Deck 10: Stock Offerings and Investor Monitoring

Question 1

Which of the following statements is incorrect?

A)A stock represents partial ownership in a corporation.
B)Like debt securities, common stock is issued by firms to obtain funds.
C)Stocks are issued by corporations to raise short-term funds.
D)The secondary stock market enables investors to sell stocks that they had previously purchased.

Answer 1

C

Question 2

The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called

A)flipping.
B)skiing.
C)flopping.
D)None of these are correct.

Answer 2

A

Question 3

A firm will typically attempt to sell shares from a secondary offering ​

A)far below the prevailing market price.
B)far above the prevailing market price.
C)at the prevailing market price.
D)at the offer price of the IPO.

Answer 3

C

Question 4

When a corporation first decides to issue stock to the public, it engages in a(n)

A)secondary offering.
B)initial public offering.
C)seasoned equity offering.
D)None of these are correct.

Question 5

Preferred shareholders

A)typically have the same voting rights as common shareholders.
B)do not share the ownership of the firm with common shareholders.
C)typically participate in the profits of the firm beyond the stated fixed annual dividend.
D)may not receive a dividend every year.

Question 6

A firm that wants to engage in a secondary stock offering does not need to file the offering with the SEC.

Question 7

A(n)____ represents ownership of a foreign stock. ​

A)ADR
B)SEAQ
C)Nasdaq
D)AMEX

Question 8

IPOs tend to occur more frequently during recessions.

Question 9

A ____ prevents dividends from being paid on common stock until all current and previously omitted dividends are paid on preferred stock.

A)residual claim
B)preferred margin
C)cumulative provision
D)liquidation claim

Question 10

When brokers encourage investors to place first-day bids for IPO shares that are above the offer price, this is referred to as

A)flipping.
B)spinning.
C)laddering.
D)None of these are correct.

Question 11

To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are less than it deserves.

Question 12

The purpose of a lockup provision is to ​

A)keep individual investors from buying and selling stock.
B)prevent downward pressure on the stock's price.
C)increase the number of outstanding shares.
D)allocate a larger proportion of stock to institutional investors.

Question 13

The transaction costs to the issuing firm in an IPO are usually ____ percent of the funds raised. ​

A)​1
B)​3
C)​7
D)​25

Question 14

A road show is a way to

A)promote a secondary offering of stock.
B)arouse interest in an IPO.
C)obtain funding from a venture capital fund.
D)gain support for a shareholders' lawsuit against a firm's board of directors.

Question 15

On average, firms that have had IPOs tend to perform ____ over a period of a year or longer.

A)well
B)poorly
C)about the same as the S&P 500 index
D)None of these are correct.

Question 16

The first-time issuance of shares by a specific firm to the public is referred to as a(n)​

A)stock repurchase.
B)secondary stock offering.
C)initial rights issue.
D)initial public offering (IPO).

Question 17

From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.

Question 18

If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock's price.

A)upward pressure
B)downward pressure
C)no additional pressure
D)None of these are correct.

Question 19

Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy.

A)more; can
B)less; can
C)more; cannot
D)less; cannot

Question 20

A firm can avoid the time lag between registering new securities with the SEC and actually selling them by using

A)a proxy.
B)shelf registration.
C)a margin call.
D)preemptive rights.

Question 21

Which of the following is NOT true regarding the Sarbanes-Oxley Act?

A)It requires firms to establish an internal control process for their financial reporting.
B)It requires a firm's CEO and CFO to certify that the audited financial statements are accurate.
C)It allows a public accounting firm to audit a client firm whose CEO was employed by the accounting firm six months earlier.
D)It prevents a firm from providing excessive compensation to members of its audit committee so that they will not closely oversee the audit.

Question 22

The ____ is a value-weighted index of stock prices of 500 large U.S. firms. ​

A)Dow Jones Industrial Average
B)Standard and Poor's 500
C)New York Stock Exchange Index
D)Nasdaq

Question 23

The OTC market does not have a trading floor.

Question 24

Listing stock on a foreign stock exchange

A)may increase the stock's liquidity.
B)may enhance the firm's global image.
C)may increase the pool of potential investors, making it easier to place an entire issue of stock.
D)All of these are correct.

Question 25

When a firm buys some of its shares that it had previously issued, this is referred to as a

A)reverse IPO.
B)leveraged buyout.
C)ladder spin.
D)stock repurchase.

Question 26

American depository receipts (ADRs)are similar to ​

A)stock options.
B)bank deposits.
C)stocks.
D)bonds.

Question 27

Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price. ​

A)overvalued
B)fixed
C)appropriate
D)undervalued

Question 28

____ are acquisitions that require substantial amounts of borrowed funds. ​

A)Stock repurchases
B)Corporate controls
C)Leveraged buyouts
D)Stock splits

Question 29

The largest organized exchange in the United States, with the largest market capitalization, is the

A)New York Stock Exchange.
B)American Stock Exchange.
C)Midwest Stock Exchange.
D)Pacific Stock Exchange.

Question 30

A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)​

A)stock repurchase.
B)secondary stock offering.
C)initial rights issue.
D)initial public offering (IPO).

Question 31

Analysts periodically communicate with high-level managers of the firms whose stock they rate.

Question 32

____ are not barriers to corporate control to eliminate agency problems. ​

A)Leveraged buyouts
B)Antitakeover amendments
C)Poison pills
D)Golden parachutes

Question 33

The ____ is a value-weighted average of stock prices of 30 large U.S. firms. ​

A)Dow Jones Industrial Average
B)Standard and Poor's 500
C)New York Stock Exchange Index
D)Nasdaq

Question 34

The prevailing price per share divided by the firm's earnings per share is known as the ​

A)dividend yield.
B)price-earnings ratio.
C)fully diluted earnings per share.
D)annual dividend.

