Deck 10: The Practice of Fundamental Investing

Question 1

A successful offering is undersubscribed.

Answer 1

False

Question 2

CEO compensation is often used to try to remedy the principal-agent conflict.

Answer 2

True

Question 3

Capital allocation is the description of how management uses resources to create value on behalf of shareholders.

Answer 3

True

Question 4

Buy-side analysts typically cover the stocks within a particular industry and produce reports that are intended to help the sell-side reach investment decisions.

Question 5

The ex-dividend date is the date on which the transfer agent "closes the book" and looks at who is the shareholder.

Question 6

Being a public company also has some advantages, among which management must answer to outside shareholders.

Question 7

Corporate governance refers to the rules, policies, and procedures that are used to direct and control a company.

Question 8

When a company acquires another public company, it typically pays a significant premium above the previous market price.

Question 9

Sell-side analysts provide information and recommendations to their firm's portfolio manager(s).

Question 10

A growing percentage of institutional investors are integrating environmental, social, and governance (ESG) factors into their investment decisions.

Question 11

A company goes public for many reasons, including that the original investors and the management team would like liquidity.

Question 12

Some investors believe that dividends increase the agency conflict.

Question 13

The least significant part of the registration statement is known as the prospectus.

Question 14

The sell-side refers to firms that facilitate securities transactions.

Question 15

Investors want directors who will voice their opinion, who are not beholden to the CEO or board chair, and who have enough experience that their opinion carries weight on the board.

Question 16

The declaration date is the date that a dividend is announced by the board of directors.

Question 17

Share repurchases do not always create value.

Question 18

When a firm decides to go public, it hires an investment bank to lead the company through the process.

Question 19

Corporations can use many tools in order to prevent takeovers, including poison pills, which require a supermajority of shareholder votes to approve selling the firm, selling the most profitable part of the company, and staggered boards.

Question 20

The three goals of executive compensation are to align management's interest with the shareholders, to keep management from leaving in bad times, and to refrain from giving too much of shareholder profits to management.

Question 21

A stock went public at $27 and closed at $45. What was the underpricing percentage?

A) 18 percent
B) 40 percent
C) 27 percent
D) 66.67 percent
E) 45 percent

Question 22

The goal of the stock pitch is to convince an investor to buy a stock or to sell a stock short.

Question 23

Once the offering has been deemed effective, the investment bank and the issuing firm have a/an _____.

A) indication of interest
B) pricing meeting
C) registration statement
D) road show
E) prospectus

Question 24

Disadvantages of a company going public include all of the following, EXCEPT that

A) there are direct costs associated with compliance.
B) management may have to disclose more of its strategy.
C) publicly traded stock provides valuable signaling information.
D) management will spend significant time meeting with analysts.
E) management must answer to outside shareholders.

Question 25

The preliminary prospectus is often referred to as a/an _____

A) SEC form S-1.
B) red herring.
C) registration statement.
D) winner's curse.
E) green shoe.

Question 26

Advantages of a company going public include all of the following, EXCEPT that

A) publicly traded stock provides valuable signaling information concerning the health of the company.
B) the original investors and the management team would like liquidity.
C) it is easier to use public stock as currency to acquire other companies.
D) it might need more capital in order to finance growth.
E) management must answer to outside shareholders.

Question 27

A company is going public with an offering price of $10 per share. The gross spread is 7 percent. How much will the bank receive? How much will the issuing firm receive?

A) $1.07; $17.00
B) $1.70; $7.00
C) $0.70; $9.30
D) $7.00; $10.00
E) $7.00; $3.00

Question 28

A company is going public with an offering price of $15 per share. The gross spread is 7 percent. How much will the bank receive? How much will the issuing firm receive?

A) $1.05; $13.95
B) $1.50; $15.00
C) $1.50; $13.50
D) $1.05; $15.00
E) $7.00; $15.00

Question 29

A stock pitch is like a book report or a news report.

Question 30

Which of the following describes the process of when the underwriter takes the issuing company's management to meet with potential investors?

A) Indications of interest
B) The pricing meeting
C) The registration statement
D) The road show
E) The prospectus

Question 31

An investment bank can do an IPO offering as a

A) firm commitment.
B) best efforts commitment.
C) firm offering.
D) bought offering.
E) red herring.

Question 32

The level of compensation of the top five earners within each public company can be found in the company's proxy statement.

Question 33

If there is a demand for more shares than are available at the offering price, the offering is said to be _____.

A) undersubscribed
B) oversubscribed
C) overpriced
D) underpriced
E) popular

Question 34

An investment bank can do an IPO offering as a

A) discounted commitment.
B) best efforts commitment.
C) premium commitment.
D) best efforts offering.
E) red herring.

Question 35

Which of the following is a document that helps potential investors understand the company?

A) Indications of interest
B) The pricing meeting
C) The registration statement
D) The road show
E) The prospectus

Question 36

Kaplan (2013) argues that the market for top executives is competitive, and compensation of other professionals is growing even faster.

Question 37

Compensation for the top executives at public companies is set by a compensation committee, which is a subset of the board of directors.

