Investment Risk and Investor Types Quiz
122 Questions
1 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

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

    More Like This

    Understanding Investment Risk Attitudes Quiz
    5 questions

    Understanding Investment Risk Attitudes Quiz

    AngelicMetaphor avatar
    AngelicMetaphor
    Geopolitical Risk for Institutional Investors
    19 questions

    Geopolitical Risk for Institutional Investors

    BountifulGreenTourmaline avatar
    BountifulGreenTourmaline
    Investment Risk Rating Quiz
    36 questions

    Investment Risk Rating Quiz

    TopQualityErbium avatar
    TopQualityErbium
    Understanding Investment Risk
    7 questions

    Understanding Investment Risk

    PleasantJubilation avatar
    PleasantJubilation
    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser