Test bank corporate finance 8e ros chap016

An issue of securities offered for sale to the general public on a direct cash basis is called a _____ offering.. SECTION: 16.3 TOPIC: INITIAL PUBLIC OFFERING TYPE: DEFINITIONS... The di

Multiple Choice Questions

1 What is venture capital?

a equity funds from internal sources used to finance high-risk projects

b capital raised from issuing equity securities in order to retire debt securities

C financing for new firms which generally entails high levels of risk

d bank loans used to pay the start-up costs of a new firm

e the use of supplier credit as a means of financing the initial inventory purchases of a new firm

3 The SEC regulation that exempts public issues of less than $5 million from most registration requirements is called:

a the Green Shoe Provision

b the Red Herring Provision

4 A prospectus is a legal document:

a issued by the SEC authorizing a new issue of securities

b that must be filed with the SEC prior to issuing any new securities

c issued by the SEC which outlines the changes required for a registration statement to be approved

D which describes the details of a proposed security offering along with relevant information

about the issuer

e which explains how new securities can be issued without the permission of the SEC

SECTION: 16.2

TOPIC: PROSPECTUS

TYPE: DEFINITIONS

5 What is a red herring?

a newspaper listing of a security offering

b negative comments by the SEC on a proposed security offering

c a debt issue that matures in less than nine months

7 An issue of securities offered for sale to the general public on a direct cash basis is called a _ offering

9 A corporation's first sale of equity securities to the public is called a(n):

a share repurchase program

b shelf registration filing

c private placement

d seasoned equity offering

E initial public offering.

SECTION: 16.3

TOPIC: INITIAL PUBLIC OFFERING

TYPE: DEFINITIONS

10 What is a seasoned equity offering?

a shares of stock that have been available for public purchase but remain unsold

b shares of stock purchased by an underwriter that can be resold to the general public after six months

c equity securities held by a firm's founder that will be offered to the general public once all the IPO shares are sold

D sale of newly issued equity shares by a firm that is currently publicly owned

e a set number of equity shares that are offered to the public once a year

a a formalized cartel created to control the ownership of a firm

b a group of attorneys united for the purpose of taking a private firm public

c a group of investors who purchase sufficient equity shares such that they can control the operations of a public corporation

d a group of bankers who jointly loan funds to finance the start-up of a new firm

E a group of underwriters formed to share the risk of marketing and distributing new

securities to the investing public

SECTION: 16.4

TOPIC: SYNDICATE

TYPE: DEFINITIONS

13 The difference between the underwriters' buying price and the offering price of the securities to the public is called the:

return any unsold securities to the issuing firm without any further financial responsibility, is called a _ offering

16 The 40 day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _ period

17 A lockup agreement is an agreement included in an underwriting contract which:

a guarantees the purchase of the entire issue by the underwriting syndicate

b guarantees that additional shares can be purchased by the underwriting syndicate at the offer price during a stated period of time

c prohibits the issuer from offering additional securities for sale for an agreed upon period of time

d establishes the gross spread to which the underwriters are entitled as a fee for services

E prohibits company insiders from selling their securities to the public during the 180 day

period following an IPO

SECTION: 16.4

TOPIC: LOCKUP AGREEMENT

TYPE: DEFINITIONS

stock is called the:

19 The date on which existing shareholders are designated as the recipients of stock rights is called the _ date

22 The privilege that allows existing shareholders to purchase unsubscribed shares in a rights offering at the subscription price is called the _ privilege

25 Loans provided directly from a limited number of investors to a corporation with

maturities typically in excess of five years are called:

26 Registration permitted under SEC Rule 415 which allows a company to register all issues

it expects to sell within the next two years at one time is called:

28 Venture capital is primarily found through:

a internet web sites

29 Which one of the following statements concerning venture capital financing is correct?

a Venture capitalists desire shares of common stock but avoid preferred stock

b Venture capital is relatively easy to acquire in today's market

c Venture capitalists rarely assume active roles in the management of the financed firm

D Venture capitalists often require at least a forty percent equity position as a condition of

30 Which one of the following statements concerning venture capitalists is correct?

a All venture capitalists become actively involved in the day-to-day management of the financed firm

B Financial strength is a key consideration when selecting a venture capitalist.

