Question 1

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

Accepted Answer

This is because debt is generally considered less risky than equity, and therefore requires less compensation for the underwriter.

Question 2

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

Accepted Answer

Underpricing can be a serious problem for most IPOs as it can result in significant losses for the issuing company and its initial shareholders. Additionally, it may signal to potential investors that the company is not confident in its own value and may lead to a decrease in investor confidence.

Question 3

Briefly explain the term venture capital.

Accepted Answer

The answer of Briefly explain the term venture capital....

Question 4

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

Accepted Answer

When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, and so forth, it is called a private placement. Private placements are exempt from registration with the Securities and Exchange Commission (SEC) and are typically used to raise capital quickly and cost-effectively. Choices A, B, and D do not match the given scenario.

Question 5

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 additional shares of stock offered by a company that has already gone public.

Question 6

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

Accepted Answer

This is the correct definition of spinning.

Question 7

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 long-run returns of IPOs tend to underperform the market, which suggests that the market is not efficient in immediately incorporating all publicly available information into stock prices. This is known as the "IPO puzzle" and is a well-documented exception to the efficient-market theory. Options A and B are not exceptions to the efficient-market theory, as underwriters charging investors more and lower IPO spreads on larger issues can be explained by factors such as compensation for risk and economies of scale. Option C is also not necessarily an exception, as the issuance of equity can be interpreted as an unfavorable signal if the market believes the firm is in financial distress, which would be a case of market efficiency.

Question 8

What costs in an IPO generally exceed all other costs?
A)Commissions
B)Issues fees
C)Spreads
D)Underpricing

Accepted Answer

The answer of What costs in an IPO generally exceed...

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 a company to file a single registration statement with the SEC to cover multiple offerings, rather than filing a separate registration statement for each new issuance. This enables companies to have a quicker and more efficient process for issuing securities in the future.

Question 10

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

Accepted Answer

Underpricing helps to generate demand for an issue by offering it at a lower price than its expected value, thereby increasing the likelihood of the issue being oversubscribed. It also helps to build investor confidence in the long-term prospects of the company.

Question 11

For industrial stocks in the United States, the announcement of an SEO usually leads to a decline in stock price, with the decline averaging 3-4 percent.

Accepted Answer

Studies have shown that the announcement of an SEO (Secondary Equity Offering) for industrial stocks in the US typically results in a decline in stock price, with the average decline being around 3-4 percent.

Question 12

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 13

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 statement is true. The Securities Act of 1933 requires companies to register their securities with the SEC before they can be publicly offered for sale. The SEC must approve the company's registration statement before it can sell securities to the general public.

Question 14

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 is an example of a conflict of interest, as the underwriter is using their influence to manipulate the analyst's report for their own benefit. It is unethical behavior and can be illegal. Spinning refers to the practice of an underwriter giving favorable allocations of stock to executives of companies they want to do business with, and Chinese wall refers to the separation of different departments within a financial institution to prevent insider trading. SOX compliance refers to adherence to the Sarbanes-Oxley Act, which aims to improve corporate governance and prevent accounting fraud. None of these terms directly relate to the situation described in the question.

Question 15

Mezzanine financing must come in the third stage.

Accepted Answer

Mezzanine financing can come in any stage of financing, not necessarily in the third stage. It is typically used as a hybrid of debt and equity financing to bridge the gap between senior debt and equity financing.

Question 16

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

Accepted Answer

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

Question 17

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

Accepted Answer

Rule 144A is a SEC exemption that permits the sale of unregistered securities to qualified institutional buyers (QIBs) such as large financial institutions, without registration with the SEC. Therefore, large financial institutions can indeed trade unregistered securities among themselves under Rule 144A.

Question 18

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 19

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

Accepted Answer

SEC registration is not required for a private placement of securities or a public offering of securities issue having a value less than $5 million and a maturity less than nine months. Therefore, both choices A and B are correct. Additionally, an issue of debt with a maturity less than nine months is exempt from SEC registration, making choice C incorrect. Therefore, the best choice is D, which includes both correct answers.

Question 20

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 are correct.

Accepted Answer

Rule 144A is the SEC provision that allows qualified institutional investors to trade privately placed securities among themselves without the need for registration with the SEC. Rule 415 pertains to shelf registration, and the Sarbanes-Oxley Act covers various regulations related to public companies and capital markets but does not specifically address private placements among institutional investors.

Quiz 15: How Corporations Issue Securities

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

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

Briefly explain the term venture capital.

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

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

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

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

What costs in an IPO generally exceed all other costs?

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

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

For industrial stocks in the United States, the announcement of an SEO usually leads to a decline in stock price, with the decline averaging 3-4 percent.

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

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

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.

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

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

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.

SEC registration is not required when a company makes

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