Deck 15: Investment Banking

Question 1

The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.
The Gramm-Leach-Bliley Act repealed the Glass-Steagall Act, which dated back to the Depression Era of the 1930s.

Answer 1

False

Question 2

The year 2008 will likely go down in history as one of the worst environments for companies wishing to go public.

Answer 2

True

Question 3

The Glass-Steagall Act of the 1930s required U.S. banks to separate their commercial banking operations and their investment banking operations into two different entities.

Answer 3

True

Question 4

"Best efforts" and "direct" methods account for a relatively small portion of investment banking roles.

Question 5

The investment banker is someone who buys large new issues of stocks and then sells them to the public after the stock price has risen.
The investment banker is another type of financial intermediary (see

Question 6

Among several other roles, as a middleman, the investment banker is responsible for designing and packaging a security offering and selling it to the public.

Question 7

Investment banking has changed from a very competitive price-sensitive environment to one where relationships determine who gets the business.
Competitive forces have increased, and have indeed become international in scope.

Question 8

The investment banking industry has shifted its emphasis from mergers and acquisitions to underwriting new securities.
Investment bankers continue to play increasingly diverse roles as financial intermediaries.

Question 9

The entire area of investment banking is becoming more competitive.

Question 10

The movement of non-brokerage firms into the brokerage area has forced traditional securities firms to expand their staffs.

Question 11

The term "underwriter" is synonymous with risk-taker or risk-bearer.

Question 12

The Glass-Steagall Act of the 1930s was created to separate U.S. bank's commercial and investment sections, which later because an advantage to the U.S. banks because foreign banks were affected by having them combined.

Question 13

Smaller investment banking houses may handle distributions for relatively unknown corporations on a "best-efforts" basis.

Question 14

In today's market environment, most investment banking houses specialize in underwriting and do not engage in the dealer-broker function.

Question 15

Because there is more uncertainty involved in the initial market reaction to common stock, a larger "underwriting spread" often exists for stocks, compared to other types of offerings.

Question 16

Continued consolidation is not expected in the investment banking industry, as market share and global competition have stabilized.

Question 17

Over 51 percent of the total revenue made through investment banking was generated by just 10 global banking firms.

Question 18

Only a small amount of security issues are sold on a "best-efforts" basis.

Question 19

Large well-established investment bankers often distribute new issues on a best-efforts basis.
A "best efforts" approach is most commonly used by smaller investment banking concerns.

Question 20

An investment banker acts as a middleman between a corporation needing funds and investors with funds.

Question 21

IPOs generally underperform compared to the general market in the immediate aftermarket.

Question 22

An underpriced offering represents a permanent lost opportunity to the issuing firm.

Question 23

The investment banking industry has shifted its activities to underwriting new securities, rather than advising on mergers and acquisitions.

Question 24

The goal of under pricing is to ensure that a large amount of shares of stock is sold.

Question 25

The term "under pricing" describes the process of setting the spread between the participants of the investment banking syndicate.
"Under pricing" actually refers to selecting a share price for new issues slightly below the market value perceived by the public.

Question 26

When a firm issues new stock, it can result in a dilution of earnings in the short run.
When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.

Question 27

An underwriting syndicate is a group of investment bankers who help to distribute a new issue for a company.

Question 28

The issuing company desires to have as little under pricing of new securities as possible.
Underpriced securities will sell rapidly, but are likely to "leave money on the table" that the issuing firm now cannot realize.

Question 29

One purpose of an underwriting syndicate is to distribute securities to the public.

Question 30

The underwriting spread is the guaranteed minimum profit to an investment bank for each share distributed.
The underwriting spread represents the profit that participants in the underwriting process hope to gain from their successful efforts in distribution.

Question 31

Shelf registration has nearly eliminated competition in the investment banking industry.
Shelf registration does not directly impact competition. It is used as a comprehensive vehicle for issues in advance for up to two years.

Question 32

After an IPO has been issued and the price of the stock drops tremendously, the investment banker is to blame since they probably miscalculated the original stock price.
There are many reasons why the stock price could have dropped.

