Question 1

Potential investors learn of the information concerning the firm and its new issue from the:

Accepted Answer

A) pre-underwriting negotiating meeting. 
B) red herring. 
C) letter of commitment. 
D) emails from their former finance professor. 
E) rights offering. 
A) pre-underwriting negotiating meeting. 
B) red herring. 
C) letter of commitment. 
D) emails from their former finance professor. 
E) rights offering.

Question 2

Lamar Inc.is attempting to raise $5,000,000 in new equity with a rights offering.The subscription price for the 125,000 new shares will be $40 per share.The stock currently sells for $50 per share and there are 250,000 shares outstanding.What will the price per share be if all rights are exercised?

Accepted Answer

Total Equity Value = (250,000 *50) + (12

Question 3

Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent.

Accepted Answer

A) best efforts; firm commitment 
B) firm commitment; best efforts 
C) general cash offer; best efforts 
D) competitive offer; negotiated offer 
E) seasoned; unseasoned 
A) best efforts; firm commitment 
B) firm commitment; best efforts 
C) general cash offer; best efforts 
D) competitive offer; negotiated offer 
E) seasoned; unseasoned

Question 4

Which of the following is not normally an example of the services offered by investment bankers?

Accepted Answer

A) Aiding in the sale of securities 
B) Facilitating mergers 
C) Acting as brokers to both individuals and institutional clients 
D) Offering checking accounts to corporations 
E) Both C and D 
A) Aiding in the sale of securities 
B) Facilitating mergers 
C) Acting as brokers to both individuals and institutional clients 
D) Offering checking accounts to corporations 
E) Both C and D

Question 5

Empirical evidence suggests that new equity issues are generally:

Accepted Answer

A) priced efficiently by the market. 
B) overpriced by investor excitement concerning a new issue. 
C) overpriced resulting from SEC regulation. 
D) underpriced, in part, to counteract the winner's curse. 
E) underpriced resulting from SEC regulation. 
A) priced efficiently by the market. 
B) overpriced by investor excitement concerning a new issue. 
C) overpriced resulting from SEC regulation. 
D) underpriced, in part, to counteract the winner's curse. 
E) underpriced resulting from SEC regulation.

Question 6

Management's first step in any issue of securities to the public is:

Accepted Answer

A) to file a registration form with the SEC. 
B) to distribute copies of the preliminary prospectus. 
C) to distribute copies of the final prospectus. 
D) to obtain approval from the board of directors. 
E) to prepare the tombstone advertisement. 
A) to file a registration form with the SEC. 
B) to distribute copies of the preliminary prospectus. 
C) to distribute copies of the final prospectus. 
D) to obtain approval from the board of directors. 
E) to prepare the tombstone advertisement.

Question 7

The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below.

Accepted Answer

A) prestige 
B) ability to manage selling syndicates 
C) role as a firm commitment buyer 
D) role as a best efforts seller 
E) None of the above 
A) prestige 
B) ability to manage selling syndicates 
C) role as a firm commitment buyer 
D) role as a best efforts seller 
E) None of the above

Question 8

Debt capacity is often given as a reason for the value of the stock falling when equity is issued.The reason for this is:

Accepted Answer

A) the high issue costs of a debt offering must be paid by the shareholders. 
B) the priority position of the equity is lowered. 
C) management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital. 
D) All of the above. 
E) None of the above 
A) the high issue costs of a debt offering must be paid by the shareholders. 
B) the priority position of the equity is lowered. 
C) management has information that the probability of default has risen, limiting the debt capacity and causing the firm to raise equity capital. 
D) All of the above. 
E) None of the above

Question 9

Corporations use the shelf registration method of security sales because:

Accepted Answer

A) preregistered securities can be quickly brought to market. 
B) the main registration process is eliminated for up to two years. 
C) their stock is below investment grade. 
D) Both A and B. 
E) Both B and C. 
A) preregistered securities can be quickly brought to market. 
B) the main registration process is eliminated for up to two years. 
C) their stock is below investment grade. 
D) Both A and B. 
E) Both B and C.

