Question 1

Which of the following is a possible exception to the efficient-market theory?
A)Underwriters charge investors more for IPO shares than they pay the issuing firms.
B)IPO spreads are lower on larger issues.
C)The issuance of equity is interpreted as an unfavorable signal by investors.
D)The long-run returns of IPOs tend to underperform the market.

Accepted Answer

The efficient-market theory assumes that all available information is reflected in the current market price. However, if the long-run returns of IPOs tend to underperform the market, it suggests that there is some inefficiency in the market as the market is not accurately pricing the future performance of these stocks. This is known as the "underpricing puzzle" and has been shown in various studies.

Question 2

What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue?
A)SOX compliance
B)spinning
C)conflict of interest
D)Chinese wall

Accepted Answer

This scenario would be considered a conflict of interest, as the underwriter's actions are motivated by their own financial gain rather than the best interest of the client. This is considered unethical and can be illegal. SOX compliance refers to regulations put in place by the Sarbanes-Oxley Act to improve transparency and accountability in corporate financial reporting. Spinning refers to the practice of underwriters giving preferential treatment to certain investors in the allocation of IPO shares. A Chinese wall is a virtual barrier put in place to prevent conflicts of interest and ensure confidentiality within a firm.

Question 3

Mezzanine financing must come in the third stage.

Accepted Answer

Mezzanine financing typically falls in the second stage of financing, between early-stage funding (such as angel or seed funding) and later-stage funding (such as IPO or acquisition).

Question 4

What costs in an IPO generally exceed all other costs?
A)commissions
B)issues fees
C)spreads
D)underpricing

Accepted Answer

Underpricing in an IPO often exceeds other costs because it involves setting the initial stock price lower than the market value, leading to significant potential loss of capital for the company.

Question 5

Rule 144A allows large financial institutions to trade unregistered securities among themselves.

Accepted Answer

Rule 144A is a SEC rule that permits the sale of unregistered securities to qualified institutional buyers (QIBs) such as large institutional investors like banks, hedge funds, insurance companies, and pension funds. This creates a more liquid market for the securities and allows issuers to raise capital from institutional investors without registering with the SEC.

Question 6

For industrial stocks in the U.S.,the announcement of an SEO usually leads to a decline in stock price,with the decline averaging 3-4%.

Accepted Answer

This statement is true. Studies have shown that when companies announce a secondary offering of stocks (SEO), it often leads to a drop in the stock price, particularly for industrial stocks. On average, the decline can be around 3-4%. This is because SEOs can dilute the value of existing shares and also signal to investors that the company may need to raise capital, which can indicate potential financial challenges.

Question 7

The first public issue by a firm is known as a seasoned equity offering.

Accepted Answer

The first public issue by a firm is known as an initial public offering (IPO), not a seasoned equity offering. A seasoned equity offering refers to the sale of additional shares by a public company that has already gone through an IPO.

Question 8

If a shareholder or an investor wants to acquire a new share of stock under a rights issue,he/she must:
A)buy call options on the stock.
B)acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent.
C)acquire the correct number of rights per share and submit them to the subscription agent.
D)register his order with the NYSE.

Accepted Answer

To acquire a new share of stock under a rights issue, the shareholder or investor must acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent. Option A (buying call options) would not be applicable in this scenario, and option C (acquiring the correct number of rights per share without specifying the subscription price) is incomplete. Option D (registering the order with the NYSE) is also not required for acquiring a new share under a rights issue.

Question 9

Shelf registration allows the firm to file a registration statement with the SEC to cover a series of subsequent issues.

Accepted Answer

Shelf registration allows for a registration statement to be filed with the SEC to cover multiple future offerings, which makes it easier and more efficient for the company to issue securities when needed.

Question 10

Most public issues must be registered with the SEC,and the company may not sell securities until the SEC has approved its registration statement.

Accepted Answer

This is true according to the Securities Act of 1933. The SEC reviews registration statements to ensure that investors have access to all material information necessary to make informed investment decisions. Only after approval can a company legally sell securities to the public.

Question 11

Generally,IPOs are overpriced and are subject to the winner's curse.

Accepted Answer

The answer of Generally,IPOs are overpriced and are subject to...

Question 12

When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies,pension funds,etc.,it is called a(an):
A)rights offering.
B)general art offering.
C)private placement.
D)unseasoned issue.

