Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 14 Raising Equity Capital
14.1 Equity Financing for Private Companies
1) When a company founder sells stock to outside investors in order to raise capital, the
share of the company owned by the founder and the founder's control over the company
will be reduced.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Equity investors in a private company usually plan to realize a return on their investment
by selling their stock when that company is acquired by another firm or sold to the public
in a public offering.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following is LEAST likely to be a possible source of funds to finance a
growing business?
A) angel investors
B) venture capital firms
C) institutional investors
D) family investors
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
1
Copyright © 2015 Pearson Education, Inc.
,4) Nature's Bounty, an organic seed company, is seeking to grow from a small company
selling seeds in local markets into a company that sells seeds across several states. The
funding for this expansion comes from a wealthy individual who uses his considerable
inherited wealth to fund a variety of eco-friendly businesses. Which of the following best
describes the individual's relationship with Nature's Bounty?
A) an angel investor
B) a venture capitalist
C) an institutional investor
D) a corporate investor
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Previous Edition
5) Why do most people launching a start-up company acquire their funds through the
venture capital industry rather than through angel investors?
A) Most entrepreneurs are not willing to relinquish the control of their business demanded
by angel investors.
B) Most entrepreneurs do not want the fees associated with investment by an angel
investor.
C) Most entrepreneurs do not need the expertise brought to a young firm by an angel
investor.
D) Most entrepreneurs do not have any relationships with individuals with substantial
capital to invest.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Previous Edition
6) Which of the following is NOT a reason why an investor would choose to invest in new
and growing firms as a limited partner in a venture capital firm rather than making those
investments directly by themselves?
A) Venture capital firms use their control of the companies they invest in to protect those
investments.
B) The investments of venture capital firm are more diversified than the investments of a
single individual.
C) A venture capital firm generally has a wide range of expertise among its general
partners.
D) The investor will have a direct say in how the companies that the venture capital firm
funds will be run.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Previous Edition
2
Copyright © 2015 Pearson Education, Inc.
,7) Which of the following best describes a limited partnership that specializes in raising
money to invest in the private equity of young firms?
A) venture capital firms
B) institutional investors
C) corporate investors
D) family investors
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
8) A large publishing firm specializing in college textbooks wishes to expand into online
delivery of its materials. In order to facilitate this, it invests in a number of small start-up
companies that deliver college courses online and uses these companies to start
diversifying the delivery of its content. Which of the following best describes the role of the
publishing firm as described above?
A) a venture capitalist
B) an institutional investor
C) a corporate investor
D) a family investor
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
9) The Ontario Teachers' Pension Plan is a pension fund for public school teachers in the
province of Ontario. It has a large and diverse portfolio of investments, both in Canada and
internationally, and had net assets in December 2007 of C$108.5 billion. Which of the
following best describes the Ontario Teachers' Pension Plan?
A) an angel investor
B) a venture capitalist
C) an institutional investor
D) a family investor
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
Copyright © 2015 Pearson Education, Inc.
, 10) A firm's founder sells equity to outside investors for the first time in the form of
preferred stock. In what way is this preferred stock most likely to differ from the preferred
stock issued by an established public firm?
A) It will have a larger dividend.
B) It will most likely not pay cash dividends.
C) It will give the holder seniority in any liquidation of the company.
D) It cannot be converted into common stock.
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) Simone founded her company using $200,000 of her own money, issuing herself
200,000 shares of stock. An angel investor bought an additional 100,000 shares for
$150,000. She now sells another 500,000 shares of stock to a venture capitalist for $1.5
million. What is the post-money valuation of the company?
A) $1,200,000
B) $1,320,000
C) $2,400,000
D) $3,600,000
Answer: C
Explanation: C) 500,000 shares at $1.5 million leads to a valuation of $3 per share;
Total shares = 500,000 + 200,000 + 100,000 = 0.8 million;
Company valuation = 0.8 million × $3 = $2.4 million
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) Simone founded her company using $200,000 of her own money, issuing herself
300,000 shares of stock. An angel investor bought an additional 100,000 shares for
$150,000. She now sells another 400,000 shares of stock to a venture capitalist for $2
million. What percentage of the firm does Simone now own?
A) 11%
B) 23%
C) 38%
D) 41%
Answer: C
Explanation: C)
Simone's ownership = 300,000 shares / 800,000 shares = 38%
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4
Copyright © 2015 Pearson Education, Inc.
