Deck 15: Investment Banking: Public and Private Placement

Question 1

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

Answer 1

True

Question 2

The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.

Answer 2

False
Explanation: The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act, which dated back to the Depression Era of the 1930s.

Question 3

When a new issue of bonds is sold, all the proceeds go to the owners of the company.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

When the stock market is rising and high, companies hold off on the issue of new common stock.

Question 8

The year 2008 will likely go down in history as one of the worst environments for companies wishing to go public.

Question 9

The period of market stabilization usually lasts two or three days after the initial offering, but may extend up to 30 days for difficult-to-distribute securities.

Question 10

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

Question 11

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

Question 12

Among several other roles, as a middleman, the investment banker is responsible for designing and packaging a security offering and selling it to the public.

Question 13

Over 51 percent of the total revenue made through investment banking was generated by just 10 global banking firms.

Question 14

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 15

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

Question 16

The Glass-Steagall Act of the 1930s was created to separate U.S. bank's commercial and investment sections, which later because an advantage to the U.S. banks because foreign banks were affected by having them combined.

Question 17

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

Question 18

The entire area of investment banking is becoming more competitive.

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

When a company goes public, an initial public offering must occur to sell the ownership of the company to the public.

Question 24

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

Question 25

When a firm issues new stock, it can result in a dilution of earnings in the short run.

Question 26

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

Question 27

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

Question 28

When stock is exchanged in the NYSE that is considered secondary offerings, while when stock is exchanged during an initial public offering that is considered primary offerings.

Question 29

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

Question 30

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 31

In 2011, IPOs rose tremendously since the market started to pick up.

Question 32

The issuing company desires to have as little underpricing of new securities as possible.

Question 33

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

Question 34

The goal of underpricing is to ensure that a large amount of shares of stock is sold.

Question 35

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

Question 36

Underpricing is when an investment banker sets the stock price above the market price to ensure that a profit is made.

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

Shelf registration requires the firm to file one comprehensive registration statement, which outlines the company's indefinite financial plan.

Question 42

Shelf registration has helped larger investment banking firms become larger, while smaller investment banking firms are left behind.

Question 43

After an IPO has been issued and the price of the stock drops tremendously, the investment banker is to blame since they probably miscalculated the original stock price.

Question 44

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

Question 45

A major trend of privatization in foreign markets began after 1984.

Question 46

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 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

Privatization in many foreign markets means selling companies to the public that were previously owned by the state or government.

Question 52

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 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

The SEC Rule 415 allows an issuing corporation to quickly take advantage of market conditions.

Question 58

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

Question 59

Privatization may have different meanings when used in the U.S. compared to foreign markets.

Question 60

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

Question 61

When investment bankers act in the function of "underwriters," they

A) give a "firm commitment" to purchase the securities from the corporation at a set price.
B) guarantee that the company will not suffer a decline in earnings after taxes.
C) are allowed to sell as many securities as possible and return the rest unsold.
D) are allowed to give advice to the company's management.

Question 62

A lower equity spread usually means that there is a lower amount of uncertainty in equity compared to other types of capital.

Question 63

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

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

Question 64

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 options are correct.

Question 65

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

Question 66

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

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

Question 67

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 68

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

Question 69

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

Question 70

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

Question 71

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

Question 72

The primary rationale for repealing the Glass-Steagall Act was that the U.S. Congress recognized the international competitive disadvantage for US commercial and investment banks.

Question 73

The managing investment banker is typically 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 options are the responsibility of the investment banker.

Question 74

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 75

Generally, the larger amount of shares issued means that the spread percentage would be lower.

Question 76

The risk function of investment banking is categorized mainly under

A) underwriting function.
B) market-maker function.
C) advisor function.
D) agent function.

Question 77

Which investment bank underwrote the most bonds in 2013 and 2014?

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

Question 78

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 79

Investment banking is changing dramatically into an industry where

A) investment bankers are using larger syndicates to distribute initial public offerings.
B) investment bankers are becoming increasingly 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 80

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%.