c Venture capitalists seldom offer any benefit other than the funds they provide

d Most venture capitalists are long-term investors in a firm

e A venture capitalists exit plan is relatively unimportant

SECTION: 16.1

TOPIC: VENTURE CAPITAL

TYPE: CONCEPTS

31 Which of the following should be considered when selecting a venture capitalist?

I style

II contacts

III exit strategy

IV financial strength

a I and III only

b II and IV only

c I, III, and IV only

d I, II, and IV only

E I, II, III, and IV

b obtaining SEC approval

C getting board approval

d preparing a registration statement

e distributing a prospectus

SECTION: 16.2

TOPIC: BOARD APPROVAL

TYPE: CONCEPTS

33 All new interstate security issues are regulated by the:

a registration statement

b Green Shoe provision

c Securities Exchange Act of 1934

34 The Securities and Exchange Commission:

a verifies the accuracy of the information contained in the prospectus

b verifies the accuracy of the information contained in the red herring

c examines the registration statement during the Green Shoe period

D is concerned only that an issue complies with all rules and regulations.

e determines the final offer price once they have approved the registration statement

SECTION: 16.2

TOPIC: ISSUING SECURITIES

TYPE: CONCEPTS

35 Underwriters generally:

a pay a spread to the issuing firm

b provide only best efforts underwriting in the U.S

C receive less compensation under a competitive agreement than under a negotiated

agreement

d market and distribute an entire issue of new securities within their own firm

e pass the risk of unsold shares back to the issuing firm via a firm commitment agreement

SECTION: 16.4

TOPIC: UNDERWRITING

TYPE: CONCEPTS

36 With firm commitment underwriting, the issuing firm:

a is unsure of the total amount of funds they will receive until after the offering is completed

b is unsure of the number of shares they will issue until after the offering is completed

c knows exactly how many shares will be purchased by the general public during the offer period

d retains the financial risk associated with unsold shares

E knows up-front the amount of money they will receive from the stock offering.

SECTION: 16.4

TOPIC: UNDERWRITING

TYPE: CONCEPTS

37 With Dutch auction underwriting:

a each winning bidder pays the price he or she bid

B all successful bidders pay the same price.

c all bidders receive at least a portion of the quantity on which they bid

d the selling firm receives the maximum possible price for each item sold

e the bidder for the largest quantity receives the first allocation of the item

SECTION: 16.4

TOPIC: UNDERWRITING

TYPE: CONCEPTS

38 If an IPO is underpriced then the:

a investors in the IPO are generally unhappy with the underwriters

b issue is less likely to sell out

c stock price will generally decline on the first day of trading

d issuing firm is guaranteed to be successful in the long term

E issuing firm receives less money than they probably should have.

SECTION: 16.5

TOPIC: IPOS AND UNDERPRICING

TYPE: CONCEPTS

I counteracting the "winner's curse".

II rewarding institutional investors for sharing their opinion of a stock's market value.III diminishing the risk to the underwriters who have agreed to a firm commitment

d I, II, and III only

E I, II, III, and IV

SECTION: 16.5

TOPIC: IPOS AND UNDERPRICING

TYPE: CONCEPTS

40 The first day returns on IPOs:

A vary significantly over time.

b are limited by the SEC to a maximum of a 50 percent increase

c were unusually high during the early 1990s

d tend to greatly increase the funding received by the issuing firms

e are limited by the SEC to a 100 percent increase

SECTION: 16.5

TOPIC: IPOS AND UNDERPRICING

TYPE: CONCEPTS

41 Which one of the following statements is correct?

a The best method of purchasing IPO shares is to place an order for a set number of shares for each IPO

b You will always receive your desired allotment of IPO shares if you agree to purchase shares in every IPO

c As long as you submit your order during the waiting period you will receive the number of shares you desire for every IPO issue

d The allocation of shares you receive will tend to be relatively constant from IPO to the nextIPO

E IPO allocations are generally less restrictive when an IPO is overpriced.