Question 38

A stock went public at $15 and closed at $17.70. What was the underpricing percentage?

A) 15 percent
B) 17 percent
C) 18 percent
D) 17.70 percent
E) 15.25 percent

Question 39

A company is going public with an offering price of $27 per share. The gross spread is 7 percent. How much will the bank receive? How much will the issuing firm receive?

A) $2.70; $24.30
B) $1.89; $25.11
C) $0.70; $27.00
D) $7.00; $20.00
E) $7.00; $27.00

Question 40

The fee paid to the underwriter is called the

A) tactical spread.
B) net spread.
C) gross spread.
D) listing fee.
E) banking fee.

Question 41

The _____ refers to firms that facilitate securities transactions.

A) buy-side
B) sell-side
C) SEC
D) issuing firm
E) pension fund

Question 42

A company is going public by selling 50 million shares. As a result of the overallotment option, the investment bank has the right to buy an additional _____ shares.

A) 2.5 million
B) 5.25 million
C) 7.5 million
D) 9.5 million
E) 11.25 million

Question 43

The _____ is the idea that anyone who wins an auction must have bid too much.

A) blue herring
B) red herring
C) loser's curse
D) winner's curse
E) red shoe

Question 44

The _____ refers to firms that actually invest in securities.

A) buy-side
B) sell-side
C) SEC
D) issuing firm
E) investment bank

Question 45

In a _____, the issuing company could agree to sell the shares at a price below the clearing price.

A) bookbuilt offering
B) discount offering
C) dirty auction
D) clean auction
E) green shoe

Question 46

Corporations can use many tools in order to prevent takeovers, including

A) poison pills.
B) non-staggered boards.
C) retaining the most profitable part of the company.
D) requiring a minority of shareholder votes to approve selling the firm.
E) staging a walk out.

Question 47

The overallotment option gives the investment bank the right to buy _____ more shares within the next _____.

A) 5 percent; 10 days
B) 30 percent; 10 days
C) 10 percent; 30 days
D) 30 percent; 15 days
E) 15 percent; 30 days

Question 48

A stock pitch includes all of the following EXCEPT

A) that stock returns are mean reverting.
B) merits of a stock.
C) models and multiples.
D) risks.
E) background information about the company.

Question 49

From 1980 to 2016, the average IPO in the United States closed _____higher than the IPO price.

A) 18 percent
B) 30 percent
C) 25 percent
D) 66 percent
E) 55 percent

Question 50

The underpricing during the 1999-2000 technology bubble was above _____.

A) 18 percent
B) 30 percent
C) 25 percent
D) 66 percent
E) 55 percent

Question 51

The investment bank helps stabilize the price of new issues in the secondary market by

A) purchasing shares in the open market.
B) selling shares in the open market.
C) risking its capital.
D) market manipulation.
E) underallotment of shares.

Question 52

The _____ gives the investment bank the right to buy 15 percent more shares within the next 30 days.

A) underwriters fee
B) red herring
C) overallotment option
D) winner's curse
E) red shoe option

Question 53

The goal of _____ is to convince an investor to buy a stock or to sell a stock short.

A) corporate governance
B) capital allocation
C) executive compensation
D) going public
E) the stock pitch

Question 54

All of the following are primary ways to allocate capital, EXCEPT

A) engaging in mergers and acquisitions.
B) paying dividends.
C) repurchasing shares.
D) decreasing the working capital of the business.
E) returning cash to debtholders.

Question 55

The key issues that investors seem to care about with respect to a board include all of the following, EXCEPT

A) the size of the board.
B) stratthe independence of the board.
C) how the board responds to shareholder proposals.
D) separation of the CEO and board chair positions.
E) how management is compensated.

Question 56

Which of the following facts about executive compensation is TRUE?

A) The level of compensation of the top five earners within each public company is not disclosed.
B) Officers are permitted to hedge their stock and option awards.
C) CEO compensation has increased much faster than the wages of the other corporate employees.
D) Aligning compensation to share price will align management to shareholders.
E) The majority of the compensation committee must be dependent directors.

Question 57

According to a study (Callahan and Mauboussin), when does compensation conflict tend to occur?

A) When it provides strong incentives to create shareholder value
B) When it helps retain key talent
C) When it limits compensation cost to levels that maximize the wealth of shareholders
D) When management has most of their wealth in this one company, so they may take too little risk
E) When it makes management focus on long-term value maximization rather than earnings per share

Question 58

A company is going public by selling 75 million shares. As a result of the overallotment option, the investment bank has the right to buy an additional _____ shares.

A) 2.5 million
B) 5.25 million
C) 7.5 million
D) 9.5 million
E) 11.25 million

Question 59

_____ is the description of how management uses resources to create value on behalf of shareholders.

A) Corporate governance
B) Capital allocation
C) Executive compensation
D) Going public
E) A stock pitch

Question 60

_____ refers to the rules, policies, and procedures that are used to direct and control a company.

A) Corporate governance
B) Capital allocation
C) Executive compensation
D) Going public
E) A stock pitch