Question 1

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

Accepted Answer

Studies have shown that on average, IPOs underperform compared to the general market in the immediate aftermarket. However, there are exceptions and some IPOs have performed well.

Question 2

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

Accepted Answer

An underpriced offering means the issuing firm has left money on the table and has not received the true market value for their securities. This represents a permanent lost opportunity for the firm as they have missed out on potential funds that could have been used for future growth and development.

Question 3

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

Accepted Answer

The investment banking industry continues to engage in a wide range of activities, including advising on mergers and acquisitions (M&A) as well as underwriting new securities. Both areas remain core functions of investment banks.

Question 4

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

Accepted Answer

Under pricing helps to attract more investors by offering shares at a discounted price, which can result in a higher demand for shares and increase the likelihood of a successful IPO.

Question 5

The term "under pricing" describes the process of setting the spread between the participants of the investment banking syndicate.
"Under pricing" actually refers to selecting a share price for new issues slightly below the market value perceived by the public.

Accepted Answer

Underpricing refers to setting the initial offering price of a new issue below its market value, not the spread between investment banking syndicate participants.

Question 6

When a firm issues new stock, it can result in a dilution of earnings in the short run.
When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.

Accepted Answer

Dilution of earnings due to a new stock issue is typically temporary, as the new equity infusion may take some time to boost earnings per share.

Question 7

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

Accepted Answer

This is correct; an underwriting syndicate is a group of investment bankers who work together to distribute a new issue of securities for a company.

Question 8

The issuing company desires to have as little under pricing of new securities as possible.
Underpriced securities will sell rapidly, but are likely to "leave money on the table" that the issuing firm now cannot realize.

Accepted Answer

Underpriced securities may sell quickly, but the issuing company will miss out on potential profits that could have been obtained by pricing the securities closer to their actual market value. Therefore, the issuing company desires to have as little underpricing as possible.

Question 9

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

Accepted Answer

An underwriting syndicate is a group of investment banks and/or brokers who work together to distribute securities to the public.

Question 10

The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed.
The underwriting spread represents the profit that participants in the underwriting process hope to gain from their successful efforts in distribution.

Accepted Answer

The underwriting spread is not a guaranteed minimum profit; it is the difference between the price at which the underwriters buy an issue from the issuer and the price at which they sell it to the public, representing potential profit.

Question 11

Shelf registration has nearly eliminated competition in the investment banking industry.
Shelf registration does not directly impact competition. It is used as a comprehensive vehicle for issues in advance for up to two years.

Accepted Answer

Shelf registration is a process that allows companies to register securities with the Securities and Exchange Commission (SEC) in advance of actually selling them to the public. It does not have a direct impact on competition in the investment banking industry, but rather provides companies with flexibility in timing and pricing their offerings. Competition in the investment banking industry is affected by a variety of factors such as reputation, expertise, and relationships with clients, among others.

Question 12

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.
There are many reasons why the stock price could have dropped.

Accepted Answer

While it is possible that the investment banker may have made a mistake in calculating the original stock price, there are many factors that can contribute to a drop in the stock price after an IPO, including market conditions, company performance, and investor sentiment. It is not fair to solely blame the investment banker for a drop in stock price.

Question 13

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

Accepted Answer

When a company goes public, an initial public offering (IPO) is conducted to sell the ownership of the company to the public. This allows the company to raise capital and increase its visibility in the market. During an IPO, the company issues and sells shares to investors, who become part owners of the company.

Question 14

In 2011, IPOs rose tremendously since the market started to pick up.
This happened in 2014.

Accepted Answer

The statement contradicts itself by stating that IPOs rose tremendously in 2011, but then stating that it happened in 2014. Therefore, the statement is false.

Question 15

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.

Accepted Answer

The SEC does allow underwriters to engage in activities that support the price of newly issued stocks. This is known as stabilization, and it involves purchasing shares in the market to prevent the stock price from falling below the offering price. However, this activity is closely monitored and must follow specific regulations to prevent manipulation of the market.

Question 16

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.

Accepted Answer

This statement is true. Secondary offerings are when existing shareholders sell their shares to the public, while in an initial public offering (IPO) the company issues new shares to the public for the first time.

Question 17

Investment bankers can help a firm undertake a secondary offering when the company is too small for a primary offering IPO.
Secondary offerings are about the sale of supplemental shares, as well as those held by owners from the primary offering, rather than the size of the company.

Accepted Answer

Secondary offerings are about the sale of supplemental shares, as well as those held by owners from the primary offering, rather than the size of the company.

Question 18

When a firm issues new stock, it always results in a dilution of earnings in the long run.
When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.

Accepted Answer

Issuing new stock can lead to dilution of earnings per share initially, but it does not always result in long-term dilution. The capital raised can be used for growth and expansion, potentially increasing future earnings.

Question 19

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

Accepted Answer

Under pricing is when an investment banker sets the stock price below the market price to encourage investors to buy the stock, which can result in a higher demand and potential profit for the investment banker.

Question 20

The out-of-pocket cost to issue new common stock is always paid by the investment banker.
These costs are ultimately borne by the issuer.

Accepted Answer

The out-of-pocket cost to issue new common stock, such as underwriting fees and other expenses, are typically paid by the issuer, not the investment banker. These costs are ultimately borne by the issuer in order to raise capital.

Quiz 15: Investment Banking

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

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

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

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

The term "under pricing" describes the process of setting the spread between the participants of the investment banking syndicate. "Under pricing" actually refers to selecting a share price for new issues slightly below the market value perceived by the public.

When a firm issues new stock, it can result in a dilution of earnings in the short run. When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.

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

The issuing company desires to have as little under pricing of new securities as possible. Underpriced securities will sell rapidly, but are likely to "leave money on the table" that the issuing firm now cannot realize.

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

The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed. The underwriting spread represents the profit that participants in the underwriting process hope to gain from their successful efforts in distribution.

Shelf registration has nearly eliminated competition in the investment banking industry. Shelf registration does not directly impact competition. It is used as a comprehensive vehicle for issues in advance for up to two years.

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. There are many reasons why the stock price could have dropped.

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

In 2011, IPOs rose tremendously since the market started to pick up. This happened in 2014.

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.

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.

Investment bankers can help a firm undertake a secondary offering when the company is too small for a primary offering IPO. Secondary offerings are about the sale of supplemental shares, as well as those held by owners from the primary offering, rather than the size of the company.

When a firm issues new stock, it always results in a dilution of earnings in the long run. When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.

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

The out-of-pocket cost to issue new common stock is always paid by the investment banker. These costs are ultimately borne by the issuer.