Question 10

The six components that make up the total costs of new issues are:

Accepted Answer

A) the spread; other direct expenses such as filing fees; indirect expenses such as management time; economies of scale; abnormal returns and the Green Shoe option. 
B) the discount; other direct expenses such as filing fees; indirect expenses such as management time; due diligence costs; abnormal returns and the Green Shoe option. 
C) the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option. 
D) the spread; other direct expenses such as filing fees; economies of scale; due diligence costs; abnormal returns and underpricing. 
E) None of the above. 
A) the spread; other direct expenses such as filing fees; indirect expenses such as management time; economies of scale; abnormal returns and the Green Shoe option. 
B) the discount; other direct expenses such as filing fees; indirect expenses such as management time; due diligence costs; abnormal returns and the Green Shoe option. 
C) the spread; other direct expenses such as filing fees; indirect expenses such as management time; abnormal returns; underpricing and the Green Shoe option. 
D) the spread; other direct expenses such as filing fees; economies of scale; due diligence costs; abnormal returns and underpricing. 
E) None of the above.

Question 11

In comparison to debt issuance expenses, the total direct costs of equity issues are:

Accepted Answer

A) considerably less. 
B) about the same. 
C) meaningless. 
D) considerably greater. 
E) None of the above. 
A) considerably less. 
B) about the same. 
C) meaningless. 
D) considerably greater. 
E) None of the above.

Question 12

Explain the advantages of a shelf-registration to an issuer.How can timeliness of disclosure and a potential market overhang work against a shelf-registration?

Accepted Answer

Several advantages of a shelf registrati

Question 13

Arguments against the use of the shelf-registration are:

Accepted Answer

A) only technology and manufacturing-based firms can use it. 
B) less current information available to investors might raise the cost of debt. 
C) possible market overhang from future issues depressing price. 
D) Both A and C. 
E) Both B and C. 
A) only technology and manufacturing-based firms can use it. 
B) less current information available to investors might raise the cost of debt. 
C) possible market overhang from future issues depressing price. 
D) Both A and C. 
E) Both B and C.

Question 14

The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share.The stock is now selling ex-rights for $26.The price rights-on is:

Accepted Answer

A) $22.00 
B) $24.00 
C) $26.00 
D) $28.00 
E) impossible to determine without the cum-rights price. 
A) $22.00 
B) $24.00 
C) $26.00 
D) $28.00 
E) impossible to determine without the cum-rights price.

Question 15

In terms of costs of issuing equity, Professor Clifford W.Smith finds that the ranking of methods, from cheapest to most expensive, is:

Accepted Answer

A) rights issue with standby underwriting, equity issue with underwriting, pure rights issue. 
B) pure rights issue, rights issue with standby underwriting, equity issue with underwriting. 
C) pure rights issue, preferred stock and debt issue with underwriting for an IPO, rights issue with standby underwriting. 
D) equity issue with underwriting, rights issue with standby underwriting, pure rights issue. 
E) equity issue with underwriting, pure rights issue, rights issue with standby underwriting. 
A) rights issue with standby underwriting, equity issue with underwriting, pure rights issue. 
B) pure rights issue, rights issue with standby underwriting, equity issue with underwriting. 
C) pure rights issue, preferred stock and debt issue with underwriting for an IPO, rights issue with standby underwriting. 
D) equity issue with underwriting, rights issue with standby underwriting, pure rights issue. 
E) equity issue with underwriting, pure rights issue, rights issue with standby underwriting.

Question 16

Regional Power wants to raise $10 million in new equity.The subscription price is $20.There are currently 3 million shares outstanding, each with 1 right.How many rights are needed to purchase 1 share?

Accepted Answer

A) 1 
B) 3 
C) 5 
D) 6 
E) 8 
A) 1 
B) 3 
C) 5 
D) 6 
E) 8

Question 17

Types of dilution include:

Accepted Answer

A) dilution of percentage ownership 
B) dilution of market share 
C) dilution of book value and earnings per share 
D) A and C 
E) All of the above 
A) dilution of percentage ownership 
B) dilution of market share 
C) dilution of book value and earnings per share 
D) A and C 
E) All of the above

Question 18

An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?

