Deck 10: Stock Offerings and Investor Monitoring

Question 1

A ____ requires that dividends cannot be 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

Answer 1

C

Question 2

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

A)1
B)3
C)7
D)25

Answer 2

C

Question 3

IPOs tend to occur more primarily during recessions.

Answer 3

False

Question 4

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 5

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 6

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 the above

Question 7

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

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

Question 8

On average, IPOs of firms 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 the above

Question 9

The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible ____ prices is referred to as ____.

A)IPO; margin selling
B)offer; secondary market building
C)offer; bookbuilding
D)IPO; bookbuilding

Question 10

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

A)flipping.
B)spinning.
C)laddering.
D)none of the above

Question 11

Which of the following statements is incorrect?

A)A stock is a certificate representing 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.

Question 12

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 the above

Question 13

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 the above

Question 14

When the lockup period expires, the share price commonly

A)remains unchanged.
B)increases significantly.
C)decreases significantly.
D)none of the above

Question 15

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 16

____ occurs when an investment bank allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank.

A)Flipping
B)Spinning
C)Laddering
D)None of the above

Question 17

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 lower than it deserves.

Question 18

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

Question 19

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

Question 20

The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last 30 years.

A)10
B)20
C)30
D)50

Question 21

Firms listed as "pink sheets" on the OTC market

A)are typically very large.
B)satisfy Nasdaq's listing requirements.
C)are typically owned by various institutional and individual investors.
D)none of the above

Question 22

A(n) ____ is a certificate which represents ownership of a foreign stock.

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

Question 23

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 the above

Question 24

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

A)It attempts to force accountants to conform to regular accounting standards in preparing a firm's financial statements.
B)It requires that only outside board members of a firm be on the firm's audit committee.
C)It allows public accounting firms to offer nonaudit consulting services to an audit client whether the client's audit committee pre-approves the nonaudit services or not.
D)It prevents members of a firm's audit committee from receiving consulting of advising fees or other compensation from the firm beyond that earned from serving on the board.

Question 25

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 26

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

Question 27

The ____ is a price-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 28

Unlike the organized exchanges, the OTC market does not have a trading floor.

Question 29

The largest organized exchange, listing the largest firms, is the

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

Question 30

____ are employed by brokerage houses and execute orders for clients on the floor of the NYSE.

A)Specialists
B)Commission brokers
C)Independent brokers
D)Dealers

Question 31

____ are acquisitions that require substantial amounts of borrowed funds.

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

Question 32

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 33

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 34

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.

Question 35

Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the market.

A)undervalued; undervalued
B)overvalued; overvalued
C)undervalued; overvalued
D)overvalued; undervalued
E)none of the above

Question 36

Buy and sell orders on the OTC market are completed by

A)auction on the trading floor.
B)sealed competitive bids.
C)noncompetitive bids.
D)a telecommunications network.

Question 37

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 38

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

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

Question 39

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 40

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 41

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 42

____ 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 43

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

Question 44

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 45

If the secondary market is inactive, then the shares would be illiquid.

Question 46

The phrase "leaving money on the table" refers to investors who pay 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 47

Listing stock on a foreign stock exchange

A)enhances the stock's liquidity.
B)may increase the firm's perceived financial standing.
C)may protect a firm against hostile takeovers.
D)all of the above

Question 48

Initial public offerings (IPOs) perform ____ on the day following 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 49

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

A)International mutual funds
B)American Depository Receipts
C)World Equity Benchmark Shares
D)Initial Public Offerings

Question 50

Whenever ____ exceeds ____, the stock price will be driven ____.

A)supply; demand; up
B)demand; supply; down
C)demand; supply; up
D)none of the above

Question 51

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

Question 52

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

A)investors communicating their concerns to other investors in an effort to place more pressure on the firm's managers or its board members
B)poison pills
C)shareholder lawsuits
D)all of the above

Question 53

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

Question 54

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

Question 55

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 56

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 57

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

A)the Nasdaq National Market
B)the Nasdaq Small Cap Market
C)the OTC Bulletin Board
D)yellow sheets
E)all of the above are part of the over-the-counter market

Question 58

American Depository Receipts (ADRs) are similar to

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

Question 59

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

Question 60

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

Question 61

The government enforcement of securities laws varies among countries.

Question 62

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

Question 63

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

Question 64

Like VC funds, private equity funds commonly take over businesses and manage them.

Question 65

Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been smaller.

Question 66

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 67

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

Question 68

Electronic communications networks (ECNs) are passive funds that track a specific index.

Question 69

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

Question 70

Electronic stock exchanges that execute stock transactions electronically are referred to as electronic communications networks (ECNs).

Question 71

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

Question 72

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

Question 73

The laws of the financial information that must be provided by public companies is similar among all developed countries.

Question 74

If investors become dissatisfied with a firm's performance, they can compete with management in soliciting proxy votes in what is known as a proxy fight.

Question 75

Common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than civil law countries such as France or Italy.

Question 76

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 77

In addition to the Nasdaq market, the OTC market has another segment known as "pink sheets," where smaller stocks are traded.

Question 78

The legal protection of shareholders varies substantially among countries.

Question 79

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

Question 80

As a result of the Sarbanes-Oxley Act, there was a reduced likelihood of fraudulent financial reporting by firms.