure on a company to deliver strong financial results?

    <p>Due to increased scrutiny from shareholders</p> Signup and view all the answers

    What is the primary purpose of an Initial Public Offering (IPO)?

    <p>To provide liquidity to existing shareholders</p> Signup and view all the answers

    Which of the following is an advantage of going public through an IPO?

    <p>Enhanced visibility for the company</p> Signup and view all the answers

    Institutional investors are usually interested in which type of Initial Public Offerings (IPOs)?

    <p>Large IPOs</p> Signup and view all the answers

    What is a disadvantage of going public through an IPO?

    <p>Limited liquidity for investors</p> Signup and view all the answers

    Which advantage is associated with going public through an IPO?

    <p>Enhanced capacity to provide liquidity to existing shareholders</p> Signup and view all the answers

    What is a key disadvantage of companies going public?

    <p>Loss of day-to-day management control</p> Signup and view all the answers

    What is a characteristic of shares of private firms?

    <p>Difficulty in selling shares</p> Signup and view all the answers

    In terms of Equity Securities, what do shareholders of public companies have some influence over?

    <p>Strategic decisions</p> Signup and view all the answers

    What usually happens when a venture capital company sells its shares through an IPO?

    <p>Potential complete loss of invested amounts</p> Signup and view all the answers

    What is one of the main advantages for a company being ready for investment?

    <p>Potential for profitable operations</p> Signup and view all the answers

    What is a characteristic of publicly listed companies?

    <p>Limited number of shareholders</p> Signup and view all the answers

    What is a disadvantage for a company going public through an IPO?

    <p>Decreased access to capital markets</p> Signup and view all the answers

    What do shareholders of public companies have some influence over?

    <p>Strategic decisions of the company</p> Signup and view all the answers

    What is a key feature of companies listed on the stock exchange?

    <p>Public access to financial reports</p> Signup and view all the answers

    Which statement accurately reflects the role of the board of directors in a public company?

    <p>Responsible for strategic decision-making</p> Signup and view all the answers

    What is the primary difference between private placements and public offerings?

    <p>Public offerings involve selling shares to the general public, whereas private placements are limited to a select group of investors.</p> Signup and view all the answers

    What advantage do dividend re-investment plans offer to shareholders?

    <p>They facilitate the compounding of returns over time.</p> Signup and view all the answers

    Why do companies opt for private placements instead of public offerings?

    <p>To avoid the high costs associated with issuing an IPO.</p> Signup and view all the answers

    What is a key feature of private placements regarding share pricing?

    <p>Shares can be sold at a discount to market price.</p> Signup and view all the answers

    Which statement best describes the role of investment banks in private placements?

    <p>Investment banks assist companies in identifying potential investors for private placements.</p> Signup and view all the answers

    What information is typically included in a company's IPO prospectus?

    <p>Management and board of directors background</p> Signup and view all the answers

    During an IPO Bookbuild process, what is the purpose of collecting indications of interest?

    <p>To finalize the offering price and number of shares sold</p> Signup and view all the answers

    What is one potential risk factor that investors consider before investing in a public company?

    <p>Regulatory risks</p> Signup and view all the answers

    What is one of the disadvantages a company may face after going public?

    <p>Limited access to capital markets</p> Signup and view all the answers

    What is a common advantage for a company going public through an IPO?

    <p>Enhanced liquidity for existing shareholders</p> Signup and view all the answers

    What is the primary goal of the underwriter when setting the final IPO price?

    <p>To ensure the company raises the maximum potential capital</p> Signup and view all the answers

    Why are IPOs historically underpriced according to the text?

    <p>To benefit existing shareholders</p> Signup and view all the answers

    What is one of the negative consequences of underpricing an IPO according to the text?

    <p>The company raises less funds than it could have</p> Signup and view all the answers

    Which factor might contribute to the underpricing phenomenon of IPOs based on the text?

    <p>Desire of the seller to have a successful IPO</p> Signup and view all the answers

    What is a drawback for a company going public due to IPO underpricing according to the text?

    <p>Loss of potential funds that could have been raised</p> Signup and view all the answers

    What is the purpose of a rights issue in equity financing?

    <p>To offer existing shareholders the opportunity to purchase new shares at a discount</p> Signup and view all the answers

    What is one risk associated with rights issues when the share price falls below the subscription price?

    <p>Shareholders may not be able to recover their investment</p> Signup and view all the answers

    In an IPO, what impact does strict regulatory compliance have on a company?

    <p>It can be expensive and time-consuming</p> Signup and view all the answers

    What is a disadvantage of going public through an IPO?

    <p>Potential pressure to deliver strong financial results</p> Signup and view all the answers

    Which of the following is a benefit associated with going public through an IPO?

    <p>Increased access to capital from public investors</p> Signup and view all the answers

    What financial impact can occur if a company's share price falls below the subscription price in a rights issue?

    <p>Potential failure to raise additional equity capital</p> Signup and view all the answers

    What is a drawback of issuing new shares through an IPO compared to private placements?

    <p>Higher costs and fees involved</p> Signup and view all the answers

    What is one advantage of raising additional equity capital through rights issues over other methods?

    <p>No risk of diluting ownership for existing shareholders</p> Signup and view all the answers

    What is a common challenge faced by companies who undergo an IPO process?

    <p>Increased pressure to maintain profitability</p> Signup and view all the answers

    Why might companies consider going public despite the potential disadvantages?

    <p>To establish a market valuation for the company</p> Signup and view all the answers

    What is a key advantage of raising additional equity capital through rights issues over other methods?

    <p>No fees incurred compared to issuing a new IPO</p> Signup and view all the answers

    What is a risk associated with rights issues when the share price falls below the subscription price?

