Securities and Investment Chapter 4 Test Questions & Answers

Chapter 04 Financial Services: Securities Brokerage and Investment Banking

KEY

1. Investment banks specialize in the origination, underwriting, and distribution of new securities issued by corporations or governments. 

2. Investment banks engage in activities such as advising on mergers, acquisitions, and corporate restructuring. 

3. Securities trading and underwriting is a profit generating activity that requires FIs to hold an inventory of securities they trade. 

4. The concentration of business among the largest firms in the securities firm/investment banking business has increased significantly since the stock market crash of 1987. 

5. Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets. 

6. The Financial Services Modernization Act of 1999 and other regulatory changes have been the cause of the increase in interindustry mergers of investment banks and securities firms. 

7. The number of investment banks and securities firms expanded rapidly from 1980 to October 1987. 

8. As of October 1987, there were over 9,500 securities firms and investment banks. 

9. The value of assets is the traditional measure of size in the securities brokerage and investment banking industry. 

10. As of 20015, income generated by securities brokerage accounted for over 25% of commercial bank holding company fee income. 

11. As of 2015, there were over 4,500 securities firms in operation. 

12. National full-line investment banks and securities firms provide business services to both retail and corporate customers. 

13. The objective of the investing function of securities firms (funds management) is to allocate assets so that they outperform relative risk-return performance benchmark. 

14. Because the business of funds management generates fees based on the size of the pool of assets managed, the flow of income is more volatile than either investment banking function or the trading function. 

15. In a public offering of a new security, an investment banker places a new issue of securities with a handful of private, usually large, investors. 

16. The top ten underwriters of global debt and equity issues represent over 70 percent of the industry total in 2015. 

17. Generally, commission income for securities firms tends to increase as stock markets increase in value and decline when stock markets decline.

18. Since the recent financial crisis, the securities and investment banking industry has been expanding and adding new lines of business. 

19. Recently (2013-2015), pre-tax profits at securities firms and investment banks have been declining because of new regulation. 

20. Initial public offerings (IPOs) are first-time issues of firms whose equity has not previously traded in an organized market. 

21. In order for an investment bank to perform a firm commitment offering of securities, they must maintain at least 20% equity on their balance sheet. 

22. A best-efforts offering of a security is more risky for an investment bank than a firm commitment offering. 

23. When conducting a firm commitment offering, the investment bank is acting as an agent on behalf of the issuing company or government. 

24. Venture capital firms often make loans to finance new and often high-risk companies that may have no business history. 

25. As compared to venture capital firms, private equity firms specialize in assisting existing companies that have proven themselves in their industry. 

26. An angel venture capitalist is likely to be a wealthy individual that makes equity investments in unsuccessful, bankrupt firms. 

27. In order to realize a return on their investment, venture capital firms eventually sell their equity interest in a company they helped to fund. 

28. Market making involves creating a primary market in a financial asset. 

29. Market makers in an NYSE stock are obligated to buy shares from sellers even when the market for the stock is declining. 

30. Agency transactions of market makers are two-way transactions on behalf of customers 

31. Principal transactions allow the market maker to always make a profit regardless of whether the market price for a specific stock is rising or falling. 

32. Over the last 10 years, the number of floor traders on the NYSE has remained relatively the same.

33. Competition from internet-based and electronic exchanges has led to a decrease in profits of market making.

34. In pure arbitrage, a trader would sell an asset in one market at one price while buying the same asset in another market at a higher price. 

35. Electronic brokerage allows an investor to have direct access to the trading floor. 

36. Cash management accounts were an early attempt by commercial banks to provide investment banking services to individuals. 

37. The Financial Services Modernization Act of 1999 allowed investment banks and securities firms to offer deposit accounts to individuals. 

38. Cash management accounts did not exist before 1999. 

39. Investment banks are forbidden to offer traditional bank services including making small business loans and the trading of loans.

40. Recent trends indicate that securities firms are increasingly focused on providing client services and downsizing proprietary trading products and services. 

41. Securities firms and investment banks engage in as many as seven key activity areas. 

42. The principal reasons for the growth in profitability of the securities industry in the middle 1990s were the trading profits from fixed income securities and the growth in new issue underwriting. 

43. Activity and performance trends in the investment banking industry are highly correlated with general economic expansions and recessions. 

