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Practice Questions for Final Exam by Kyung Hwan Shim University of New South Wales Australian School of Business School of Banking & Finance for FINS 1613 S1 2010 June 7, 2010

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These notes are preliminary and under development. They are made available for FINS 1613 S1 2010 students only and may not be distributed or used without the author’s written consent.

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Problems on Raising Capital and Venture Capital John is the founder of Prospects Technologies. Prospects is a high technology firm with great prospects. In 1999, John needed capital to finance growth. SkyHigh Venture Capital was willing to provide John with $1M for a 35% stake of the firm value. John accepted SkyHigh’s offer.

(a) What was Prospects’ firm value after SkyHigh VC’s financing?

(b) What was John’s stake and what was it worth after the financing?

(c) What was the firm value after the 2nd round of financing?

(d) What were John’s and SkyHigh VC’s stake in the firm after the 2nd round of financing and how much were they worth? Comment on your results.

Problems on Raising Capital and IPO John, Skyhigh and 2ndRound VC decided in 2003 to undergo an IPO. The IPO was intended to raise $10M by floating 1M shares corresponding to 1/2 of Prospects’ stake. The issue price was set to be $12 per share. The underwriting fees were $2M. On the day of the IPO, the stock price closed at $15.

(e) What was the IPO spread per share?

(f ) What was the capital amount raised net of underwriting costs from the IPO?

(g) How much were the underpricing per share and total underpricing cost?

(h) How much was total cost of issuance?

(i) What was the firm value after IPO?

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(j) How much did John, SkyHigh, and 2ndRound VC as a group realize in wealth loss due to underpricing?

(k) How much did John, SkyHigh,