Deck 10: Stock Offerings and Investor Monitoring

Question 1

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

Answer 1

B

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 the above

Answer 2

A

Question 3

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.

Answer 3

B

Question 4

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 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

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.

Question 7

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 8

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 the above

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

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 11

____ represents ownership of a foreign stock.

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

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

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

Question 14

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 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

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 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 less than it deserves.

Question 18

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 19

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

Question 20

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 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 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 or advising fees or other compensation from the firm beyond that earned from serving on the board.

Question 22

____ are acquisitions that require substantial amounts of borrowed funds.

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

Question 23

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

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

Question 24

American depository receipts (ADRs) are similar to

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

Question 25

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 26

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 27

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 28

____ 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 29

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 the above

Question 30

Whenever _____, the stock price will be driven up.

A) supply exceeds demand
B) demand exceeds supply
C) demand is reduced
D) none of the above

Question 31

The OTC market does not have a trading floor.

Question 32

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 33

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

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

Question 34

____ 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 35

The largest organized exchange in the United States, listing the largest firms, is the

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

Question 36

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 37

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 38

Firms listed on the "pink sheets" of the OTC market

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

Question 39

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

Question 40

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 41

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 42

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 43

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

Question 44

The legal protection of shareholders varies substantially among countries.

Question 45

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

Question 46

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 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

A) the Nasdaq
B) the pink sheets
C) the OTC Bulletin Board
D) the New York Stock Exchange

Question 56

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 57

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

Question 58

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

Question 59

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 60

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

A) investors communicating their concerns to other investors and to a firm's high-level managers in an effort to place pressure on the firm's managers or its board members
B) poison pills
C) shareholder lawsuits
D) All of the above are forms of shareholder activism.

Question 61

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 negotiate the terms of its investment, including the amount of funds it is willing to invest.
B) One common exit strategy for VC funds is to sell its equity stake to the public before the business engages in a public stock offering.
C) VC funds receive money from wealthy investors and from pension funds that are willing to maintain the investment for a long-term period.
D) All of the above are true with respect to VC funds.

Question 62

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

Question 63

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

Question 64

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

Question 65

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 the above

Question 66

International exchange-traded funds (ETFs) represent international indexes that reflect the stock markets of particular countries; shares of an index can be purchased or sold, thereby allowinginvestors to invest directly in a stock index representing any one of several countries.

Question 67

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 68

Which of the following is not true with respect to preferred stock?

A) Preferred stock usually does not allow for significant voting rights.
B) If the firm does not have sufficient earnings from which to pay the preferred stock dividends, the preferred shareholders may force the firm into bankruptcy.
C) Normally, the owners of preferred stock do not participate in the profits of the firm beyond the stated fixed annual dividend.
D) Payment of preferred dividends is not a tax-deductible expense.
E) All of the above are true.

Question 69

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

Question 70

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

Question 71

The government enforcement of securities laws varies among countries.

Question 72

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 73

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

Question 74

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
B) 80
C) 133.33
D) none of the above

Question 75

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

Question 76

Venture capital funds typically take over businesses and manage them.

Question 77

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

Question 78

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 79

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 80

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.