Question 1

Which one of the following statements concerning debt issues is correct?

Accepted Answer

Firms often pay higher interest rates on term loans than on public issues of debt. This is because term loans are typically provided by a single lender and therefore carry more credit risk for the lender, whereas public issues of debt can be sold to multiple investors, spreading the risk.

Question 2

Which of the following have been offered as justification for stock price declines following an SEO announcement?
I.Investors assume managers issue stock when shares are overvalued.
II.Corporate taxes imposed on stock offerings lower the value of the issuer's cash flows.
III.Issuing debt may be considered a signal that the issuer has too much debt.
IV.Issue costs reduce the value of the issuing firm.

Accepted Answer

I is a common explanation for stock price declines following a stock offering because investors may believe that managers are issuing stock when shares are overvalued. III is also a plausible explanation for a stock price decline following a debt offering, as it may signal that the issuer has taken on too much debt. IV is another reason for a stock price decline because issuing firms must bear the costs of the issue, which lowers their overall value. II is not a common justification for stock price declines following a stock offering, so it is not included in the best choice. Therefore, C is the best answer because it includes I, III, and IV.

Question 3

What is the length of the SEC registration waiting period?

Accepted Answer

The SEC registration waiting period, often referred to as the "cooling-off" period, is 20 days. This is the time frame the SEC has to review a company's registration statement before the securities can be sold to the public.

Question 4

Which of the following have been offered as explanations of IPO underpricing?
I.Underpricing helps offset the "winner's curse".
II.Underpricing helps ensure investors will be long-term holders of the IPO securities.
III.Underpricing helps ensure investment bank customers will earn a profit on average.
IV.Underpricing is needed to convince investors to accept the risks associated with IPOs.

Accepted Answer

Underpricing has been offered as an explanation to offset the "winner's curse," ensure investment bank customers will earn a profit on average, and convince investors to accept the risks associated with IPOs. However, there is little evidence to support the claim that underpricing ensures investors will be long-term holders of the IPO securities.

Question 5

Which one of these statements is correct?

Accepted Answer

The answer of Which one of these statements is correct?
...

Question 6

Galactic Travel wants to do an IPO but is quite concerned that the underwriters might underprice the issue.Which one of the following might the firm consider to address this concern?

Accepted Answer

Dutch auction underwriting would allow Galactic Travel to set a minimum price for the IPO, ensuring that the shares are not underpriced. This method involves letting potential investors bid on the shares, with the price being set at the lowest level at which all of the shares can be sold. This way, the company can achieve a fair price for its shares without the risk of underpricing. The other options do not directly address the concern of underpricing the issue.

Question 7

Which of these are two major benefits a firm derives from going public?
I.Investment bank customers remain content
II.Increased ability of the firm to raise capital
III.Reselling IPO shares at higher prices on the first day of trading
IV.Shareholders are better able to diversify their holdings

Accepted Answer

Going public allows a firm to increase their ability to raise capital from public investors, making option II true. Shareholders benefit from diversification of their holdings, making option IV true. Option I is not a benefit of going public, and option III refers to a short-term benefit that may not always occur.

Question 8

Assume the SEC approved the registration statement for a new securities issue this morning.Which one of the following statements must be true about this issue?

Accepted Answer

The fact that the SEC approved the registration statement means that the issuer has met all of the required regulatory requirements for the new securities issue. This would include providing a final prospectus and following all rules and regulations. However, it does not mean that the red herring can be distributed immediately or that the SEC believes the issue will be profitable. The waiting period may have already started prior to the approval being received.

Question 9

What is the primary reason why securities are sometimes offered through a rights offering?

Accepted Answer

Rights offerings are used as a way for a company to raise capital while allowing current shareholders to maintain their proportional ownership position. Shareholders are given the option to purchase additional shares at a discounted price before the offering is made available to the general public. This helps the company avoid the dilution of ownership that can occur with other methods of raising capital, such as a public offering.

Question 10

Which one of these was most cited by CFOs as the motive for going public?

Accepted Answer

The answer of Which one of these was most cited...

