Question 1

Which of the following relationships is true regarding the costs of issuing the following securities?

Accepted Answer

Issuing common stock often involves higher costs due to underwriting fees, legal fees, and the dilution of existing shares, making it generally more expensive than issuing preferred stock or bonds. Preferred stock issuance costs are typically higher than bonds due to higher coupon rates and the need to make the stock attractive to investors, but lower than common stock due to less dilution and fewer legal complexities. Bonds are usually the cheapest to issue because they involve lower interest rates and are secured, making them less risky for investors.

Question 2

In a private placement,the securities are offered and sold to a limited number of investors.

Accepted Answer

In a private placement, the securities are offered and sold to a limited number of investors, often including accredited investors such as institutional investors, high-net-worth individuals or qualified purchasers. It is a common method of fundraising for companies that want to avoid the regulatory complexities and costs associated with going public.

Question 3

The investment banker performs what three basic functions?

Accepted Answer

The investment banker performs the basic functions of underwriting, distributing, and advising. Underwriting refers to the process of guaranteeing a certain amount of money for a company's securities, distributing refers to the selling of those securities to investors, and advising refers to providing guidance to the company on financial matters such as mergers and acquisitions.

Question 4

Which of the following statements concerning private placements is MOST correct?

Accepted Answer

Private placements do not involve selling securities to the public, but investment bankers may still provide advice on the sale and evaluation of buyers. Private placements can include both stocks and bonds. While some private placements may be sold to government entities, it is not true that more than half are sold to them.

Question 5

Activities of the investment banker include

Accepted Answer

Investment bankers assume the risk of selling a security issue, sell new securities to the ultimate investors, and provide advice to firms issuing securities. Therefore, all the options (A, B, and C) are included in the activities of investment bankers.

Question 6

Which of the following is an advantage of using private placements for debt?

Accepted Answer

Private placements for debt do not require registration with the SEC, which reduces costs associated with registration statement, underwriting fees, and distribution costs.

Question 7

The provisions of the Sarbanes-Oxley Act of 2002,or SOX,apply to all U.S.-based corporations,as well as to foreign corporations conducting business in U.S.markets.

Accepted Answer

The answer of The provisions of the Sarbanes-Oxley Act of...

Question 8

When an investment banking firm "underwrites" an issue of securities,the firm is performing which of the following?

Accepted Answer

When an investment banking firm underwrites an issue of securities, it is offering to purchase the securities from the firm issuing them, thereby assuming the risk of resale to investors. Essentially, the investment banking firm is guaranteeing that it will buy the securities from the issuer and that the issuer will receive the funds it expects to raise from the sale. In return, the investment banking firm receives a fee for its underwriting services.

Question 9

Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways.Which of the following methods guarantees the corporation with a pre-determined price for the securities?

Accepted Answer

An underwriting is a process in which an investment banking firm guarantees a pre-determined price for the securities being sold by the corporation. The investment banking firm buys the securities from the corporation at a discounted price, and then sells them to the public at a higher price, thus earning a profit. This guarantees the corporation a fixed amount of money for the securities being sold rather than leaving it to chance on the open market. A best efforts basis is when the investment banking firm agrees to use their best efforts to sell the securities, but does not guarantee a pre-determined price. A commission basis is when the investment banking firm earns a commission on the sale of securities, but does not guarantee a pre-determined price. A competitive bid is a process in which multiple investment banking firms bid on the opportunity to underwrite the securities, but is not a method that guarantees a pre-determined price.

Question 10

Commercial banks that also provide investment banking services are called

Accepted Answer

Commercial banks that also provide investment banking services are called universal banks. This type of banking model is commonly used in countries such as Germany and Switzerland, where banks offer a wider range of financial services to their clients, including both commercial and investment banking activities. Universal banks also have access to a broader set of revenue streams and are able to diversify their risks more effectively.

