How Corporations Issue Securities Exam Prep Chapter 15

Principles of Corporate Finance, 13e (Brealey)

Chapter 15 How Corporations Issue Securities

1) A business plan generally contains a description of

I) the proposed products;

II) the potential market;

III) the underlying technology;

IV) resources needed

A) I only

B) I and II only

C) II and III only

D) I, II, III, and IV

2) Equity investment in start-up private companies is called

A) venture capital.

B) mezzanine financing.

C) initial public offering (IPO).

D) seasoned equity offering (SEO).

3) The market for venture capital refers to the

I) private financial marketplace for providing equity investment for small, start-up firms;

II) bond market;

III) market for providing equity to well-established firms

A) I only

B) II only

C) II and III only

D) III only

4) Which of the following statements is generally true of venture capital (VC) firms?

A) VCs are always silent partners in the start-up company that they finance.

B) VCs always have a majority of directors in the start-up company.

C) VCs generally provide management advice and contacts in addition to capital.

D) VCs are combinations of publicly traded companies.

5) Arrange the following in chronological order for a typical start-up firm:

I) VC financing;

II) mezzanine financing;

III) stage 1, 2, 3, 4, etc.,financing;

IV) IPO

A) I, II, III, and IV

B) I, III, II, and IV

C) IV, I, II, and III

D) III, I, II, and IV

6) Venture capitalists provide start-up companies

A) all the money they will need up front.

B) enough money at each stage so that they can reach the next stage or major checkpoint.

C) assistance in managing the initial public offering (IPO).

D) funding intended to buy out the company's founders.

7) Wealthy individuals who provide equity investment for new firms are called

I) white knights;

II) red herrings;

III) angel investors

A) I only

B) I and II only

C) III only

D) II only

8) Generally, venture capital funds are organized as

I) proprietorships;

II) corporations;

III) limited private partnerships

A) I only

B) II only

C) III only

D) I and II only

9) Venture capital investment was highest in the year

A) 1999.

B) 2000.

C) 2003.

D) 2005.

10) Large firms like Intel that provide equity capital to new innovative companies are called

A) angel investors.

B) corporate venturers.

C) white knights.

D) mezzanine financiers.

11) The stock exchange that specializes in trading the shares of young and rapidly growing companies is the

A) NASDAQ.

B) NYSE.

C) London Stock Exchange.

D) Tokyo Stock Exchange.

12) According to the data, venture capital funds earn an average annual rate of return of about

A) 32 percent.

B) 24 percent.

C) 17 percent.

D) 12 percent.

13) Firms looking to raise funds will file registration statements with the

A) Federal Reserve Board (FED).

B) Office of the Comptroller of the Currency (OCC).

C) Securities and Exchange Commission (SEC).

D) Public Company Accounting Oversight Board (PCAOB).

14) According to evidence from surveys of CFOs, the top-most motive for firms to go public is to

A) broaden the base of ownership.

B) enhance the reputation of the firm.

C) establish a market price/value for our firm.

D) create public shares for use in future acquisitions.

15) The main reason for the recent migration of a large number of firms from public-to-private ownership is

A) blue-sky laws.

B) Sarbanes-Oxley Act.

C) International Accounting Standards (IAS).

D) advent of shelf registration.

16) Generally, underwriters provide the following services to the issuing firm:

I) provide advice;

II) buy some or all of the new issue;

III) resell the issue to the public

A) I only

B) I and II only

C) I and III only

D) I, II, and III

17) State laws that regulate sales of securities within the state are called

A) red herrings.

B) registration laws.

C) Rule 415 regulations.

D) blue-sky laws.

18) Underwriters will handle an issue of new securities on a(n)

I) best efforts basis;

II) firm commitment basis;

III) all or none basis

A) I only

B) II only

C) III only

D) I or II or III

19) Underwriters are typically compensated for their services in helping a firm issue new securities in the form of a

A) commission.

B) set fee.

C) spread.

D) finder's fee.

20) Generally, initial public offerings (IPOs) are

A) overpriced.

B) correctly priced.

C) underpriced.

D) There is no general trend.

21) The average initial returns from investing in IPOs is the highest in

A) Denmark.

B) China.

C) Italy.

D) Mexico.

22) The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the value) is called

A) winner's curse.

B) seniority.

C) English auction.

D) uniform-price auction.

23) In a uniform-price auction,

A) all winning bidders pay the price that they bid.

B) all winning bidders pay a price that is the highest bid.

C) all winning bidders pay a price that is the lowest winning bid.

D) all winning bidders receive their full allocation.

24) Suppose that a government wishes to auction 5 million bonds (quantity), and three potential buyers submit the following bids:

In a discriminatory auction,

A) Buyer A pays $1,015 and Buyer B pays $1,000.

B) Buyer A pays $1,000 and Buyer B pays $1,000.

C) Buyer A pays $990 and Buyer B pays $990.

D) Buyer A pays $1,000 and Buyer C Pays $990.

25) Suppose a government wishes to auction 5 million bonds (quantity), and three would-be buyers submit the following bids:

In a uniform-price auction,

A) Buyer A pays $1,015 and Buyer B pays $1,000.

B) Buyer A pays $1,000 and Buyer B pays $1,000.

C) Buyer A pays $990 and Buyer B pays $990.

D) Buyer A pays $1,000 and Buyer C Pays $990.

26) The winner's curse is reduced in a(n)

A) discriminatory auction.

B) uniform-price auction.

C) English auction.

D) winner-take-all auction.

27) An equity issue sold to the firm's existing stockholders is called a

A) rights offer.