SECTION: 16.5

TOPIC: IPO ALLOCATIONS

TYPE: CONCEPTS

IPO is more likely to receive an allocation of shares when:

a an IPO is substantially oversubscribed than when it is not

b he or she bids a higher amount as the offer price than do other investors

c an IPO is severely underpriced

43 When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

a increase

B decrease.

c remain constant

d respond but the direction of the response is not predictable as shown in past studies

e decrease momentarily and then immediately increase substantially within the hour

SECTION: 16.6

TOPIC: SEASONED OFFERINGS

TYPE: CONCEPTS

44 The total direct costs of underwriting an equity IPO:

a tend to increase on a percentage basis as the proceeds of the IPO increase

b generally range between 2 and 8 percent of the offer price

C generally range between 5 and 15 percent of the offer price.

d exclude the cost of the underwriter's fee

e exclude both the gross spread and the underpricing cost

a Domestic bonds are generally more expensive to issue than equity IPOs

b The total direct costs of an equity IPO is typically 15 percent of the amount raised

c A seasoned offering is typically more expensive on a percentage basis than an IPO

D There tends to be substantial economies of scale when issuing securities.

e The costs of issuing convertible bonds tend to be less on a percentage basis than the costs ofissuing straight debt

SECTION: 16.7

TOPIC: COSTS OF ISSUING SECURITIES

TYPE: CONCEPTS

46 Existing shareholders:

A may have a preemptive right to maintain their proportional ownership positions.

b may be required to purchase shares any time they are granted rights

c must forfeit any rights they are granted if they opt out of a rights offering

d are generally well advised to let the rights they receive expire

e can maintain their proportional ownership positions without participating in a seasoned equity offering

SECTION: 16.8

TOPIC: RIGHTS OFFERING

TYPE: CONCEPTS

47 To purchase shares in a rights offering, you generally just need to:

a pay the subscription amount in cash

b submit the required form along with the required number of rights

c pay the difference between the market price of the stock and the subscription price

d submit the required number of rights along with a payment for the underwriting fee

E submit the required number of rights along with the subscription price.

SECTION: 16.8

TOPIC: RIGHTS OFFERING

TYPE: CONCEPTS

I the number of rights required to purchase one new share.

II the market price of the security

III the subscription price

IV the price-earnings ratio of the stock

a II and III only

b II and IV only

c I and II only

D I, II, and III only

e I, II, III, and IV

SECTION: 16.8

TOPIC: RIGHTS OFFERING

TYPE: CONCEPTS

49 Before a seasoned stock offering, you owned 3,500 shares of a firm that had 225,000 shares outstanding After the seasoned offering, you still owned 3,500 shares but the number

of shares outstanding rose to 275,000 This is an example of _ dilution

50 Which one of the following statements concerning dilution is correct?

a Dilution of percentage ownership occurs whenever an investor participates in a rights offering

b Market value dilution increases as the net present value of a project increases

C An individual investor has less control over a firm if he or she experiences percentage

ownership dilution

d Book value dilution reduces the resale value of an investor's holdings

e Investors are entitled to immediate tax refunds whenever they are injured by any type of dilution

SECTION: 16.9

TOPIC: DILUTION

TYPE: CONCEPTS

debt?

a A direct long-term loan has to be registered with the SEC

B Direct placement debt tends to have more restrictive covenants than publicly issued debt.

c Distribution costs are lower for public debt than for private debt

d It is easier to renegotiate public debt than private debt

e Wealthy individuals tend to dominate the private debt market

SECTION: 16.10

TOPIC: LONG-TERM DEBT

TYPE: CONCEPTS

52 Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

of $32 a share with a 9 percent spread As it turns out, the underwriters only sell 68,500 shares How much cash will Tyson receive from the IPO?

Total cash received = 80,000 $32 (1 .09) = $2,329,600

AACSB TOPIC: ANALYTIC

SECTION: 16.7

TOPIC: ISSUING SECURITIES

TYPE: PROBLEMS

54 Allied Corporation offers 40,000 shares of common stock to the public in an initial public offering (IPO) The underwriters agree to provide their services in a best efforts underwriting The offering price is set at $28 The gross spread is $3 After completing their sales efforts the underwriters determine that they were able to sell a total of 36,750 shares How much cash did Allied Corporation receive from their IPO?

Total cash received = 36,750 ($28 $3) = $918,750

AACSB TOPIC: ANALYTIC

SECTION: 16.7

TOPIC: ISSUING SECURITIES

TYPE: PROBLEMS

55 Lakeside Industrial has decided to sell an additional 1,800 shares of stock through a Dutchauction The bids that the company receives include:

How much will Lakeside Industrial receive in total from selling the additional 1,800 shares? Ignore all transaction and flotation costs

Total cash received = 1,800 $35 = $63,000

AACSB TOPIC: ANALYTIC

SECTION: 16.4

TOPIC: DUTCH AUCTION

TYPE: PROBLEMS