Question 11

Spandra Electronics wants to raise money by selling stock.After talking to several investment banking firms,Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock.Goldman sells 4.5 million shares and returns the rest to Spandra.This is an example of

Accepted Answer

This situation aligns with a commission or best-efforts agreement because Goldman Sachs did not guarantee to sell all of the shares, but rather sold as many as they could and returned the unsold portion to Spandra. A privileged subscription with a standby agreement typically involves the investment bank agreeing to purchase any unsold shares, while a competitive bid purchase involves multiple buyers competing to purchase the shares.

Question 12

Investment firms,such as Goldman Sachs,assist the transfer of capital by

Accepted Answer

Investment firms like Goldman Sachs facilitate indirect transfers of capital by acting as intermediaries between savers and borrowers. They assist in the buying and selling of securities, such as bonds or stocks, and help match borrowers, such as corporations or governments, with investors looking to invest their money. This type of indirect transfer is a key function of investment firms in the financial system.

Question 13

A corporation sells securities to an investment banking firm on January 1st.The next day an international oil crisis causes stock prices to drop dramatically.The corporation is immune from the drop in price of its stock due to which function of the investment banking firm?

Accepted Answer

The investment banking firm's function of underwriting protects the corporation from losses due to the drop in stock prices by purchasing the securities from the corporation at a predetermined price. Therefore, the corporation is immune from the drop in price of its stock.

Question 14

Reynolds,Inc.needs to raise $5 million by selling common stock.Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs,who then is responsible for selling the shares to investors.This is an example of a

Accepted Answer

This is an example of a negotiated purchase, where Reynolds, Inc. directly sells a specific number of shares at a set price to Goldman Sachs, who then takes on the responsibility of selling these shares to investors. This contrasts with other methods such as a best-efforts agreement where the intermediary would sell shares without guaranteeing the total amount raised.

Question 15

When a company repurchases its own common stock,it is likely that

Accepted Answer

When a company repurchases its own common stock, it indicates that the company views its own stock as undervalued. This can lead to an increase in demand for the stock, which can result in an increase in the stock price. Therefore, option A is the best choice. Option B is incorrect because artificial demand would typically cause an increase in the stock price. Option C is also incorrect because internal transactions can still have an impact on the stock price. Option D is irrelevant and incorrect.

Question 16

If a corporation wants a guarantee that all of its shares of stock will be sold,it should use which of the following distribution methods?

Accepted Answer

A competitive bid purchase guarantees that all of the shares will be sold because potential buyers submit bids to purchase the shares, with the highest bidder ultimately being selected to purchase all of the shares. This ensures that all shares will be sold and the corporation will receive the highest possible price for the shares.

Question 17

The investment banker does NOT underwrite the securities to be issued in which of the following?

Accepted Answer

The investment banker may not underwrite securities in a best efforts offering as they only act as an agent to the issuer and do not guarantee the sale of the securities. However, investment bankers typically underwrite securities in initial public offerings, primary market transactions, and firm commitment offerings.

Question 18

Which of the following statements about investment banking in the United States is MOST correct?

Accepted Answer

The investment banking industry in the United States is dominated by large banks that are also investment bankers, such as Goldman Sachs, JPMorgan Chase, and Morgan Stanley. These banks offer a wide range of financial services along with investment banking, including commercial banking, wealth management, and trading operations. This consolidation trend has increased in recent years, with several large banks acquiring smaller investment banks, resulting in fewer standalone investment banks operating in the market.

Question 19

Which of the following statements is MOST correct concerning flotation costs?

Accepted Answer

Flotation costs are typically higher for common stocks than for preferred stocks and bonds. This is because issuing common stock often involves more risk and uncertainty, leading to higher underwriting fees and commissions. Common stocks represent ownership in a company and come with voting rights, making their issuance more complex and potentially riskier than bonds or preferred stocks, which are debt instruments or carry fixed dividends.

Question 20

A "Dutch auction" was used by Google to raise money in 2004.A Dutch auction involves

Accepted Answer

A Dutch auction involves allowing investors to submit bids saying how many shares they'd like to buy and at what price. This was the method used by Google in their initial public offering (IPO) in 2004 to sell their shares to the public. Investors could submit bids for the number of shares they wanted and the price they were willing to pay, and this helped to establish the market price for the shares.

Quiz 2: The Financial Markets and Interest Rates