Accepted Answer

Selling an entire issue of securities to a small group of institutional investors is called a private placement. This is different from a general art offering, which is open to the public, and a rights offering, which allows current shareholders to buy additional shares. An unseasoned issue typically refers to a new company or one that has a limited financial track record.

Question 13

The New Word Corporation has 1,000,000 shares outstanding at $30/share.If the firm wishes to raise $13.5 million at a subscription price (North American rights offering)of $27/share,calculate the value of a right.
A)$1/right
B)$2/right
C)$3/right
D)$4/right

Accepted Answer

The answer of The New Word Corporation has 1,000,000 shares...

Question 14

The most prevalent motive for firms to undertake an IPO is to create public shares for use in future acquisitions.

Accepted Answer

The answer of The most prevalent motive for firms to...

Question 15

The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called:
A)Rule 144A.
B)Rule 415.
C)the Sarbanes-Oxley Act.
D)none of the options.

Accepted Answer

Rule 144A is the SEC provision that allows qualified institutional investors to trade privately placed securities among themselves without having to register the securities with the SEC. This rule was designed to increase liquidity for these investors while still maintaining certain regulatory protections.

Question 16

Underpricing is a technique used by underwriters to enhance the success of an issue.

Accepted Answer

Underpricing is a technique used by underwriters to set the issue price below its market value, which can increase demand and ensure the success of the issue.

Question 17

The underwriting spread for debt is generally less than that for equity.

Accepted Answer

This is generally true as debt is typically perceived as less risky than equity and requires less effort to sell, so underwriters charge a lower spread for debt offerings.

Question 18

Spinning refers to the practice whereby an underwriter sells shares in a hot new issue to a CEO-for the CEO's personal benefit-for the purpose of the underwriter gaining future business from the CEO's firm.

Accepted Answer

This is an accurate definition of spinning.

Question 19

SEC registration is not required when a company makes a:
A)private placement of securities.
B)public offering of securities issue having a value less than $5 million and a maturity less than nine months.
C)public offering of securities having a value greater than $5 million.
D)both A and B.

Accepted Answer

Private placements, or offerings to a limited number of accredited investors, do not require SEC registration. Additionally, public offerings of securities with a value less than $5 million and a maturity less than nine months (also known as Regulation A offerings) are exempt from SEC registration. Therefore, choices A and B are correct. However, public offerings of securities with a value greater than $5 million do require SEC registration. Therefore, choice C is incorrect.

Question 20

Underpricing is not a serious problem for most initial public offerings (IPOs).

Accepted Answer

Underpricing is a serious problem for most IPOs, as it means that the company is missing out on potential funds that it could have raised if the shares had been priced higher. Additionally, underpricing can lead to a significant loss of value for the initial investors in the company.

Quiz 15: How Corporations Issue Securities

Which of the following is a possible exception to the efficient-market theory?

What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue?

Mezzanine financing must come in the third stage.

What costs in an IPO generally exceed all other costs?

Rule 144A allows large financial institutions to trade unregistered securities among themselves.

For industrial stocks in the U.S.,the announcement of an SEO usually leads to a decline in stock price,with the decline averaging 3-4%.

The first public issue by a firm is known as a seasoned equity offering.

If a shareholder or an investor wants to acquire a new share of stock under a rights issue,he/she must:

Shelf registration allows the firm to file a registration statement with the SEC to cover a series of subsequent issues.

Most public issues must be registered with the SEC,and the company may not sell securities until the SEC has approved its registration statement.

Generally,IPOs are overpriced and are subject to the winner's curse.

When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies,pension funds,etc.,it is called a(an) :

The New Word Corporation has 1,000,000 shares outstanding at $30/share.If the firm wishes to raise $13.5 million at a subscription price (North American rights offering) of $27/share,calculate the value of a right.

The most prevalent motive for firms to undertake an IPO is to create public shares for use in future acquisitions.

The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called:

Underpricing is a technique used by underwriters to enhance the success of an issue.

The underwriting spread for debt is generally less than that for equity.

Spinning refers to the practice whereby an underwriter sells shares in a hot new issue to a CEO-for the CEO's personal benefit-for the purpose of the underwriter gaining future business from the CEO's firm.

SEC registration is not required when a company makes a:

Underpricing is not a serious problem for most initial public offerings (IPOs).