Question 1

If the announcement of a new equity offering causes current equity values to drop, then signaling theory would predict that:

Accepted Answer

A) supply of equity will outstrip demand. 
B) management knows the issue to be overpriced. 
C) the firm has no attractive investment opportunities. 
D) underwriters charge too high a spread. 
A) supply of equity will outstrip demand. 
B) management knows the issue to be overpriced. 
C) the firm has no attractive investment opportunities. 
D) underwriters charge too high a spread. B

Question 2

Discuss the functions conducted by security underwriters.

Accepted Answer

There are three basic functions performed by underwriters.First, they operate as advisor to firms that contemplate new security issues.It is rather doubtful in this function that there exists much of an agency problem; reputation is quite important to the underwriter and if they encouraged issues that were ultimately unsuccessful, they would rapidly see their business going to other underwriters.Next, underwriters, acting either on a firm commitment or best efforts basis, will purchase the issue of securities from the firm.This is without recourse under the firm commitment basis.Finally, the underwriter will sell the securities to the general public.This effort is conducted either alone or in syndication with other underwriters in the case of a large issue.A portion of the success of the sale can come from that which the underwriter has selected, which of course deals with issues such as reputation and sales network.In return for these services, the underwriter earns a spread on the securities that are underwritten.

Question 3

A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.

Accepted Answer

A) True 
 B)False  True

Question 4

A South African group needs to raise $4 million to pay for its diamonds in the near future.It will raise the funds by offering rights of 400,000 each, and which entitles the owner to buy one new share.The company currently has one million shares outstanding priced at $40 each.What must be the subscription price on the rights the company plans to offer?

Accepted Answer

4,000,000/400,000 =

Question 5

A major purpose of the prospectus is to:

Accepted Answer

A) inform investors of the security's rate of return. 
B) advise investors of the security's potential risk. 
C) distribute stock warrants to prospective investors. 
D) list the security's dividend payment dates. 
A) inform investors of the security's rate of return. 
B) advise investors of the security's potential risk. 
C) distribute stock warrants to prospective investors. 
D) list the security's dividend payment dates.

Question 6

Underwriters are commercial banking firms that act as financial midwives to a new issue.

Accepted Answer

A) True 
 B)False

Question 7

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading, the issuing company's stock price had risen to $70.What is the cost of underpricing?

Accepted Answer

A) 81 million 
B) 91 million 
C) 101 million 
D) 111 million 
A) 81 million 
B) 91 million 
C) 101 million 
D) 111 million

Question 8

When securities are issued under a firm commitment, the underwriter bears the risk of low sales.

Accepted Answer

A) True 
 B)False

Question 9

The costs of underpricing an equity issue are borne mostly by the underwriter.

Accepted Answer

A) True 
 B)False

Question 10

The most important function of an underwriter is to:

Accepted Answer

A) assess the firm's capital needs. 
B) approve the prospectus before distribution to the public. 
C) provide private placement of the firm's debt. 
D) buy the issue of securities from the firm and resell to the public. 
A) assess the firm's capital needs. 
B) approve the prospectus before distribution to the public. 
C) provide private placement of the firm's debt. 
D) buy the issue of securities from the firm and resell to the public.

Question 11

The direct expense of a stock issue includes the:

Accepted Answer

A) cost of underpricing the stock. 
B) underwriting spread and other expenses. 
C) underwriting spread, other expenses, and cost of underpricing. 
D) underwriting spread. 
A) cost of underpricing the stock. 
B) underwriting spread and other expenses. 
C) underwriting spread, other expenses, and cost of underpricing. 
D) underwriting spread.

Question 12

What was the market price of a share of stock before a rights issue if one share of new stock could be purchased at $100 for every four shares that were previously owned? The stock price after the successful rights issue was $200.

Accepted Answer

A) $150 
B) $225 
C) $241 
D) $250 
A) $150 
B) $225 
C) $241 
D) $250

Question 13

If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share, the spread per share is:

Accepted Answer

A) $1.00. 
B) $2.00. 
C) $38.00. 
D) $40.00. 
A) $1.00. 
B) $2.00. 
C) $38.00. 
D) $40.00.