Question 35

____ are employed by brokerage firms and execute orders for clients on the NYSE. ​

A)Specialists
B)Commission brokers
C)Venture managers
D)Dealers

Question 36

Firms listed on the OTC Pink market

A)are typically very large.
B)satisfy the Nasdaq's listing requirements.
C)are typically owned by major institutional and individual investors.
D)do not have to register with the Securities and Exchange Commission.

Question 37

Shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time. ​

A)share price
B)employee job descriptions
C)board of directors
D)asset size

Question 38

____ are portfolios of international stocks created and managed by various financial institutions. ​

A)International mutual funds
B)American depository receipts
C)Exchange rate options
D)Initial public offerings

Question 39

____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created and managed by portfolio managers. ​

A)International mutual funds
B)American depository receipts
C)World equity depository receipts
D)Initial public depository receipts

Question 40

An example of shareholder activism is

A)communication with the firm.
B)engaging in a proxy contest.
C)filing a lawsuit against the board.
D)All of these are correct.

Question 41

Private firms that need a large equity investment but are not yet in a position to go public may attempt to obtain funding from a venture capital (VC)fund.

Question 42

The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.

Question 43

Whenever _____ the stock price will be driven up.

A)supply exceeds demand
B)demand exceeds supply
C)demand is reduced
D)None of these are correct.

Question 44

Which of the following is  NOT  a part of the over-the-counter market?

A)the OTCQB
B)the OTC Pink
C)the OTC Bulletin Board
D)the New York Stock Exchange

Question 45

A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is ​

A).74 percent.
B)1.34 percent.
C)7.44 percent.
D)1.14 percent.

Question 46

In general, secondary offerings cause an immediate increase in the market price of the stock.

Question 47

Underwriters sell most or all of the shares of an IPO to institutional investors.

Question 48

Which of the following is NOT a form of shareholder activism?

A)proxy contests
B)poison pills
C)shareholder lawsuits
D)None of these are correct.

Question 49

Crowdfunding is a way that small businesses can raise funds from a number of investors over the Internet.

Question 50

The Sarbanes-Oxley Act has improved transparency, but investors may still have limited information about publicly traded firms.

Question 51

Venture capital (VC)funds receive money from wealth investors and from pension funds that need to receive their money back in one year or less.

Question 52

As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information.

Question 53

The phrase "leaving money on the table" refers to investors paying more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer)price on the IPO date.

Question 54

Venture capital (VC)funds commonly serve as advisers to the businesses in which they invest.

Question 55

Initial public offerings (IPOs)tend to occur more frequently during bearish (weak)stock markets.

Question 56

Venture capital (VC)funds typically plan to exit from their original investment within about one year.

Question 57

If the secondary market for a stock is inactive, then the shares are illiquid.

Question 58

Venture capital (VC)funds usually invest in publicly traded businesses.

Question 59

In addition to extended sessions offered by the stock exchanges, some electronic communications networks (ECNs)allow for trading at any time.

Question 60

Initial public offerings (IPOs)typically perform ____ on the day of the IPO and ____ for periods of a year or longer after the IPO. ​

A)well; poorly
B)poorly; well
C)well; well
D)poorly; poorly

Question 61

Index-traded funds are passive funds that track a specific index.

Question 62

The Dow Jones Industrial Average (DJIA)is a price-weighted average of stock prices of 30 large U.S. firms.

Question 63

International exchange-traded funds (ETFs)represent international stock indexes and thus enable investors to invest in a specific index representing a particular country's stock market.

Question 64

The legal protection of shareholders varies substantially among countries.

Question 65

A venture capital fund typically plans to exit from its original investment within about four to seven years.

Question 66

Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors.

Question 67

Assume that a firm is valued at $800 million and has 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share.

A)6.00
B)80.00
C)133.33
D)None of these are correct.

Question 68

Research studies have found that the share prices of both target firms and acquiring firms react very positively to announcements of an acquisition.

Question 69

If shareholders become dissatisfied with a firm's performance, they may engage in a proxy contest in an attempt to change the composition of the board of directors.

Question 70

Initial public offerings (IPOs)tend to occur more frequently during bullish stock markets.

Question 71

Which of the following is NOT true with respect to venture capital (VC)funds?

A)When a VC fund decides to invest in a business, it will set out clear requirements that the business must meet to receive the funding.
B)A VC fund commonly sells its equity stake in a firm to the public before the firm engages in an IPO.
C)VC funds receive money from wealthy investors and pension funds that are willing to maintain the investment for a long-term period.
D)All of these are true with respect to VC funds.

Question 72

Venture capital funds typically take over businesses and manage them.

Question 73

Common law countries such as the United States, Canada, and the United Kingdom allow for more legal protections for shareholders than civil law countries such as France or Italy.

Question 74

All countries that have stock markets have similar laws regarding the financial information that must be provided by public companies.

Question 75

Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.

Question 76

The government enforcement of securities laws varies among countries.

Question 77

According to financial research, there is evidence that the stock price associated with an IPO typically rises on the first day but then declines over time.

Question 78

The OTC market has several segments including the OTCQX and OTC Pink, where smaller stocks are traded.

Question 79

If managers believe that their firm's stock price is weak because it is undervalued by the market, they may consider repurchasing a portion of the shares that are outstanding.

Question 80

The owners of common stock are permitted to vote on the

A)election of the board of directors.
B)authorization to issue new shares of common stock.
C)approval of amendments to the corporate charter.
D)adoption of bylaws.
E)All of these are correct.