Deck 15: Investment Banking: Public and Private Placement

Question 1

The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.

Answer 1

False

Question 2

The movement of non-brokerage firms into the brokerage area has forced traditional securities firms to expand their staffs.

Answer 2

True

Question 3

Large well-established investment bankers often distribute new issues on a best-efforts basis.

Answer 3

False

Question 4

Investment banking has changed from a very competitive price-sensitive environment to one where relationships determine who gets the business.

Question 5

The whole area of investment banking is becoming more competitive.

Question 6

An investment banker acts as a middleman between a corporation needing funds and investors with funds.

Question 7

The investment banker is someone who buys large new issues of stocks and then sells them to the public after their price has risen.

Question 8

The largest underwriter of both stocks and bonds during 2009 was Citigroup.

Question 9

A market maker transacts in stocks as a broker.

Question 10

The term "underwriter" is synonymous with risk-taker or risk-bearer.

Question 11

In investment banking, the equity market is larger than the debt market.

Question 12

The top 10 underwriters in the world are all large U.S. firms.

Question 13

The Glass-Steagall Act of the 1930s required U.S. banks to separate their commercial banking operations and their investment banking operations into two different entities.

Question 14

The years 2008 and 2009 are likely to go down in history as one of the worst environments for companies wishing to go public.

Question 15

Only a small amount of security issues are sold on a "best-efforts" basis.

Question 16

Small investment banking houses may handle distributions for relatively unknown corporations on a "best-efforts" basis.

Question 17

As a middleman, the investment banker is responsible for designing and packaging a security offering and selling it to the public.

Question 18

In today's market environment, most investment banking houses specialize in underwriting and do not engage in the dealer-broker function.

Question 19

The investment banking industry has shifted its emphasis from mergers and acquisitions to underwriting new securities.

Question 20

Continued consolidation is not expected in the investment banking industry, as market share and global competition have stabilized.

Question 21

The out-of-pocket cost to issue new common stock is always paid by the investment banker.

Question 22

Rule 415 allows corporations to quickly take advantage of market conditions.

Question 23

Investment bankers can help a firm undertake a secondary offering when the company is too small for a primary offering IPO.

Question 24

IPOs generally underperform compared to the general market in the immediate aftermarket.

Question 25

One purpose of an underwriting syndicate is to distribute securities to the public.

Question 26

Between 1990 and 2009, the average first-day return for IPOs in the U.S. was over 30 percent.

Question 27

Only the strong investment bankers are in a position to benefit from the new shelf registration process.

Question 28

An underwriting syndicate is a group of investment bankers who help to distribute a new issue for a company.

Question 29

"Best efforts" and "direct" methods account for a small portion of investment banking offerings.

Question 30

An underpriced offering represents a permanent lost opportunity to the issuing firm.

Question 31

It would not be unusual for an investment banking syndicate to include as many as 30 investment banking houses in large offerings.

Question 32

Shelf registration requires the firm to file one comprehensive registration statement, which outlines the company's immediate long-term financing plans.

Question 33

The investment banking industry has shifted its activities to underwriting new securities, rather than advising on mergers and acquisitions.

Question 34

Because there is more uncertainty involved in the initial market reaction to common stock, a larger underwriting spread often exists for stocks, compared to other types of offerings.

Question 35

The term underpricing describes the process of setting the spread between the participants of the investment banking syndicate.

Question 36

While manipulation of security prices is normally illegal, the SEC allows underwriters to temporarily support the price of stocks that they have brought to market.

Question 37

The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed.

Question 38

When a firm issues new stock, it always results in dilution of earnings in the long run.

Question 39

The issuing company desires to have as little underpricing as possible.

Question 40

Shelf registration has nearly eliminated competition in the investment banking industry.

Question 41

Because of their lower levels of risk to the underwriter, debt issuances have lower spread percentages than equity percentages and smaller issuances have lower spread percentages than large issuances.

Question 42

Privately placed bonds are the most popular method of raising long-term corporate debt.

Question 43

Investment banking is highly concentrated with the top 10 underwriters controlling 90% of the global market for stocks and bonds.

Question 44

Investment banks are hesitant to issue bonds when they perceive the interest rate to be low.

Question 45

Private placement eliminates the expensive registration process with the Securities Exchange Commission.

Question 46

Shelf Registration is most frequently used with new issues of common stock.

Question 47

A major trend of privatization in foreign markets began in the 1990's.

Question 48

Google's IPO was controversial because Google used a Dutch investment banking firm to underwrite the IPO.

Question 49

If the retail price of a stock issuance is $17.50 and the syndicate members' price is $15.50, the total spread is 11.4%.

Question 50

Even though the firm may pay a lower interest rate on a private placement, it will pay higher out-of-pocket costs than a public offering.

Question 51

The use of banks to finance leveraged buy-outs has often caused a misdirection of capital.

Question 52

The "best-efforts" method of underwriting is the most common method used in issuances.

Question 53

A branch of investment banking that has been very opportunistic in recent years has been the increase in sales of foreign securities of companies formerly owned by the government.

Question 54

One of the reasons why the debt market is much larger than the equity market is because debt issuances mature periodically unlike equity issuances.

Question 55

Shelf registration primarily gives large, strong companies flexibility in the timing of debt or equity issues.

Question 56

When a company first goes public, a registration statement must be filed with the New York Stock Exchange.

