Deck 15: Investment Banking: Public and Private Placement

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

It would not be unusual for an investment dealer syndicate to include as many as 20 investment houses in large offerings.

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

The whole area of investment underwriting is becoming more competitive.

Question 17

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

Question 18

A market maker transacts in shares as a broker.

Question 19

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

Question 20

The investment industry has increased functions during the 1980s and 1990s to include more merger/acquisition advisory services and international investment banking services.

Question 21

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

Question 22

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

Question 23

The use of banks to finance leveraged buyouts has often caused a misdirection of capital.

Question 24

Bank purchases of investment dealers have nearly eliminated competition in the investment industry.

Question 25

New share listings peaked on the Toronto Stock Exchange in 2000 before the market downturn.

Question 26

The movement of nonbrokerage firms into the investment area has forced traditional securities firms to expand their capital base.

Question 27

Leveraged buyouts usually entail the use of a large proportion of debt to take control of the firm.

Question 28

Privatization of government enterprises has resulted in significant public underwritings in recent years.

Question 29

During the 1980s vertical integration took place as the chartered banks acquired investment dealers.

Question 30

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.

Question 31

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

Question 32

Only the strong investment dealers with a strong capital base are in a position to compete in the international arena.

Question 33

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 34

Initial public offerings are far more significant than seasoned offerings.

Question 35

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

Question 36

Provinces and corporations rely heavily on international investment houses to raise funds.

Question 37

Rights offerings have shown the greatest growth in the equity markets.

Question 38

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

Question 39

The investment industry has shifted its emphasis from mergers and acquisitions to underwriting new securities.

Question 40

All six of the major Canadian banks acquired investment dealers in the 1980s by way of purchasing existing investment houses.

Question 41

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 42

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 43

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 44

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 45

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 46

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 47

The underwriting spread is the guaranteed minimum profit to an investment dealer for each share distributed.

Question 48

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

Question 49

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 50

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 51

Growth in the investment dealer industry can be seen by

A) the expansion in the profits of investment dealers.
B) the international expansion of the industry.
C) the expansion of the functions performed other than underwriting.
D) all of the other answers are correct

Question 52

The investment business has changed from a competitive price-sensitive environment to one where relationships determine who gets the business.

Question 53

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

Question 54

The early returns from initial public offerings are highly predictable.

Question 55

Canadian securities firms are amongst the largest in the world.

Question 56

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

A) no expensive registration process
B) lower interest rates
C) more flexibility in negotiation
D) no extensive public relations requirements

Question 57

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

Question 58

Generally, the total cost to issue securities (as a percent of total proceeds)

A) is greater for common stock than for debt and increases as the size of the issue increases.
B) is greater for debt than for common stock and decreases as the size of the issue increases.
C) is greater for debt than for common stock and increases as the size of the issue increases.
D) is greater for common stock than for debt and decreases as the size of the issue increases.

Question 59

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 60

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 61

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 62

______________ 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 63

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 value (price) of the company.
C) stabilizing the offering during the distribution period.
D) all of the other answers are correct

Question 64

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 are the net proceeds to the firm.

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

Question 65

The highest price paid for a seat on the Toronto Stock Exchange was

A) $ 60,000.
B) $191,000.
C) $370,000.
D) $545,000.

Question 66

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) two of the other answers are correct

Question 67

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 aftertaxes.
C) the investment dealer collects an underwriting fee.
D) all of the other answers are correct

Question 68

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 aftertaxes.
C) may sell as many securities as possible and return the rest unsold.
D) may give advice to management.

Question 69

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 70

Underpricing occurs

A) when additional shares are to be issued for companies with securities already publicly traded.
B) to aid in the market's reception of the securities.
C) in large secondary offerings.
D) all of the other answers are correct

Question 71

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 72

Investment dealers are responsible for all of the following except

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

Question 73

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 74

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 75

Leveraged buyout activity has been limited in Canada because of

A) more resource based firms.
B) less widely held companies.
C) government legislation.
D) two of the other answers are correct

Question 76

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 nonbrokerage firms into the investment field

Question 77

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

A) book
B) market
C) break up
D) real

Question 78

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 2-3 days but can last up to 30 days if a security is difficult to distribute.
C) cannot always keep prices of securities from falling.
D) all of the other answers are correct

Question 79

Which of the following is a characteristic of leveraged buyouts?

A) buyouts are usually financed by debt
B) some corporate assets are often sold after the buyout is completed
C) funds for the buyout are raised through securities markets
D) all the other answers are correct

Question 80

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%. How much must Bindex's aftertax income increase to prevent dilution of EPS?

A) $40,000
B) $237,500
C) $250,000
D) none of the other answers are correct