Question 14

POP System allows for:

Accepted Answer

A) access to a broad source of funds. 
B) access to a cheaper source of funds. 
C) allows a reduction in the cost of acquiring additional funds. 
D) slows the acquisition of additional funds. 
A) access to a broad source of funds. 
B) access to a cheaper source of funds. 
C) allows a reduction in the cost of acquiring additional funds. 
D) slows the acquisition of additional funds.

Question 15

In regards to new issues of common stock, economists have found that the announcement of a new issue:

Accepted Answer

A) results in the stock price falling. 
B) causes the stock price to rise. 
C) has no effect on the stock price. 
D) increases the market value of the stock temporarily. 
A) results in the stock price falling. 
B) causes the stock price to rise. 
C) has no effect on the stock price. 
D) increases the market value of the stock temporarily.

Question 16

One advantage to private placements is the low cost associated with its issue.

Accepted Answer

A) True 
 B)False

Question 17

A firm decides to raise $1 million with a rights issue.The issue will be based on a subscription price of $20, with 50,000 shares to be issued.Assume the shares outstanding currently trade for $35.Calculate the Ex-rights price of the company stock.

Accepted Answer

Ex rights price = 1/(N + 1) ×

Question 18

Which of the following is correct if an underwriter is selling stock to the public at $40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold, and the issuing firm receives $111 million from the underwriter?

Accepted Answer

A) The underwriter's spread was greater than $3. 
B) The issue appreciated in price immediately. 
C) The issue included 3 million shares. 
D) The stock was issued on a best efforts basis. 
A) The underwriter's spread was greater than $3. 
B) The issue appreciated in price immediately. 
C) The issue included 3 million shares. 
D) The stock was issued on a best efforts basis.

Question 19

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

Accepted Answer

A) 6.98% 
B) 7.19% 
C) 7.75% 
D) 8.33% 
A) 6.98% 
B) 7.19% 
C) 7.75% 
D) 8.33%

Question 20

If a corporation's management, with its superior knowledge of proposed investments, considers a security issue to be underpriced, it may react by:

Accepted Answer

A) withdrawing the issue. 
B) lowering the price of the existing shares to equal the new shares. 
C) increasing the number of shares to be sold. 
D) adopting POP registration, which automatically raises the issue price. 
A) withdrawing the issue. 
B) lowering the price of the existing shares to equal the new shares. 
C) increasing the number of shares to be sold. 
D) adopting POP registration, which automatically raises the issue price.

Exam 15: Venture Capital, Ipos, and Seasoned Offerings

If the announcement of a new equity offering causes current equity values to drop, then signaling theory would predict that:

Discuss the functions conducted by security underwriters.

A rights issue is one in which a public company offers shares only to existing shareholders in order to raise additional cash.

A major purpose of the prospectus is to:

Underwriters are commercial banking firms that act as financial midwives to a new issue.

Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each.By the end of the first day's trading, the issuing company's stock price had risen to $70.What is the cost of underpricing?

When securities are issued under a firm commitment, the underwriter bears the risk of low sales.

The costs of underpricing an equity issue are borne mostly by the underwriter.

The most important function of an underwriter is to:

The direct expense of a stock issue includes the:

What was the market price of a share of stock before a rights issue if one share of new stock could be purchased at $100 for every four shares that were previously owned? The stock price after the successful rights issue was $200.

If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share, the spread per share is:

POP System allows for:

In regards to new issues of common stock, economists have found that the announcement of a new issue:

One advantage to private placements is the low cost associated with its issue.

A firm decides to raise $1 million with a rights issue.The issue will be based on a subscription price of $20, with 50,000 shares to be issued.Assume the shares outstanding currently trade for $35.Calculate the Ex-rights price of the company stock.

Which of the following is correct if an underwriter is selling stock to the public at $40 per share, the underwriter receives a $3 per share spread, 2 million shares are sold, and the issuing firm receives $111 million from the underwriter?

What percentage of direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each?

If a corporation's management, with its superior knowledge of proposed investments, considers a security issue to be underpriced, it may react by:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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