Question 1

Securities exchanges will not permit securities to be sold:

Accepted Answer

Securities exchanges will not permit securities to be sold until the registration statements have been approved by the appropriate regulatory body. Therefore, choice B, which indicates that securities cannot be sold prior to approval of the registration statements, is the best answer. However, overpricing and guaranteeing their value are not necessarily requirements for selling securities, and the existence of a shelf registration is not always necessary.

Question 2

What%age of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $34 each to an underwriter and the underwriter sells the shares at $40 each?

Accepted Answer

The underwriting spread is $6 per share ($40 - $34), totaling $18 million for 3 million shares. The direct expense percentage is calculated as $1 million (other expenses) divided by $18 million (underwriting spread), which is approximately 7.19%.

Question 3

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading, the issuing company's stock price had risen to $70.What is the total cost (direct expenses plus underpricing cost)?

Accepted Answer

The answer of Assume the issuer incurs $1 million in...

Question 4

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading, the issuing company's stock price had risen to $70.What is the cost of underpricing?

Accepted Answer

The cost of underpricing is the difference between the price at which the shares were sold to the underwriter and the price at which they were sold to the public. In this case, the shares were sold to the underwriter at $40 each and to the public at $43 each. Therefore, the cost of underpricing is $3 per share, or $9 million in total.

Question 5

A private placement avoids which of the following costs?

Accepted Answer

A private placement avoids the cost of registration with the SEC, which can be substantial. However, it may still incur other costs such as administration costs or fixed costs. The depression in the stock price is not a cost, but rather a potential consequence of a public offering.

Question 6

Which of the following security issues might have the lowest direct costs?

Accepted Answer

Bonds typically have lower direct costs compared to other securities as they do not require the same level of underwriting and legal fees as IPOs or seasoned equity offerings. Additionally, convertible securities may also have higher costs as they involve the issuance of both debt and equity components.

Question 7

The POP system allows firms to:

Accepted Answer

The POP (Public Offering Price) system allows firms to incur only short time delays in selling securities, typically one to two days. It does not have provisions for purchasing securities without registration, delaying payment for securities, or offering rights issues to non-existing shareholders.

Question 8

Which of the following is correct if an underwriter is selling stock to the public at $40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold, and the issuing firm receives $111 million from the underwriter?

Accepted Answer

The answer of Which of the following is correct if...

Question 9

Prospective investors are advised of a stock's potential risks by the:

Accepted Answer

The prospectus is a document provided to potential investors that outlines the risks associated with investing in a particular stock. It is required by the Securities and Exchange Commission (SEC) and is intended to provide investors with all the necessary information to make an informed decision before investing. The underwriter is responsible for assisting the company in preparing the prospectus, but the prospectus itself is the primary source of information for investors regarding the risks associated with the investment. Underpricing laws and initial public offerings do not provide information on the risks of a stock.

Question 10

The "winner's curse" is a reminder that:

Accepted Answer

The "winner's curse" refers to the tendency of successful bidders to overpay for an object in an auction. This happens when bidders get caught up in the excitement of the bidding and end up paying more than the object is actually worth.

Question 11

A rights issue offers the firm's shareholders one new share of stock at $40 for every three shares of stock they currently own.What should be the stock price after the rights issue if the stock sells for $80 per share before the issue?

Accepted Answer

Before the rights issue, the shareholder owned 3 shares worth $240 ($80 per share). After the rights issue, the shareholder will own 4 shares (3 original and 1 from the rights issue) for a total cost of $160 ($40 for the rights issue share and $80 for the 3 original shares). The new market capitalization for the firm will be the number of shares outstanding multiplied by the stock price after the issue. 
New market cap = 4 x Stock price after issue
$640 = 4 x Stock price after issue
Stock price after issue = $160
Therefore, the stock price after the rights issue is $70 (($80 + $40)/2) per share.

Question 12

Some investors believe that the decision by management to issue equity as opposed to issuing debt is a signal that:

Accepted Answer

The decision to issue equity instead of debt may signal that management believes the stock is currently overvalued. This is because issuing equity will dilute the value of existing shares, so management would only choose to do so if they believed the existing shares were already trading at a high price.

Question 13

What is the primary reason for a reduction in share value after a successful rights issue? The new shares:

Accepted Answer

A rights issue typically offers new shares at a discount to encourage existing shareholders to purchase them, which can lead to a temporary reduction in the share value due to the dilution effect.

Question 14

Which of the following statements is generally true concerning the costs of security issue?

Accepted Answer

Debt is generally cheaper to issue than equity because debt is considered less risky by investors and therefore requires a lower rate of return. Additionally, the interest paid on debt is tax-deductible, further reducing the cost. Underpricing can be a significant cost if the issuer sets the price of the security too low and misses out on potential profits. Finally, there may be some economies of scale in security issuance, such as lower underwriting costs for larger offerings.

Question 15

What %age of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

Accepted Answer

The total revenue generated from selling 3 million shares at $43 each is 3 million x $43 = $129 million. The underwriting spread of $3 per share results in a total expense of 3 million x $3 = $9 million. Additionally, $1 million in other expenses was incurred to sell the shares. Therefore, the total expenses incurred by the issuer is $10 million ($9 million + $1 million). 
The percentage of direct expense required to market the stock is calculated as: (Total expenses / Total revenue) x 100%
= ($10 million / $129 million) x 100%
= 7.75%
Therefore, the best choice is option C, which gives the correct percentage of direct expense required to market the stock.

Question 16

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading, the issuing company's stock price had risen to $70.In %age terms, how much market value is absorbed by the total cost (direct expenses plus underpricing cost)?

Accepted Answer

The answer of Assume the issuer incurs $1 million in...

Question 17

Provincial securities regulations exist in order to:

Accepted Answer

Provincial securities regulations primarily exist to protect investors from fraudulent and deceptive firms. The regulations aim to ensure that investors have access to and receive accurate and truthful information regarding securities being offered in the marketplace.

Question 18

One strategy that appears to be used by certain underwriters to reduce the risk of marketing a stock is to:

Accepted Answer

Underwriters may set the initial stock price below its true value to ensure that the stock is attractive to investors, leading to a successful sale and reducing the risk of unsold shares.

Question 19

Stock that is sold through a rights issue:

Accepted Answer

A rights issue is a type of offering in which a current shareholder is given the right to purchase additional shares of the company's stock at a discounted price. These new shares are usually limited to sale to existing shareholders, giving them the opportunity to maintain their proportional ownership in the company. Therefore, choice C is the correct answer.

Question 20

The direct expense of a stock issue includes the:

Accepted Answer

The direct expense of a stock issue includes the underwriting spread and other expenses, but not the cost of underpricing, which is considered an indirect cost.

Quiz 15: Venture Capital, Ipos, and Seasoned Offerings