Question 11

When issuing securities,which of the following can occur prior to receiving SEC approval?
I.Oral offer to buy shares
II.Written offer to buy shares
III.Final determination of the offer price
IV.Distribution of a preliminary prospectus

Accepted Answer

Oral offers to buy shares can occur prior to SEC approval, but written offers cannot be made until after approval has been received. Final determination of the offer price cannot occur until after SEC approval as it must be disclosed in the final prospectus. Distribution of a preliminary prospectus can occur prior to SEC approval, but it must include a disclaimer informing potential investors that the securities have not yet been approved by the SEC. Therefore, the only options that can occur prior to receiving SEC approval are oral offers and distribution of a preliminary prospectus.

Question 12

What was the average first-day return on IPOs for the period 1975-2012 in the U.S.?

Accepted Answer

The average first-day return on IPOs for the period 1975-2012 in the U.S. was 21.7 percent, according to a study by Jay Ritter, a finance professor at the University of Florida.

Question 13

A stock with a file price range of _____,a final offer price of ______,and a first-day closing price of _____ is the best example of the partial adjustment phenomenon.

Accepted Answer

The answer of A stock with a file price range...

Question 14

Currently,you own 7 percent of the outstanding stock of Metals Unlimited.The firm has decided to issue additional shares of stock and has given you the first option to purchase 7 percent of those additional shares.Which one of the following will you be participating in if you opt to purchase the shares you have been offered?

Accepted Answer

If you opt to purchase the additional shares offered to you, you will be participating in a rights offer. A rights offer is a type of stock offering in which existing shareholders have the right to purchase newly issued shares in proportion to their existing holdings. This option is commonly used by companies to raise additional capital without diluting the ownership of existing shareholders.

Question 15

Which one of the following statements concerning the underwriting of new issues of debt and equity is correct?

Accepted Answer

Underwriters may receive warrants and shares of stock as part of their compensation.

Question 16

You own 600 of the 12,000 outstanding shares of BLM stock.The firm just announced that it will be issuing an additional 3,000 shares to the general public in a cash offer at $19 per share.What type of event are you participating in if you opt to purchase 100 of these additional shares?

Accepted Answer

The event being described is a seasoned equity offering, which is when a company offers additional shares to the public after already having had an initial public offering.

Question 17

The Green Shoe option is most apt to be exercised when an IPO is ______ and _____.

Accepted Answer

The Green Shoe option allows underwriters to purchase additional shares from the issuer at a discounted price in case of oversubscription. Therefore, it would be most apt to be exercised when an IPO is underpriced (which would lead to oversubscription) and oversubscribed (thereby allowing the underwriters to exercise the option and purchase additional shares at a lower price).

Question 18

Which one of the following is an intended result of a lockup agreement?

Accepted Answer

A lockup agreement is a legal agreement between the underwriters and insiders of an IPO, where they agree not to sell their shares for a period of time, usually 90-180 days after the IPO. This is done to temporarily support the market price of IPO shares and prevent selling pressure, which could result in a drop in price.

Question 19

Which one of the following statements is correct?

Accepted Answer

According to securities law, a prospectus must be given to all investors who are purchasing shares of new equity offering. Hence, option B is the correct statement.

Option A is incorrect as the approval of any change in the authorized number of shares depends on the company's articles of association.

Option C is incorrect as the authority to approve additional shares of stock for a new issue depends on the company's board of directors.

Option D is incorrect as the first step of issuing new securities is actually the filing of a registration statement with the regulatory body.

Option E is incorrect as no written offers can be made during the waiting period of a new securities issue.

Question 20

The primary purpose of a lockup agreement is to ensure:

Accepted Answer

A lockup agreement is a contractual agreement between company insiders and the underwriters of an IPO, which restricts insiders from selling their shares for a specified period after the IPO. The primary purpose of a lockup agreement is to ensure that insiders maintain an economic interest in the issuer for a minimum period of time, usually 90 to 180 days. This helps to prevent insiders from quickly liquidating their shares, which could adversely affect the market for the company's stock.

Quiz 19: Raising Capital