Question 33

When a company goes public, an initial public offering must occur to sell the ownership of the company to the public.

Question 34

In 2011, IPOs rose tremendously since the market started to pick up.
This happened in 2014.

Question 35

While manipulation of security prices is normally illegal, the SEC allows underwriters to temporarily support the price of stocks that they have brought to market.

Question 36

When stock is exchanged in the NYSE that is considered secondary offerings, while when stock is exchanged during an initial public offering that is considered primary offerings.

Question 37

Investment bankers can help a firm undertake a secondary offering when the company is too small for a primary offering IPO.
Secondary offerings are about the sale of supplemental shares, as well as those held by owners from the primary offering, rather than the size of the company.

Question 38

When a firm issues new stock, it always results in a dilution of earnings in the long run.
When dilution occurs because of a new issue, it typically takes time for the new equity infusion to boost earnings per share, but this condition is temporary in most cases.

Question 39

Under pricing is when an investment banker sets the stock price above the market price to ensure that a profit is made.

Question 40

The out-of-pocket cost to issue new common stock is always paid by the investment banker.
These costs are ultimately borne by the issuer.

Question 41

Privately placed bonds are the most popular method of raising long-term corporate debt.
Private placements exceed 50% of long-term corporate debt.

Question 42

Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of the offering price.

Question 43

Shelf registration primarily gives large, strong companies flexibility in the timing of debt or equity issues.

Question 44

Investment banks are hesitant to issue bonds when they perceive the interest rate to be low.

Question 45

The SEC Rule 415 allows an issuing corporation to quickly take advantage of market conditions.

Question 46

A major trend of privatization in foreign markets began after 1984.

Question 47

Leveraged buy-outs usually entail the use of a large proportion of debt to take control of the firm.

Question 48

The primary rationale for repealing the Glass-Steag all Act was that the U.S. Congress recognized the necessity for increased growth in the investment banking industry within the U.S.
Congress believed that the risks inherent in security lines of business could place the banking system at risk of default.

Question 49

Even though the firm may pay a lower interest rate on a private placement, it will pay higher out-of-pocket costs than a public offering.
The interest rate is usually higher, and the related costs are lower.

Question 50

Privatization in many foreign markets means selling companies to the public that were previously owned by the state or government.

Question 51

Google's IPO was controversial because Google used a Dutch investment banking firm to underwrite the IPO.
Google's use of the Dutch auction process deals with the manner in which a selling range is established, marketed, and executed... NOT with the nationality of the firms involved. Any controversy was because of the issue price falling short of the anticipated initial selling range.

Question 52

The "best efforts" method of underwriting is the most common method used in issuances.
This method of underwriting is far less common.

Question 53

Only the stronger investment bankers are in a position to benefit from the shelf registration process.

Question 54

When a company first goes public, a registration statement must be filed with the New York Stock Exchange.
The registration must be filed with the SEC.

Question 55

Shelf registration has helped larger investment banking firms become larger, while smaller investment banking firms are left behind.

Question 56

Shelf registration requires the firm to file one comprehensive registration statement, which outlines the company's indefinite financial plan.
The process allows an advance comprehensive registration for equity financing within up to a two-year window.

Question 57

A branch of investment banking that has been very opportunistic in recent years has been the increase in sales of foreign securities of companies formerly owned by the government.

Question 58

Private placement eliminates the expensive and lengthy registration process with the Securities and Exchange Commission.

Question 59

Privatization may have different meanings when used in the U.S. compared to foreign markets.

Question 60

Shelf registration is most frequently used with new issues of common stock.

Question 61

The managing investment banker is typically responsible for

A) putting a syndicate together to aid in the distribution and share the underwriting risk.
B) determining the value (price) of the company.
C) stabilizing the offering during the distribution period.
D) all of these options are the responsibility of the investment banker.

Question 62

When investment bankers act in the function of "underwriters," they

A) give a "firm commitment" to purchase the securities from the corporation at a set price.
B) guarantee that the company will not suffer a decline in earnings after taxes.
C) are allowed to sell as many securities as possible and return the rest unsold.
D) are allowed to give advice to the company's management.