    <p>Risk of failure if share price falls below subscription price</p> Signup and view all the answers

    What is a drawback for a company going public due to IPO underpricing?

    <p>Dilution of ownership of existing shareholders</p> Signup and view all the answers

    What is a common disadvantage of companies going public?

    <p>Strict regulatory compliance requirements</p> Signup and view all the answers

    What is a key feature of private placements regarding share pricing?

    <p>Negotiated price and quantity of shares offered</p> Signup and view all the answers

    What is one common reason why companies use private placements?

    <p>To raise capital quickly and efficiently without the costs of issuing an IPO</p> Signup and view all the answers

    What is a common advantage for a company going public through an IPO?

    <p>Ability to raise significant capital from the public</p> Signup and view all the answers

    What is a key disadvantage of companies going public?

    <p>Increased regulatory requirements and compliance costs</p> Signup and view all the answers

    What is a purpose of a rights issue in equity financing?

    <p>To raise additional capital by offering existing shareholders the right to purchase new shares</p> Signup and view all the answers

    In the IPO process, what is the purpose of collecting indications of interest?

    <p>To gauge investor demand and set the final IPO price</p> Signup and view all the answers

    What are the advantages of going public through an IPO?

    <p>Access to capital, liquidity for shareholders, increased visibility and credibility, ability to attract top talent, ability to use stock for acquisitions</p> Signup and view all the answers

    What are some disadvantages a company may face after going public?

    <p>Disclosure requirements, loss of control, short-term pressure, cost of compliance, potential shareholder activism</p> Signup and view all the answers

    What is the purpose of a rights issue in equity financing?

    <p>To raise additional capital by offering existing shareholders the right to purchase new shares at a discounted price</p> Signup and view all the answers

    What is a key feature of the IPO process?

    <p>Initial Public Offering (IPO), underwriting, price discovery, listing on a stock exchange</p> Signup and view all the answers

    What are some characteristics of the secondary markets for publicly listed companies?

    <p>Liquidity, price discovery, continuous trading, transparency, potential for capital gains or losses</p> Signup and view all the answers

    What are some advantages of a company going public through an IPO?

    <p>Access to broader capital, liquidity for investors, enhanced financial strength, greater visibility, ability to raise additional funds in the future</p> Signup and view all the answers

    What are some disadvantages of a company going public through an IPO?

    <p>Increased pressure for financial results, loss of control, regulatory requirements, underpricing risk, public scrutiny</p> Signup and view all the answers

    What is the purpose of the IPO process for a company?

    <p>To raise capital for growth and expansion, provide liquidity to existing shareholders</p> Signup and view all the answers

    What are some benefits of trading shares on secondary markets?

    <p>Enhanced liquidity, access to more investors, visibility, ability to raise additional funds</p> Signup and view all the answers

    What role do investment banks or stockbroking firms play in the IPO process?

    <p>Help price and market shares to investors</p> Signup and view all the answers

    What are some advantages of going public through an IPO?

    <p>Access to more capital, liquidity for shareholders, increased visibility and credibility in the market.</p> Signup and view all the answers

    What are some disadvantages of going public through an IPO?

    <p>Increased regulatory requirements, loss of control, pressure to deliver strong financial results.</p> Signup and view all the answers

    What is a key step in the IPO process?

    <p>Underwriting the offering.</p> Signup and view all the answers

    What is equity financing and why is it important for companies?

    <p>Equity financing involves selling shares of the company to investors, providing capital without accruing debt.</p> Signup and view all the answers

    What are some characteristics of secondary markets for equity securities?

    <p>Provides liquidity for existing shareholders, subject to market fluctuations, less regulatory requirements compared to IPOs.</p> Signup and view all the answers

    What are some advantages of going public?

    <p>Increased credibility in the marketplace, ability to raise capital through stock offerings</p> Signup and view all the answers

    What are some disadvantages of going public?

    <p>Expensive, loss of control by continuing owners, agency costs due to separation of ownership and management</p> Signup and view all the answers

    Describe the IPO process briefly.

    <p>Firm selects a manager/arranger, prepares issue documents and financial statements, performs due diligence, and issues a prospectus</p> Signup and view all the answers

    What is the purpose of equity financing?

    <p>To raise capital by issuing shares of the company to investors</p> Signup and view all the answers

    Why might companies still consider going public despite the potential disadvantages?

    <p>To increase credibility in the marketplace and raise significant capital from the public</p> Signup and view all the answers

    Why are IPOs historically underpriced according to the text?

    <p>To benefit retaining owners</p> Signup and view all the answers

    What is a disadvantage for a company going public due to IPO underpricing?

    <p>Loss of potential funds</p> Signup and view all the answers

    What is the purpose of collecting indications of interest during an IPO Bookbuild process?

    <p>Setting the final IPO price</p> Signup and view all the answers

    What is a key advantage of going public through an IPO?

    <p>Immediate profit for investors</p> Signup and view all the answers

    What is a disadvantage of a company going public through an IPO?

    <p>Increased pressure to deliver strong financial results</p> Signup and view all the answers

    What is a drawback for a company going public due to IPO underpricing?

    <p>Forgone opportunity cost</p> Signup and view all the answers

    What is one risk associated with rights issues when the share price falls below the subscription price?

    <p>Dilution of ownership</p> Signup and view all the answers

    What is a responsibility of the investment bank in the IPO process?

    <p>Setting the final IPO price</p> Signup and view all the answers

    What is the primary goal of setting the final IPO price in the Bookbuild process?

    <p>Maximizing potential capital for the company</p> Signup and view all the answers

    What is one explanation for the underpricing of IPOs according to the text?

    <p>Desire of the seller to have a successful IPO</p> Signup and view all the answers

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