Accepted Answer

A) Insiders can sell their shares or cash out 
B) Generate cash to pay down bank indebtedness 
C) To establish a market value for the equity and provide funds for operations 
D) All of the above. 
E) None of the above. 
A) Insiders can sell their shares or cash out 
B) Generate cash to pay down bank indebtedness 
C) To establish a market value for the equity and provide funds for operations 
D) All of the above. 
E) None of the above.

Question 19

The key difference between a negotiated offer and a competitive offer is that:

Accepted Answer

A) the underwriters can not set the spread in a negotiated bid but can in a competitive offer. 
B) the issuing firm can offer its securities to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used. 
C) the issuing firm works the underwriter for the best spread in a negotiated bid which will be less than that available in a competitive offer. 
D) the underwriter will not do a full investigation in a negotiated bid because the company is at their mercy, while in a competitive bid the underwriter must be extra diligent. 
E) None of the above. 
A) the underwriters can not set the spread in a negotiated bid but can in a competitive offer. 
B) the issuing firm can offer its securities to the highest bidder in a competitive bid but in a negotiated bid only one investment banker is used. 
C) the issuing firm works the underwriter for the best spread in a negotiated bid which will be less than that available in a competitive offer. 
D) the underwriter will not do a full investigation in a negotiated bid because the company is at their mercy, while in a competitive bid the underwriter must be extra diligent. 
E) None of the above.

Question 20

The Overland Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities.The current share price is $40 and there are 500,000 shares outstanding.The number of rights needed to buy a share of stock should be:

Accepted Answer

A) 1 
B) 10 
C) 40 
D) 400 
E) indeterminate without the subscription price. 
A) 1 
B) 10 
C) 40 
D) 400 
E) indeterminate without the subscription price.

Exam 20: Issuing Securities to the Public

Potential investors learn of the information concerning the firm and its new issue from the:

Lamar Inc.is attempting to raise $5,000,000 in new equity with a rights offering.The subscription price for the 125,000 new shares will be $40 per share.The stock currently sells for $50 per share and there are 250,000 shares outstanding.What will the price per share be if all rights are exercised?

Under the _____ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _____ method, the underwriter does not purchase the shares but merely acts as an agent.

Which of the following is not normally an example of the services offered by investment bankers?

Empirical evidence suggests that new equity issues are generally:

Management's first step in any issue of securities to the public is:

The diagonal listing of investment bankers on tombstone advertisements reflects their ____ relative to the other investment bankers listed below.

Debt capacity is often given as a reason for the value of the stock falling when equity is issued.The reason for this is:

Corporations use the shelf registration method of security sales because:

The six components that make up the total costs of new issues are:

In comparison to debt issuance expenses, the total direct costs of equity issues are:

Explain the advantages of a shelf-registration to an issuer.How can timeliness of disclosure and a potential market overhang work against a shelf-registration?

Arguments against the use of the shelf-registration are:

The LaPorte Corporation has a new rights offering that allows you to buy one share of stock with 3 rights and $20 per share.The stock is now selling ex-rights for $26.The price rights-on is:

In terms of costs of issuing equity, Professor Clifford W.Smith finds that the ranking of methods, from cheapest to most expensive, is:

Regional Power wants to raise $10 million in new equity.The subscription price is $20.There are currently 3 million shares outstanding, each with 1 right.How many rights are needed to purchase 1 share?

Types of dilution include:

An IPO of a firm formerly financed by venture capital is carried out for what primary purposes?

The key difference between a negotiated offer and a competitive offer is that:

The Overland Corporation intends to issue 50,000 new shares to raise funds for expansion of current plant facilities.The current share price is $40 and there are 500,000 shares outstanding.The number of rights needed to buy a share of stock should be:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Under the _ method, the underwriter buys the securities for less than the offering price and accepts the risk of not selling the issue, while under the _ method, the underwriter does not purchase the shares but merely acts as an agent.