Question 1

Which one of these statements related to debt financing is correct?

Accepted Answer

A) Debt issues of any type,unlike equity issues,do not require SEC registration. 
B) Commercial banks specialize more in private placements than in term loans. 
C) Private placements generally have longer maturities than term loans. 
D) The majority of debt issues are public issues. 
E) Public debt issues generally have more restrictive covenants than private issues.

Question 2

Under the ________ method,the underwriter buys the entire issue,while under the ________ method,the underwriter does not purchase the shares but merely acts as an agent.

Accepted Answer

A) best efforts; firm commitment 
B) firm commitment; best efforts 
C) negotiated offer; competitive offer 
D) competitive offer; negotiated offer 
E) seasoned; unseasoned

Question 3

The price at which offered securities are sold in a Dutch auction underwriting is determined by the:

Accepted Answer

A) lead underwriter. 
B) bidders. 
C) SEC. 
D) issuing firm. 
E) venture capitalists.

Question 4

A registration statement is effective on the 20th day after filing unless:

Accepted Answer

A) the SEC is backlogged with statements. 
B) a tombstone ad is issued indicating its demise. 
C) a letter of comment suggesting changes is issued by the SEC. 
D) a syndicate can be formed sooner. 
E) the issue exceeds $50 million in which case the wait period is 30 days.

Question 5

Which one of the following is not one of the four main functions provided by underwriters?

Accepted Answer

A) Assumption of some market risk 
B) Responsibility for marketing securities 
C) Auditing the financial statements 
D) Estimating the value of an offering 
E) Establishing the offer price

Question 6

Debt capacity is often offered as a reason for a stock price to decline when additional equity securities are issued.The primary reason that supports this argument is that:

Accepted Answer

A) the high issue costs of a debt offering must be paid by the shareholders. 
B) an additional equity issue reduces the debt capacity of a firm. 
C) management feels the probability of default has risen,which limits the firm's debt capacity and thus an equity issue is necessary. 
D) unless additional debt is issued in the future,stock dividends will tend to decline after the new securities are issued. 
E) additional equity is only issued when a firm cannot meet its current debt obligations,thereby signaling the firm is on the verge of bankruptcy.

Question 7

Arguments offered as explanations,with or without market evidence,as to why most U.S.equity issues are sold without rights include all the following except:

Accepted Answer

A) underwriters buy at an agreed upon price and bear some risk of selling the issue. 
B) cash proceeds are available sooner in underwriting and the issue is available to a wider market. 
C) underwriters certify that the offering price is consistent with the true value of the issue. 
D) the underwritten offer price is generally set 48 hours prior to the offering while the rights price must be set much further in advance. 
E) underwriters tend to increase the stock price through their sales efforts.

Question 8

Green Shoe options generally last ________ days and benefit ________.

Accepted Answer

A) 30; the issuer 
B) 30; the underwriting syndicate 
C) 60; the underwriting syndicate 
D) 60; the issuer 
E) 90; both the issuer and the underwriting syndicate

Question 9

Management's first step in any issue of securities to the public is to:

Accepted Answer

A) file a registration form with the SEC. 
B) distribute copies of the preliminary prospectus. 
C) distribute copies of the final prospectus. 
D) obtain approval from the board of directors. 
E) prepare the tombstone advertisement.

Question 10

Assume it requires 3 rights to obtain a new share in a rights offering.If the stock's price prior to the ex-rights date is $25 and the ex-rights price is $22.75,what is the value of each right?

Accepted Answer

A) $.67 
B) $.75 
C) $.56 
D) $1.25 
E) $2.25

Question 11

The Green Shoe provision is used to:

Accepted Answer

A) cover oversubscriptions. 
B) address unsold shares. 
C) provide additional reward to investment bankers for a risky issue. 
D) provide funding to investment bankers for unsold shares. 
E) reduce the number of shareholders.

Question 12

The Direct Interactive Publishing Company is planning to raise $200 million dollars in new capital.There are currently 50 million shares outstanding with an estimated market price of $60 each.The corporate officers are debating whether to use a rights offering (with or without a standby underwriting)or have the issue fully underwritten.The company is currently listed on a regional exchange and plans to list on a national exchange after the new issue.List and explain three advantages/disadvantages of each issue method.

Accepted Answer

The answer of The Direct Interactive Publishing Company is planning...

Question 13

Historically,firms that issued new securities at a price that was above the file price range have:

Accepted Answer

A) successfully avoided leaving any significant funds on the table. 
B) ended up overpricing their securities by at least 10 percent. 
C) left more money on the table than firms that issued within the file price range. 
D) ended up with unsold shares even though the final offer price was considered to be fair. 
E) left less money on the table than firms that issued at or below the file price range.

Question 14

In comparison to debt issuance expenses,the total direct costs of equity issues are:

Accepted Answer

A) considerably less. 
B) the same. 
C) minimally less. 
D) considerably greater. 
E) minimally greater.

Question 15

All the following are major requirements needed to qualify for shelf registration except:

Accepted Answer

A) having a current rating of investment grade. 
B) having outstanding stock with a market value in excess of $150 million. 
C) not defaulting on debt in the past three years. 
D) having no violations of the Securities Act of 1933 in the past three years. 
E) having no violations of the Securities Exchange Act of 1934 in the past three years.

Question 16

Security issues that are governed by Regulation A are:

Accepted Answer

A) distributed solely among current company employees and directors. 
B) sold in full to a single purchaser. 
C) those that only include securities currently held by corporate insiders. 
D) limited such that only current shareholders can purchase them. 
E) valued at less than $5 million.

Question 17

Corporations primarily use the shelf registration method of security sales because:

Accepted Answer

A) preregistered securities can be quickly brought to market. 
B) SEC registration is avoided. 
C) their stock is rated as junk. 
D) they are issuing securities to the general public for the first time. 
E) they are doing a private offering.

Question 18

The Wordsmith Corporation has 40,000 shares outstanding with a market price of $25 each.The firm expects to raise $200,000 via a rights offering at a subscription price of $20.How many rights must be submitted to acquire one new share?

Accepted Answer

A) .20 
B) .25 
C) 5.00 
D) 1.25 
E) 4.00

Question 19

Which one of these applies to the aftermarket period?

Accepted Answer

A) The red herrings are distributed. 
B) Underwriters generally only sell shares at or above the offer price. 
C) Book building is conducted. 
D) The lead underwriter determines the offer price. 
E) Underwriting negotiations are completed.

Question 20

A red herring contains:

Accepted Answer

A) exactly the same information as the final prospectus except for the SEC approval. 
B) the same information as the final prospectus. 
C) only a brief synopsis of the final prospectus. 
D) only a description of how the funds raised will be used. 
E) information very similar to the final prospectus but excludes the selling price.

Exam 20: Raising Capital