Deck 15: Investment Banking: Public and Private Placement

Question 1

Which of the following is not an advantage of private placement?

A) No expensive registration process.
B) Higher interest rates.
C) More flexibility in negotiation.
D) No extensive public relations requirements.

Answer 1

B

Question 2

An investment dealer acting as an "underwriter":

A) gives a "firm commitment" to purchase the securities from the corporation at a set price.
B) causes the company to suffer a decline in earnings after taxes.
C) may sell as many securities as possible and return the rest unsold.
D) may give advice to management.

Answer 2

A

Question 3

The managing investment dealer is responsible for:

A) putting a syndicate together to aid in the distribution and share the underwriting risk.
B) determining the EPS of the company.
C) stabilizing the offering after the distribution period.
D) auditing the financial statements of the company.

Answer 3

A

Question 4

Which of the following is considered an advantage (for the corporation)of going public?

A) The president becomes a public relations man.
B) Extensive and time-consuming reporting requirements.
C) Increased liquidity for the corporation's shareholders.
D) The cost of flotation.

Question 5

Underpricing occurs:

A) when the market anticipates a large profit.
B) to improve the dealers commission structure.
C) in small tertiary offerings.
D) to aid in the market's reception of the securities.

Question 6

All of the following are disadvantages of going public except:

A) the firm may now become active in mergers and acquisitions.
B) the company must make all information available to the public through filings to the securities commissions.
C) an erosion in value may take place after the initial offering.
D) there is a high cost associated with going public.

Question 7

Dilution of earnings occurs because:

A) a new issue of common stock creates more shares outstanding that reduces earnings per share temporarily.
B) the company suffers a decline in earnings after taxes.
C) the investment dealer collects an underwriting fee.
D) poor financial performance leading to reduced earnings.

Question 8

The investment dealer:

A) is responsible for the expansion in the profits of corporation selling shares.
B) is reliant upon the personal selling of its employees.
C) always performs all functions in the IPO process.
D) is the one link between the corporation in need of funds and the investor.

Question 9

Market stabilization:

A) is the action by the managing investment dealer to keep the price of newly issued securities from rising quickly.
B) usually lasts 3-6 days but can last up to 60 days if a security is difficult to distribute.
C) can always keep prices of securities from falling.
D) is accomplished by repurchasing securities as the market price moves below the initial public offering price.

Question 10

An investment dealer makes its money from:

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

Question 11

The function of the managing investment dealer includes:

A) forming an underwriting syndicate,preparing a prospectus,distributing shares to the selling group.
B) form an underwriting syndicate,examine a prospectus,require full disclosure.
C) preparing a prospectus,distributing shares to the selling group,buying the shares for long-term investment.
D) prepare a prospectus,require full disclosure,buy the shares for long-term investment.

Question 12

Publicly traded companies generally have:

A) more pressure for short-term performance.
B) less pressure for short-term performance.
C) very strong stock market performance.
D) low distribution costs in selling securities.

Question 13

The market stabilization function usually:

A) is performed by the company.
B) lasts six to nine months.
C) provides price support for the stock during the distribution period.
D) is illegal.

Question 14

All of the following are advantages of going public except:

A) more funds are available to publicly traded firms.
B) the fact a company is public helps in bank negotiations and marketing.
C) publicly traded stocks afford the shareholders more liquidity.
D) the firm disseminates more information to the public on corporate affairs.

Question 15

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

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

Question 16

In a public distribution,the dealer group will generally:

A) pay a higher price for shares than the public.
B) pay a lower price for shares than the managing investment dealer.
C) pay a higher price for shares than the managing investment dealer.
D) pay a lower price for shares than members of the investment dealer syndicate group.

Question 17

In issuing stock,the term "spread" refers to:

A) the profit the managing investment dealer 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 18

Maxwell Corp.is coming to the market with a new offering of 300,000 shares,at $25 to the public.Maxwell will receive $22 per share.The firm has 1 million shares outstanding and earnings of $6 million.What is the amount of dilution in earnings per share?

A) $2.00.
B) $1.38.
C) $1.77.
D) No dilution occurs since new money is received by Maxwell.

Question 19

The investment dealer's function involves all of the following except:

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

Question 20

Which of the following are advantages to private bond placement over public offerings?

A) Higher interest costs.
B) Greater flexibility in negotiating terms.
C) Lower registration fees.
D) Lower interest costs.

Question 21

Which of the following is a characteristic of leveraged buyouts?

A) Buyouts are usually financed by private equity.
B) Corporate assets are often retained after the buyout is completed.
C) Cash for the buyout are raised through private placement.
D) Funds for the buyout are raised through securities markets.

Question 22

When a firm sells a new issue through an investment dealer,the costs incurred:

A) are the "give up" expense of the spread plus the legal and accounting fees,printing expense,and other small fees.
B) are the spread to the underwriter that includes all the costs of legal and accounting fees,printing expense,and other small fees.
C) are dependent upon the number of underwriters in the syndicate.
D) include the existing audit and accounting fees.

