Question 1

The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the:

Accepted Answer

A) spread. 
B) margin. 
C) offer differential. 
D) firm commitment. 
E) underwriting capital. 
A) spread. 
B) margin. 
C) offer differential. 
D) firm commitment. 
E) underwriting capital.

Question 2

A price-weighted index consists of Stocks A, B, and C which are priced at $30, $12, and $18 a share, respectively. The current index divisor is 2.40. If Stock C undergoes a 1-for-3 reverse stock split, the new index divisor will be:

Accepted Answer

A) 1.92 
B) 2.11 
C) 2.20 
D) 3.08 
E) 3.84 
A) 1.92 
B) 2.11 
C) 2.20 
D) 3.08 
E) 3.84

Question 3

Yesterday, the DJIA closed at 12,309.16. The divisor is .123017848. Today, every one of the stocks in the index increased in value by $.40 a share. What is the value of today's closing DJIA?

Accepted Answer

A) 12,309.16 
B) 12,406.71 
C) 12,442.23 
D) 12,564.38 
E) 12,571.02 
A) 12,309.16 
B) 12,406.71 
C) 12,442.23 
D) 12,564.38 
E) 12,571.02

Question 4

When a group of underwriters jointly works together to sell a new issue of securities, the underwriters form a(n):

Accepted Answer

A) underwriting cartel. 
B) market union. 
C) venture capital association. 
D) Dutch market. 
E) syndicate. 
A) underwriting cartel. 
B) market union. 
C) venture capital association. 
D) Dutch market. 
E) syndicate.

Question 5

Which one of the following can be assumed when the SEC approves an IPO registration?

Accepted Answer

A) The securities offering will provide value to the shareholders. 
B) The issuer is financially sound. 
C) The issuer will remain solvent. 
D) All rules have been followed to allow for full disclosure of information. 
E) The stock price is set at a level which will allow shareholders to earn a positive rate of return. 
A) The securities offering will provide value to the shareholders. 
B) The issuer is financially sound. 
C) The issuer will remain solvent. 
D) All rules have been followed to allow for full disclosure of information. 
E) The stock price is set at a level which will allow shareholders to earn a positive rate of return.

Question 6

Southaven, Inc., is offering 1,000 shares in a Dutch auction IPO. The following bids have been received:
$$\begin{array} { c c c } 
\text { Bidder } & \text { Ountity } & \text {Price } \
\text { A } & 300 & \$ 25 \
\text { B } & 200 & 25 \
\text { C } & 500 & 22 \
\text { D } & 400 & 21 \
\text { E } & 200 & 20
\end{array}$$
How much will the firm receive from this offering if the underwriter's fee is 7.5%?

Accepted Answer

A) $17,906 
B) $20,350 
C) $22,385 
D) $27,485 
E) $31,095 
A) $17,906 
B) $20,350 
C) $22,385 
D) $27,485 
E) $31,095

Question 7

Trey currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trey is a securities:

Accepted Answer

A) broker. 
B) representative. 
C) underwriter. 
D) floor broker. 
E) dealer. 
A) broker. 
B) representative. 
C) underwriter. 
D) floor broker. 
E) dealer.

Question 8

Which one of the following best describes a broker?

Accepted Answer

A) intermediary who arranges trades between a buyer and a seller 
B) trader who buys and sells from his or her inventory 
C) firm which charges a commission for arranging a transaction 
D) person who buys securities for his or her own account on an exchange floor 
E) trader who transacts business on behalf of a securities issuer 
A) intermediary who arranges trades between a buyer and a seller 
B) trader who buys and sells from his or her inventory 
C) firm which charges a commission for arranging a transaction 
D) person who buys securities for his or her own account on an exchange floor 
E) trader who transacts business on behalf of a securities issuer

Question 9

An index consists of the following securities and has an index divisor of 2.0. What is the price-weighted index return?
$\begin{array}{cccc}
\text { Index Stock } & \text { Shares Outstanding } & \text { Beglnning Share } & \text { Ending Share } \
& & \text { Price } & \text { Price } \
\text { S } & 4,800 & \$ 55 & \$ 51 \
\text { T } & 3,500 & \$ 32 & \$ 36
\end{array}$

Accepted Answer

A) -1.69% 
B) -.78% 
C) 0 
D) .92% 
E) 1.43% 
A) -1.69% 
B) -.78% 
C) 0 
D) .92% 
E) 1.43%

Question 10

Incorp has just sold 20 million shares through an IPO offering. The shares were offered at $20.00 a share and all of the shares were sold. The firm received a total of $422,000,000 for this issue. What was the spread?