Chapter 14 Raising Equity Capital
14.1 Equity Financing for Private Companies
1) When a company founder sells stock to outside investors in order to raise capital, the
share of the company owned by the founder and the founder's control over the company
will be reduced.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Equity investors in a private company usually plan to realize a return on their investment
by selling their stock when that company is acquired by another firm or sold to the public
in a public offering.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following is LEAST likely to be a possible source of funds to finance a
growing business?
A) angel investors
B) venture capital firms
C) institutional investors
D) family investors
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
1
Copyright © 2015 Pearson Education, Inc.
,4) Nature's Bounty, an organic seed company, is seeking to grow from a small company
selling seeds in local markets into a company that sells seeds across several states. The
funding for this expansion comes from a wealthy individual who uses his considerable
inherited wealth to fund a variety of eco-friendly businesses. Which of the following best
describes the individual's relationship with Nature's Bounty?
A) an angel investor
B) a venture capitalist
C) an institutional investor
D) a corporate investor
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Previous Edition
5) Why do most people launching a start-up company acquire their funds through the
venture capital industry rather than through angel investors?
A) Most entrepreneurs are not willing to relinquish the control of their business demanded
by angel investors.
B) Most entrepreneurs do not want the fees associated with investment by an angel
investor.
C) Most entrepreneurs do not need the expertise brought to a young firm by an angel
investor.
D) Most entrepreneurs do not have any relationships with individuals with substantial
capital to invest.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Previous Edition
6) Which of the following is NOT a reason why an investor would choose to invest in new
and growing firms as a limited partner in a venture capital firm rather than making those
investments directly by themselves?
A) Venture capital firms use their control of the companies they invest in to protect those
investments.
B) The investments of venture capital firm are more diversified than the investments of a
single individual.
C) A venture capital firm generally has a wide range of expertise among its general
partners.
D) The investor will have a direct say in how the companies that the venture capital firm
funds will be run.
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Previous Edition
2
Copyright © 2015 Pearson Education, Inc.
,7) Which of the following best describes a limited partnership that specializes in raising
money to invest in the private equity of young firms?
A) venture capital firms
B) institutional investors
C) corporate investors
D) family investors
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
8) A large publishing firm specializing in college textbooks wishes to expand into online
delivery of its materials. In order to facilitate this, it invests in a number of small start-up
companies that deliver college courses online and uses these companies to start
diversifying the delivery of its content. Which of the following best describes the role of the
publishing firm as described above?
A) a venture capitalist
B) an institutional investor
C) a corporate investor
D) a family investor
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
9) The Ontario Teachers' Pension Plan is a pension fund for public school teachers in the
province of Ontario. It has a large and diverse portfolio of investments, both in Canada and
internationally, and had net assets in December 2007 of C$108.5 billion. Which of the
following best describes the Ontario Teachers' Pension Plan?
A) an angel investor
B) a venture capitalist
C) an institutional investor
D) a family investor
Answer: C
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3
Copyright © 2015 Pearson Education, Inc.
, 10) A firm's founder sells equity to outside investors for the first time in the form of
preferred stock. In what way is this preferred stock most likely to differ from the preferred
stock issued by an established public firm?
A) It will have a larger dividend.
B) It will most likely not pay cash dividends.
C) It will give the holder seniority in any liquidation of the company.
D) It cannot be converted into common stock.
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) Simone founded her company using $200,000 of her own money, issuing herself
200,000 shares of stock. An angel investor bought an additional 100,000 shares for
$150,000. She now sells another 500,000 shares of stock to a venture capitalist for $1.5
million. What is the post-money valuation of the company?
A) $1,200,000
B) $1,320,000
C) $2,400,000
D) $3,600,000
Answer: C
Explanation: C) 500,000 shares at $1.5 million leads to a valuation of $3 per share;
Total shares = 500,000 + 200,000 + 100,000 = 0.8 million;
Company valuation = 0.8 million × $3 = $2.4 million
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) Simone founded her company using $200,000 of her own money, issuing herself
300,000 shares of stock. An angel investor bought an additional 100,000 shares for
$150,000. She now sells another 400,000 shares of stock to a venture capitalist for $2
million. What percentage of the firm does Simone now own?
A) 11%
B) 23%
C) 38%
D) 41%
Answer: C
Explanation: C)
Simone's ownership = 300,000 shares / 800,000 shares = 38%
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
4
Copyright © 2015 Pearson Education, Inc.