Question 23

An investment dealer spread is:

A) commissions from buyers.
B) fees from other investment dealers in the syndicate.
C) artificially supporting the share price during and after the offering.
D) included in the flotation cost.

Question 24

The investment industry in Canada is:

A) evenly distributed amongst over 200 firms.
B) dominated by U.S.investment firms.
C) dominated by only a few players.
D) centred in Montreal.

Question 25

Raybac is about to go public.Its present shareholders own 500,000 shares.The new public issue will represent 800,000 shares.The shares will be priced at $25 to the public with a 4% spread.The out-of pocket costs will be $450,000.What is the net proceeds to the firm?

A) $18,750,000
B) $19,200,000
C) $18,250,000
D) $19,550,000

Question 26

The spread is the underwriter's compensation based on:

A) the price of the security to the public.
B) the net proceeds to the firm or the government.
C) the price paid by the brokers.
D) a fee schedule set by the securities commission.

Question 27

The investment dealer's function involves:

A) taking none of the risk in the distribution of an issue.
B) always insuring a company 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 insure a liquid market.
D) guaranteeing a set price for the security.

Question 28

The dilutive effect of a share issue occurs because:

A) earnings fall initially.
B) the number of shares increase.
C) of the capital raised.
D) share equity becomes more significant relative to debt.

Question 29

The investment dealer is responsible for:

A) choosing the capital structure of the company.
B) designing and packaging a security offering.
C) designing the convertible feature of the bond issue.
D) deciding if the company goes public.

Question 30

A company's value,based on the assumption that its divisions being sold individually,is called ___________ value.

A) book
B) market
C) breakup
D) real

Question 31

Bindex has net income of $2,500,000 and 1,000,000 shares outstanding.Its common stock is currently selling for $40 per share.It needs to raise $3,610,000 in funds for a new asset.Its investment dealer plans to sell an issue of common stock to the public for $38 for a spread of 5% on offer price.How much must Bindex's after-tax income increase to prevent dilution of EPS?

A) $40,000
B) $237,500
C) $250,000
D) $361,000

Question 32

Which of the following is considered an advantage (for the corporation)of going public?

A) The president becomes a public relations man.
B) Extensive and time-consuming reporting requirements.
C) Access to large amounts of capital.
D) Low cost of going public.

Question 33

The advantages of being publically traded include all of the following except:

A) the corporation may tap the security markets for a greater amount of funds by selling securities directly to the public through a public placement.
B) going public allows the firm to play the merger game,using marketable securities for the purchase of other firms.
C) corporate information on profit margins and product lines must be divulged.
D) shareholders of a heretofore private corporation may also sell part of their holdings if the corporation decides to go public.

Question 34

Which of the following is not a recent trend in the investment industry?

A) Consolidation of capital among a few investment dealers.
B) Specialization of investment dealers.
C) Increasing numbers of dealers because of high returns.
D) The movement of non brokerage firms into the investment field.

Question 35

The amount of securities funding by private placement in the last decade has been:

A) about the same as public offerings.
B) about the same as rights offerings.
C) somewhere between public offerings and rights offerings.
D) less than public and rights offerings.

Question 36

Investment dealers are responsible for all of the following except:

A) packaging securities.
B) offering securities.
C) trading securities.
D) selling securities.

Question 37

Leveraged buyout activity has been limited in Canada because:

A) Canadian corporations are internationally held.
B) Canadian corporations are more susceptible to cyclical swings in the economy.
C) government legislation restricts leverage buyouts.
D) Canadian corporations have high cash flow.

Question 38

______________ occurs when a company is broken up into smaller divisions and sold for a profit.

A) Liquidation
B) Internal reorganization
C) Bankruptcy
D) Restructuring

Question 39

The risk function of investment dealers is categorized under the:

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

Question 40

Firm X needs to net $7,800,000 from the sale of common stock.Its investment dealer has informed the firm that the retail price will be $22 per share,and that the firm will receive $19 per share.Out-of-pocket costs are $100,000.How many shares must be sold?

A) 410,526
B) 354,545
C) 359,091
D) 415,790

Question 41

The underwriter is someone who buys large new issues of stocks and then sells them to the public.

Question 42

General Corp.issued new shares at $37.60 with an underwriting fee of $2.22 per share.Calculate the underwriting spread on this new share issue.

A) 4.56%
B) 7.00%
C) 5.90%
D) 7.96%

Question 43

In 2008 the world dealt with the most dramatic financial crisis since the depression and bank failures of the 1930's.This crisis occurred because of all of the following except:

A) increased leverage based on increasing property values in the subprime mortgage business.
B) financial institutions accepted questionable credit instruments.
C) there was a lack of effective oversight by the regulatory bodies.
D) an increase in global interest rates.

Question 44

Laura's Design is about to go public.Its present shareholders own 800,000 shares.The new public issue will represent 1,200,000 shares.The shares will be priced at $30 to the public with a 5% spread.The out-of pocket costs will be $700,000.What are the net proceeds to the firm?

