Question 1

What is the definition of a syndicate?

Accepted Answer

A syndicate is a group of underwriters who come together to share the risk of selling a new issue of securities, typically in an initial public offering (IPO). This allows for a wider distribution of the securities to potential investors, as each underwriter is responsible for selling a portion of the issue.

Question 2

Which one of the following is a preliminary prospectus?

Accepted Answer

A red herring is a preliminary prospectus that provides information about an upcoming securities offering but does not include all the details. It is called a red herring because it contains a warning on the cover stating that it is not yet complete and subject to change.

Question 3

Advertisements in a financial newspaper announcing a public offering of securities,along with a list of the investment banks handling the offering,are called:

Accepted Answer

Advertisements in a financial newspaper that announce a public offering of securities and provide a list of the investment banks handling the offering are called "tombstones." "Red herrings" refer to preliminary prospectuses issued before a public offering, "green shoes" refer to an over-allotment option granted to the underwriters, "registration statements" refer to the legal document disclosing information about the offering, and "cash offers" are not relevant in this context.

Question 4

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public.The underwriters charged a fee of 8 percent and paid Blue Stone Builders $16.40 a share on 40,000 shares.Which one of the following terms best describes this underwriting?

Accepted Answer

The answer of Blue Stone Builders recently offered to sell...

Question 5

Tony currently owns 12,000 shares of GL Tools.He has just been notified that the firm is issuing additional shares of stock and that he is being given a chance to purchase some of these shares prior to the shares being offered to the general public.What is this type of an offer called?

Accepted Answer

This is a rights offer, where existing shareholders are given the chance to purchase additional shares before they are offered to the general public.

Question 6

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

Accepted Answer

A securities issue that is offered for sale to the general public on a direct cash basis is called a general cash offer. A best efforts underwriting involves the underwriter agreeing to use their best efforts to sell the securities but does not guarantee the sale. A firm commitment underwriting involves the underwriter guaranteeing the sale of the securities. A rights offer allows current shareholders to purchase additional shares at a discounted price. A herring offer is a type of preemptive rights offer in the United Kingdom.

Question 7

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period.

Accepted Answer

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the "quiet period." This is to prevent issuers from hyping up their stock and disseminating potentially misleading information to the public. It allows for a more level playing field among investors. The other options, "silent," "lockup," "green," and "red," do not refer to this specific period of time.

Question 8

The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the:

Accepted Answer

The difference between the underwriters' cost of buying shares in a firm commitment and the offering price of those securities to the public is called the gross spread. It is typically expressed as a percentage of the offering price and represents the compensation for the underwriters' services.

Question 9

A rights offering in which an underwriting syndicate agrees to purchase the unsubscribed portion of an issue is called a _____ underwriting.

Accepted Answer

In a standby underwriting, the underwriting syndicate agrees to purchase any unsubscribed shares in the issue, providing a form of guarantee to the issuing company. This helps to ensure that the company will receive the funding it needs, even if not all shares or rights are sold to current shareholders. A firm commitment underwriting involves the underwriting syndicate purchasing all of the shares in the issue and reselling them to investors, while a best efforts underwriting involves the underwriting syndicate only agreeing to sell as many shares as possible, with no guarantee of the full subscription. Direct fee and tombstone are not related to underwriting methods.

Question 10

Jones & Co.is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products.What is this type of funding called?

Accepted Answer

The type of funding described in the scenario is called venture capital. This involves providing funding to start-ups or early-stage companies with high growth potential in exchange for equity in the company. Venture capitalists typically invest in companies that have promising new ideas and innovative technologies that have the potential to disrupt industries and create significant returns on investment. Jones & Co. fits this description, as they are focused on funding individuals who are trying to convert their new ideas into viable products. Green shoe funding, tombstone underwriting, red herring funding, and life cycle capital are not relevant to the scenario described.

Question 11

What is the form called that is filed with the SEC and discloses the material information on a securities issuer when that issuer offers new securities to the general public?

Accepted Answer

The registration statement is the form that is filed with the SEC to disclose material information on a securities issuer when that issuer offers new securities to the general public.

Question 12

What is a prospectus?

Accepted Answer

A prospectus is a document that outlines the details of a proposed security offering, including information about the issuer and the terms of the offering. This document is typically provided to potential investors and must be filed with the SEC as part of the registration statement for the offering. The prospectus serves as a key source of information for investors who are considering whether to invest in the offering.

Question 13

Soup Galore is a partnership that was formed three years ago for the purpose of creating,producing,and distributing healthy soups in a dried form.The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public.What is this type of an equity offering called?

Accepted Answer

The equity offering described in the scenario is an initial public offering (IPO) because the firm is offering shares of stock to the general public for the first time after previously being a private partnership. Choice A, venture capital offering, refers to raising capital from private investors. Choice B, shelf offering, refers to a method of issuing securities where a company can register a stock with the SEC and issue it at a later date. Choice C, private placement, refers to offering securities to a select few private investors. Choice D, seasoned equity offering, refers to a company that has already gone public offering additional shares of stock to raise additional capital.

Question 14

Miller & Chase is offering $4 million of new securities to the general public.Which SEC regulation governs this offering?

Accepted Answer

Regulation A governs offerings of up to $5 million in a 12-month period and allows for simplified registration requirements for smaller companies looking to raise capital from the general public.

Question 15

What is a seasoned equity offering?

Accepted Answer

A seasoned equity offering refers specifically to the sale of newly issued equity shares by a firm that is already publicly owned. This is different from an initial public offering (IPO), which is the first time a company offers equity shares to the public.

Question 16

Shares of PLS United have been selling with rights attached.Tomorrow,the stock will sell independent of these rights.Which one of the following terms applies to tomorrow in relation to this stock?

Accepted Answer

The term "ex-rights date" refers to the date on which a stock trades without the rights attached to it. In this case, tomorrow is the ex-rights date for the stock of PLS United.

Question 17

The date on which a shareholder is officially listed as the recipient of stock rights is called the:

Accepted Answer

The holder-of-record date is the date on which a shareholder is officially listed as the recipient of stock rights.

Question 18

Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale.The underwriters sold a total of 53,000 shares to the public.The additional 3,000 shares were purchased in accordance with which one of the following?

Accepted Answer

The additional 3,000 shares were purchased via the green shoe provision, which allows the underwriters to sell more shares than originally planned, up to a certain amount (in this case, 3,000). This is often used when there is more demand for the stock than anticipated.

Question 19

D.L.Jones & Co.recently went public.The firm received $20.80 a share on the entire offer of 25,000 shares.Keeser & Co.served as the underwriter and sold 23,700 shares to the public at an offer price of $22 a share.What type of underwriting was this?

Accepted Answer

This is a firm commitment underwriting, in which Keeser & Co. agreed to purchase the entire 25,000 shares from DL Jones & Co. at a specified offer price, and then sold 23,700 shares to the public at a higher price of $22 per share, earning a spread of $0.20 per share. The fact that all shares were ultimately sold to the public indicates that there was sufficient demand for the stock.

Question 20

Executive Tours has decided to take its firm public and has hired an investment firm to handle this offering.The investment firm is serving as a(n):

Accepted Answer

The investment firm is serving as an underwriter, which is a financial institution that helps a company issue and sell its securities to the public. Underwriters typically take on the risk of buying the securities from the issuer and then selling them to the public, and they receive a fee for their services.

Quiz 15: Raising Capital