Accepted Answer

A) 5.50% 
B) 5.75% 
C) 6.00% 
D) 6.25% 
E) 7.25% 
A) 5.50% 
B) 5.75% 
C) 6.00% 
D) 6.25% 
E) 7.25%

Question 11

Which one of the following has the greatest duty to provide liquidity to the financial market?

Accepted Answer

A) floor broker 
B) independent broker 
C) dealer 
D) designated market maker 
E) floor trader 
A) floor broker 
B) independent broker 
C) dealer 
D) designated market maker 
E) floor trader

Question 12

When stocks are held in an index in proportion to their total company market value, the index is:

Accepted Answer

A) dollar-weighted. 
B) front-weighted. 
C) back-weighted. 
D) price-weighted. 
E) value-weighted. 
A) dollar-weighted. 
B) front-weighted. 
C) back-weighted. 
D) price-weighted. 
E) value-weighted.

Question 13

Reliant Underwriters has agreed to a firm commitment underwriting in which they will pay $36.75 million in exchange for 3 million shares of stock for an IPO offering. The offering price is expected to be $13.50 a share. How much will the underwriters earn if all of the shares can be sold?

Accepted Answer

A) $1.25 million 
B) $2.75 million 
C) $3.75 million 
D) $4.25 million 
E) $4.50 million 
A) $1.25 million 
B) $2.75 million 
C) $3.75 million 
D) $4.25 million 
E) $4.50 million

Question 14

A price-weighted index consists of Stocks A, B, and C which are priced at $50, $35, and $15 a share, respectively. The current index divisor is 2.75. What will the new index advisor be if Stock A undergoes a 5-for-1 stock split?

Accepted Answer

A) .40 
B) .65 
C) 1.00 
D) 1.65 
E) 1.85 
A) .40 
B) .65 
C) 1.00 
D) 1.65 
E) 1.85

Question 15

Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets?

Accepted Answer

A) primary 
B) secondary 
C) third 
D) fourth 
E) fifth 
A) primary 
B) secondary 
C) third 
D) fourth 
E) fifth

Question 16

Which of the following is correct regarding the compensation paid to private equity fund managers?

Accepted Answer

A) Managers typically receive 20 percent of fund profits but no separate management fee. 
B) Managers typically receive a high percentage management fee but no portion of fund profits. 
C) Management compensation is usually subject to a clawback provision to limit the performance fees. 
D) "Carried interest" refers to the interest fund managers earn on performance fees. 
E) Fees paid to fund managers do not reduce the net return of the fund. 
A) Managers typically receive 20 percent of fund profits but no separate management fee. 
B) Managers typically receive a high percentage management fee but no portion of fund profits. 
C) Management compensation is usually subject to a clawback provision to limit the performance fees. 
D) "Carried interest" refers to the interest fund managers earn on performance fees. 
E) Fees paid to fund managers do not reduce the net return of the fund.

Question 17

Under the provisions of a general cash offer, shares of stock are offered to:

Accepted Answer

A) underwriters on a guaranteed sale basis only. 
B) current shareholders prior to being offered to the general public. 
C) institutional investors only. 
D) the issuer's employees on a cash purchase basis only. 
E) the general public on a "first-come, first-served" basis. 
A) underwriters on a guaranteed sale basis only. 
B) current shareholders prior to being offered to the general public. 
C) institutional investors only. 
D) the issuer's employees on a cash purchase basis only. 
E) the general public on a "first-come, first-served" basis.

Question 18

Mason Materials is offering 800 shares in a Dutch auction IPO. The following bids have been received:
$$\begin{array} { c c c } 
\text { Bidder } & \text { Ouantity }&\text{Price} \
\text { A } & 200 & \$ 28 \
\text { B } & 300 & 27 \
\text { C } & 100 & 27 \
\text { D } & 500 & 26 \
\text { E } & 500 & 25
\end{array}$$
How many shares will be allocated to Bidder A?