Question 57

Shelf Registration has contributed to the concentrated nature of the investment banking industry.

Question 58

Leveraged buy-outs usually entail the use of a large proportion of debt to take control of the firm.

Question 59

The primary rationale for repealing the Glass-Steagall Act was that the U.S. Congress recognized the necessity for increased growth in the investment banking industry within the U.S.

Question 60

Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price.

Question 61

In issuing stock, the term "spread" refers to

A) the profit the managing investment banker gets for an issue of stock.
B) the disparity between the initial asking price and the average price for the stock issued some months later.
C) the difference between what the corporation gets for new issues of stock and what the public pays for the stock.
D) the total cost to the corporation for issuing new stock.

Question 62

Dilution of earnings occurs because

A) a new issue of common stock creates more shares outstanding which reduces earnings per share temporarily.
B) the company suffers a decline in earnings after taxes.
C) the investment banker collects an underwriting fee.
D) all of these.

Question 63

In a public distribution, the dealer group will generally pay a

A) higher price for the stock than the public.
B) lower price for the stock than the managing investment banker.
C) higher price for the stock than the managing investment banker.
D) lower price for the stock than members of the investment banking syndicate group.

Question 64

When a firm sells a new issue through an investment banker the costs incurred

A) are the "give up" expense of the spread plus the legal and accounting fees, printing expense and other small fees.
B) are the spread to the underwriter which includes all the costs of legal and accounting fees, printing expense and other small fees.
C) are dependent upon the number of underwriters in the syndicate.
D) a and c.

Question 65

Generally, the total cost to issue securities (as a percent of total proceeds)

A) is greater for common stock than for debt and increases as the size of the issue increases.
B) is greater for debt than for common stock and decreases as the size of the issue increases.
C) is greater for debt than for common stock and increases as the size of the issue increases.
D) is greater for common stock than for debt and decreases as the size of the issue increases.

Question 66

Which investment bank underwrote the most common stock and bonds in 2009?

A) Merrill Lynch
B) J.P. Morgan
C) Deutsche Bank
D) Citigroup

Question 67

Raybac is about to go public. Its present stockholders own 500,000 shares. The new public issue will represent 700,000 shares. The shares will be priced at $25 to the public with a 5% spread. The out-of pocket costs will be $450,000. What are the net proceeds to the firm?

A) $18,750,000
B) $17,200,000
C) $18,250,000
D) $16,175,000

Question 68

The Glass-Steagall Act prohibited

A) retail brokerage firms from having investment banking operations.
B) commercial banks from combining investment banking and commercial banking functions.
C) investment banks from selling both debt and equity securities.
D) insurance companies from selling investment products.

Question 69

The investment banker's function involves all of the following except

A) take a portion of the risk in the distribution of an issue.
B) always insure a company a given amount of equity can be sold so that long-range financial planning can be made accurately.
C) make a market by buying and selling a security to insure a liquid market.
D) contract to buy securities from the corporation and resell them to other security dealers and the public.

Question 70

When an investment banker acts as an "underwriter" he

A) gives a "firm commitment" to purchase the securities from the corporation at a set price.
B) The company suffers a decline in earnings after taxes.
C) may sell as many securities as possible and return the rest unsold.
D) may give advice to management.

Question 71

The current leader in the mortgage-backed market is Bank of America - Merrill Lynch.

Question 72

The risk function of investment banking is categorized mainly under:

A) Underwriting Function
B) Market Maker Function
C) Advisor Function
D) Agent Function

Question 73

Stock prices for Amazon and eBay managed to avoid the turbulent price movements that followed the collapse of the Internet bubble.

Question 74

Investment banking is changing dramatically to an industry where

A) investment bankers are using larger syndicates to distribute initial public offering.
B) investment bankers are becoming larger and larger so that they can take on more risk and have less need for large syndicates.
C) investment bankers don't need a distribution network because most new issues are sold directly to institutional investors.
D) new investment banking firms are being established to deal with the increasing number of companies looking for capital.

Question 75

The Gramm-Leach-Bliley Act

A) repealed depression era laws separating commercial banking, insurance, brokerage and investment banking.
B) allowed Citigroup to keep Salomon Smith Barney, Travelers, and CitiBank together as one entity.
C) did not take away the ability of the Federal Reserve to impose restriction on banks.
D) all of these are true.

Question 76

The managing investment banker is responsible for

A) putting a syndicate together to aid in the distribution and share the underwriting risk.
B) determining the value (price) of the company.
C) stabilizing the offering during the distribution period.
D) all of these are the responsibility of the investment banker.

Question 77

Which of the following activities is not a service provided by investment bankers?

A) Underwriting initial public offerings
B) Raising capital via mutual fund offerings
C) Advising in mergers
D) Advising on restructurings

Question 78

An investment banker makes money from

A) commissions from buyers.
B) fees from other investment bankers in the syndicate.
C) the spread between issue price and proceeds to the issuer.
D) artificially supporting the stock price during and after the offering.

Question 79

The investment banker may advise clients on a continuing basis about

A) the types of securities being sold.
B) the number of shares for distribution.
C) the timing of the sale.
D) all of these.

Question 80

Which of the following is not a key role of an investment banker?

A) Market maker
B) Underwriter
C) Acting as transfer agent
D) Agent in private placement