A) $34,200,000
B) $36,000,000
C) $33,500,000
D) $11,400,000

Question 45

Which of the following is a characteristic of leveraged buyouts?

A) Buyouts are usually financed by new stock placement.
B) Corporate assets remain in tact after buyout is completed.
C) Funds for the buyout are raised through bank financing.
D) Buyout targets have smooth cash flows throughout the year.

Question 46

Market stabilization:

A) is the action by the managing investment dealer to keep the price of newly issued securities from falling below the issue price to the public.
B) usually lasts 30-365 days if a security is difficult to distribute.
C) always keeps prices of securities from falling.
D) is similar to profit sharing.

Question 47

SFC's EPS following the issue would be _______________.

A) $3.40
B) $3.80
C) $5.00
D) $6.40

Question 48

Vansteelandt Inc.has net income of $4,000,000 and 1,000,000 shares outstanding.Its common stock is currently selling for $50 per share.It needs to raise $2,000,000 in funds for a new asset.Its investment dealer plans to sell an issue of common stock to the public for $48 for a spread of 4% on offer price.How much must Vansteelandt's after tax income increase to prevent dilution of EPS?

A) $173,612
B) $80,000
C) $41,667
D) $40,000

Question 49

SFC's EPS would be ________ without the addition of expected $1,000,000 in new earnings.

A) $3.80
B) $3.40
C) $5.00
D) $6.40

Question 50

Which of the following is an advantage of private placement?

A) No expensive registration process.
B) Extensive public relations requirements.
C) Low flexibility in negotiation.
D) Higher audit fees.

Question 51

Francis Corp.is coming to the market with a new offering of 1,000,000 shares,at $20 to the public.Francis Corp.will receive $17 per share.The firm has 2 million shares outstanding and earnings of $8 million.What is the amount of dilution in earnings per share?

A) $1.85
B) $3.00
C) $10.00
D) $1.33

Question 52

Leveraged buyout activity has been limited in Canada because of:

A) less resource based firms.
B) less widely held companies.
C) government legislation.
D) poor financial performance.

Question 53

Underpricing occurs:

A) when additional shares are to be issued for companies with securities already privately traded.
B) when the market anticipates a huge loss.
C) in large primary offerings.
D) when fraud is suspected.

Question 54

The Very Big Corporation needs to net $10,000,000 from the sale of common stock.Its investment dealer has informed the firm that the retail price will be $25 per share,and that the firm will receive $22 per share.Out-of-pocket costs are $300,000.How many shares must be sold?

A) 454,545
B) 468,182
C) 412,000
D) 400,000

Question 55

A market maker transacts in shares as a broker.

Question 56

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

Question 57

GHX Ltd.(GHX)needs to issue an additional $50,000,000 in common shares.GHX's investment banker has determined that the new shares could be issued at a retail price of $30 and the underwriting costs will be $2.25 a share.If other issuance costs would be $1,500,000 how many shares would GHX need to issue?

A) 2,456,900
B) 1,855,856
C) 500,000
D) 4,888,999

Question 58

When a firm issues new shares,it always results in dilution of earnings in the long run.

Question 59

All of the following are characteristics of going private from public except:

A) the interest rate,which is higher on the interest-bearing security.
B) the fact a company is private helps in bank negotiations and marketing.
C) private-traded stocks afford the shareholders more liquidity.
D) the firm disseminates more information to the public on corporate affairs.

Question 60

SFC's most recent reported EPS is _____________.

A) $3.40
B) $5.00
C) $6.40
D) $3.00

Question 61

An investment dealer acts as a middleperson between a corporation needing funds and investors with funds.

Question 62

Private placement eliminates the expensive registration process with the securities commission.

Question 63

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

Question 64

As a middleperson,the investment dealer is responsible for designing and packaging a security offering and selling it to the public.

Question 65

The whole area of investment underwriting is becoming more competitive.

Question 66

Small investment dealers may handle distributions for relatively unknown corporations on a "best-efforts" basis.

Question 67

If a stock has a strong after-market,selling shareholders in the initial distribution will be pleased.

Question 68

Large well-established investment dealers often distribute new issues on a best-efforts basis.

Question 69

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

Question 70

The term "underpricing" describes the process of setting the spread between the participants of the investment dealer syndicate.

Question 71

The investment industry functions include merger and acquisition services,advisory services and international investment banking services.

Question 72

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

Question 73

Private placement of debt has grown at about the same rate as public placement of debt.

Question 74

The investment dealer serves in an agency function when a firm goes public.

Question 75

It would not be unusual for an investment dealer syndicate to include as many as 15 investment houses in large offerings.

Question 76

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

Question 77

Large investment houses are usually vertically integrated,acting as underwriter-dealer-broker and capturing more fees and commissions.

Question 78

When a company first goes public,a registration statement must be filed with the Toronto Stock Exchange.

Question 79

The out-of-pocket cost to issue new common stock is always paid by the investment dealer.

Question 80

Privately placed bonds are the most popular method of raising debt.