Accepted Answer

A) 0 
B) 80 
C) 125 
D) 145 
E) 200 
A) 0 
B) 80 
C) 125 
D) 145 
E) 200

Question 19

Which one of the following is the primary flaw of a price-weighted index?

Accepted Answer

A) Price-weighted indexes ignore stock splits which affect stock prices. 
B) The effect a company has on the index is dependent solely on the price per share. 
C) Only a small number of stocks can be included in a price-weighted index. 
D) If the number of shares outstanding of an index stock changes, the index divisor must be recomputed. 
E) The index can only be computed once the trading day is over. 
A) Price-weighted indexes ignore stock splits which affect stock prices. 
B) The effect a company has on the index is dependent solely on the price per share. 
C) Only a small number of stocks can be included in a price-weighted index. 
D) If the number of shares outstanding of an index stock changes, the index divisor must be recomputed. 
E) The index can only be computed once the trading day is over.

Question 20

In a recent IPO, the Sausage Co. offered 1.4 million shares of stock at an offer price of $16 a share. The underwriting was conducted on a best efforts basis with a spread of 7.0%. The Sausage Co. received a total of $20,079,868 in sale proceeds. How many shares were sold?

Accepted Answer

A) 1,349,453 shares 
B) 1,486,500 shares 
C) 1,498,200 shares 
D) 1,505,700 shares 
E) 1,508,400 shares 
A) 1,349,453 shares 
B) 1,486,500 shares 
C) 1,498,200 shares 
D) 1,505,700 shares 
E) 1,508,400 shares

Exam 5: The Stock Market

The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the:

A price-weighted index consists of Stocks A, B, and C which are priced at $30, $12, and $18 a share, respectively. The current index divisor is 2.40. If Stock C undergoes a 1-for-3 reverse stock split, the new index divisor will be:

Yesterday, the DJIA closed at 12,309.16. The divisor is .123017848. Today, every one of the stocks in the index increased in value by $.40 a share. What is the value of today's closing DJIA?

When a group of underwriters jointly works together to sell a new issue of securities, the underwriters form a(n):

Which one of the following can be assumed when the SEC approves an IPO registration?

Southaven, Inc., is offering 1,000 shares in a Dutch auction IPO. The following bids have been received: Bidder Ountity Price A 300 \ 25 B 200 25 C 500 22 D 400 21 E 200 20 How much will the firm receive from this offering if the underwriter's fee is 7.5%?

Trey currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trey is a securities:

Which one of the following best describes a broker?

An index consists of the following securities and has an index divisor of 2.0. What is the price-weighted index return? Index Stock Shares Outstanding Beglnning Share Ending Share Price Price S 4,800 \ 55 \ 51 T 3,500 \ 32 \ 36

Incorp has just sold 20 million shares through an IPO offering. The shares were offered at $20.00 a share and all of the shares were sold. The firm received a total of $422,000,000 for this issue. What was the spread?

Which one of the following has the greatest duty to provide liquidity to the financial market?

When stocks are held in an index in proportion to their total company market value, the index is:

Reliant Underwriters has agreed to a firm commitment underwriting in which they will pay $36.75 million in exchange for 3 million shares of stock for an IPO offering. The offering price is expected to be $13.50 a share. How much will the underwriters earn if all of the shares can be sold?

A price-weighted index consists of Stocks A, B, and C which are priced at $50, $35, and $15 a share, respectively. The current index divisor is 2.75. What will the new index advisor be if Stock A undergoes a 5-for-1 stock split?

Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets?

Which of the following is correct regarding the compensation paid to private equity fund managers?

Under the provisions of a general cash offer, shares of stock are offered to:

Mason Materials is offering 800 shares in a Dutch auction IPO. The following bids have been received: Bidder Ouantity Price A 200 \ 28 B 300 27 C 100 27 D 500 26 E 500 25 How many shares will be allocated to Bidder A?

Which one of the following is the primary flaw of a price-weighted index?

In a recent IPO, the Sausage Co. offered 1.4 million shares of stock at an offer price of $16 a share. The underwriting was conducted on a best efforts basis with a spread of 7.0%. The Sausage Co. received a total of $20,079,868 in sale proceeds. How many shares were sold?

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Futures Contracts

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

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