B) general cash offer.

C) private placement.

D) discriminatory-price auction.

28) A general cash offer involves the following processes:

I) register the issue with the SEC;

II) sell the securities through an underwriter or a syndicate of underwriters;

III) have underwriter build up a book of likely demand for the securities

IV) price of the issue is fixed;

V) sell the securities to the public

A) I, II, and III only

B) I, II, and IV only

C) I, II, III, IV, and V

D) I, III, IV, and V only

29) Which of the following statements best describes shelf registration?

A) The issuance of securities to qualified institutional investors

B) The enforcement of blue-sky laws

C) The provision that allows large companies to file a single registration statement covering financing plans up to three years into the future

D) Registration of the sale of securities in the primary market

30) Shelf registration is more often used for the

A) issue of common stock.

B) issue of convertible securities.

C) issue of corporate bonds.

D) issue of warrants.

31) The following are advantages of shelf registration

I) securities can be issued in dribs and drabs without incurring excessive transaction costs;

II) securities can be issued on short notice;

III) security issues can be timed to take advantage of market conditions

A) I only

B) II only

C) III only

D) I, II, and III

32) The underwriter's spread is the highest for

A) IPOs.

B) seasoned equity offerings.

C) convertible bonds.

D) straight bonds.

33) The very first public equity sold by a company is referred to as

A) a rights issue.

B) American depositing receipts (ADRs).

C) an initial public offering (IPO).

D) a seasoned equity offering (SEO).

34) A new public equity issue from a company with public equity previously outstanding is called a(n)

A) initial public offering (IPO).

B) American depository receipt (ADR).

C) seasoned equity offering (SEO).

D) private placement.

35) Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds?

A) Initial public offerings (IPOs)

B) Seasoned equity offerings (SEOs)

C) Convertible bonds

D) Straight bonds

36) Most financial economists attribute the drop in the price of equity subsequent to the announcement of a new issue to

A) an increase in the supply of shares.

B) information effect.

C) an increase in the supply of shares and information effect.

D) neither an increase in the supply of shares nor information effect.

37) A rights issue is also called a(n)

A) private placement.

B) shelf registration.

C) initial public offering (IPO).

D) privileged subscription.

38) Image Storage Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using a (North American) rights issue. If the current stock price is $50 and the subscription price is $47/share, what is the value of a right?

A) $0.40/right

B) $5.00/right

C) $2.50/right

D) $1.00/right

39) New Image Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. How many (North American) rights are needed to buy one new share?

A) One right/share

B) Two rights/share

C) Three rights/share

D) Four rights/share

40) If a shareholder or an investor wants to acquire a new share of stock under a rights issue, he or she must

A) buy call options on the stock.

B) acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent.

C) acquire the correct number of rights per share and submit them to the subscription agent.

D) register his or her order with the NYSE.

41) Which of the following is a possible exception to the efficient-market theory?

A) Underwriters charge investors more for IPO shares than they pay the issuing firms.

B) IPO spreads are lower on larger issues.

C) The issuance of equity is interpreted as an unfavorable signal by investors.

D) The long-run returns of IPOs tend to underperform the market.

42) The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price (North American rights offering) of $27/share, calculate the value of a right.

A) $1/right

B) $2/right

C) $3/right

D) $4/right

43) When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, and so forth, it is called a(n)

A) rights offering.

B) general art offering.

C) private placement.

D) unseasoned issue.

44) SEC registration is not required when a company makes

A) a private placement of securities.

B) a public offering of securities issue having a value less than $5 million and a maturity less than nine months.

C) an issue of debt with a maturity less than nine months.

D) both a private placement of securities and a public offering of securities issue having a value less than $5 million and a maturity less than nine months.

45) The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called

A) Rule 144A.

B) Rule 415.

C) the Sarbanes-Oxley Act.

D) None of these options.

46) What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue?

A) SOX compliance

B) Spinning

C) Conflict of interest

D) Chinese wall

47) What costs in an IPO generally exceed all other costs?

A) Commissions

B) Issues fees

C) Spreads

D) Underpricing

48) The announcement of an SEO usually leads to a decline in stock price, with the decline averaging 2-4 percent.

49) Mezzanine financing must come in the third stage.

50) Underpricing is not a serious problem for most initial public offerings (IPOs).

51) Most public issues must be registered with the SEC, and the company may not sell securities until the SEC has approved its registration statement.

52) The most prevalent motive for firms to undertake an IPO is to create public shares for use in future acquisitions.

53) Generally, IPOs are overpriced and are subject to the winner's curse.

54) Shelf registration allows the firm to file a registration statement with the SEC to cover a series of subsequent issues.

55) The first public issue by a firm is known as a seasoned equity offering.

56) The underwriting spread for debt is generally less than that for equity.

57) Rule 144A allows large financial institutions to trade unregistered securities among themselves.

58) Underpricing is a technique used by underwriters to enhance the success of an issue.

59) Spinning refers to the practice whereby an underwriter sells shares in a hot new issue to a CEO, for instance,—for the CEO's personal benefit—for the purpose of the underwriter gaining future business from the CEO's firm.

60) Briefly explain the term venture capital.

61) Briefly explain the term initial public offering (IPO).

62) Briefly explain the role of underwriters in the issuance of securities.

63) What are some of the costs to a firm associated with issuing new securities?

64) Briefly explain the basic procedure for a new issue.

65) Explain the term winner's curse.

66) Discuss the advantages of shelf registration.

67) Briefly explain the term private placement.

68) Briefly discuss SEC rule 144A.

69) Explain the need for a firewall between underwriters and analysts.