Question 63

If the retail price of a stock issuance is $17.50 and the syndicate members' price is $15.50, the total spread is 11.4%.
The percentage spread must be calculated between the retail price and the price paid to the issuer, rather than within the syndicate.

Question 64

Generally, the larger amount of shares issued means that the spread percentage would be lower.

Question 65

Raybac is about to go public. Its present stockholders own 500,000 shares. The new public issue will represent 700,000 shares. The shares will be priced at $25 to the public with a 5% spread. The out-of-pocket costs in addition to the spread will be $450,000. What are the net proceeds to Raybac?

A) $17,500,000
B) $17,050,000
C) $17,075,000
D) $16,175,000

Question 66

Investment banking is changing dramatically into an industry where

A) investment bankers are using larger syndicates to distribute initial public offerings.
B) investment bankers are becoming increasingly larger so that they can take on more risk and have less need for large syndicates.
C) investment bankers don't need a distribution network because most new issues are sold directly to institutional investors.
D) new investment banking firms are being established to deal with the increasing number of companies looking for capital.

Question 67

Stock prices for Amazon and eBay managed to avoid the turbulent price movements that followed the collapse of the Internet bubble.
Both equities took enormous hits and saw sharp price adjustments downward, but unlike many others they managed to recover strongly.

Question 68

A lower equity spread usually means that there is a lower amount of uncertainty in equity compared to other types of capital.

Question 69

Which of the following activities is not a service provided by investment bankers?

A) Underwriting initial public offerings
B) Raising capital via mutual fund offerings
C) Advising in mergers
D) Advising on restructurings

Question 70

The investment banker may advise clients on a continuing basis about

A) the types of securities being sold.
B) the number of shares for distribution.
C) the timing of the sale.
D) all of these options are correct.

Question 71

The investment banker's function involves all of the following EXCEPT

A) Taking a portion of the risk in the distribution of an issue.
B) Always ensuring a company that a given amount of equity can be sold so that long-range financial planning can be made accurately.
C) Making a market by buying and selling a security to ensure a liquid market.
D) Contracting to buy securities from the corporation and resell them to other security dealers and the public.

Question 72

An investment banker most commonly makes money from

A) commissions from buyers.
B) fees from other investment bankers in the syndicate.
C) the spread between the issue price and proceeds to the issuer.
D) artificially supporting the stock price during and after the offering.

Question 73

The risk function of investment banking is categorized mainly under

A) underwriting function.
B) market-maker function.
C) advisor function.
D) agent function.

Question 74

Which of the following is not a key role of an investment banker?

A) Market-maker
B) Underwriter
C) Acting as a transfer agent
D) Agent in private placement

Question 75

Which investment bank underwrote the most bonds in 2013 and 2014?

A) Merrill Lynch
B) J.P. Morgan
C) Deutsche Bank
D) Citigroup

Question 76

The Glass-Steag all Act prohibited

A) retail brokerage firms from having investment banking operations.
B) commercial banks from combining investment banking and commercial banking functions.
C) investment banks from selling both debt and equity securities.
D) insurance companies from selling investment products.

Question 77

Investment banking is highly concentrated with the top 10 underwriters controlling 90% of the global market for stocks and bonds.
The percentage is over half, but does not approach 90%.

Question 78

Because of their lower levels of risk to the underwriter, and smaller issuances have lower spread percentages than large issuances.
The smaller the issue, the higher the fees as a percentage of offering price; hence, the greater the spread.

Question 79

In issuing stock, the term "spread" refers to

A) the profit the managing investment banker gets for an issue of stock.
B) the disparity between the initial asking price and the average price for the stock issued some months later.
C) the difference between what the corporation gets for new issues of stock and what the public pays for the stock.
D) the total cost to the corporation for issuing new stock.

Question 80

If the retail price of a stock issuance is $17.50 and the issuers' price is $15.50, the total spread is 11.4%.
The percentage spread must be calculated between the retail price and the price paid to the issuer, rather than within the syndicate.