44. Most securities firms are subject to large amounts of interest rate and market risk because of the large amount financial assets on the balance sheet. 

45. The largest source of funding for securities firms and investment banks as an industry is repurchase agreements. 

46. As of 2015, equity capital in the securities industry measured over 12 percent. 

47. The U.S.A. Patriot Act requires firms to implement processes to deter money laundering. 

48. The Security Investor Protection Corporation (SIPC) protects investors against losses of up to $25,000,000 caused by the failure of a securities firm. 

49. Trades created by institutional orders that are carried out away from central exchanges are called dark pools. 

50. As of 2015, 45 percent of all stock trades in the U.S. occurred through dark pools. 

51. Seeking international partners is a recent trend among securities firms and investment banks. 

52. Securities firms and investment banks are more involved internationally than other member of the financial services industry. 

53. Full-line firms such as Bank of America Merrill Lynch are generally called bulge-bracket investment banks. 

54. Boutique investment banks specialize in originating, underwriting, and distributing issues of new securities. 

55. The role of a broker-dealer is to assist in the issue of new securities where as an underwriter’s role is to assist in the trading of existing securities. 

56. Discount brokers are stockbrokers that conduct trades for customers but do not offer investment advice. 

57. A securities issue placed with one or a few large institutional investors is called an IPO. 

58. In a private offering, the investment banker acts as a private placement agent for a fee, placing securities with one or a few institutional investors such as life insurance companies. 

59. Asset managers sometimes prefer dark pools to exchanges because orders remain hidden until they are executed, which can help investors get a better price on large trades. 

60. Which of the following are not one of the main types of trading activities? 

A. position trading.

B. pure arbitrage

C. risk arbitrage

D. card trading

E. electronic brokering

61. By 2015, there were approximately ________ securities firms and investment banks operating. 

A. 9,100

B. 7,600

C. 1,200

D. 4,400

E. 220

62. The most common benchmark of relative size of a firm in the securities trading and underwriting industry is based on 

A. total asset value.

B. total equity.

C. total debt.

D. annual sales.

E. annual profits.

63. Which of the following differentiates securities firms from investment banks? 

A. Securities firms are concerned with the commercial side of the business while investment banks are concerned with the retail side of the business.

B. Securities firms assist in trading of existing securities while investment banks specialize in underwriting new securities.

C. Securities firms underwrite new issues of securities while investment banks provide brokerage services.

D. Securities firms originate new issues of securities and investment banks underwrite the securities.

E. Securities firms are concerned with private placements of securities whereas investment banks are concerned with publicly traded securities.

64. Which of the following would be a key area of activity for an investment bank specializing in the commercial side of the business? 

A. Purchase of existing securities.

B. Sale of securities in the secondary market.

C. Brokerage of existing securities.

D. Underwriting issues of new securities.

E. All of the options.

65. Which of the following is true? 

A. Investment bankers earn fees based on the success of their placements when they underwrite using a best-efforts basis.

B. Investment bankers earn fees based on the success of their placement when they underwrite using firm-commitment basis.

C. With best-efforts underwriting, investment bankers act as principals because they purchase securities from the issuer and sell them at a higher price.

D. An investment banker is acting as an agent when conducting a firm-commitment offering of securities.

E. None of the options is correct.

66. Discount brokers 

A. are securities firms focused on providing research support for customers.

B. conduct trades for customers but do not offer investment advice.

C. allow customers to receive investment advice at very low rates.

D. complete trades for customers on- or offline while offering investment advice.

E. are electronic trading securities firms that allow customers to trade without the use of a broker.

67. Which of the following is most typical of broker-dealers? 

A. They assist in underwriting of new securities.

B. They assist in trading of existing securities.

C. They assist in issuing new securities.

D. They assist in underwriting and distribution of new securities.

E. All of the options.

68. Which of the following is true of private placement of securities? 

A. Securities are placed with few large institutional investors.

B. Securities of private firms are sold to the investing public at lower prices.

C. The securities must be registered with the SEC.

D. Public trading in these securities is not allowed.

E. Subject to more stringent disclosure and informational requirements than those imposed by the SEC on publicly registered issues.

69. The function of institutional venture capital firms is to 

A. find and fund the most promising new firms.

B. lend funds on a long-term basis to promising new companies with no track record.

C. take equity positions in successful established companies.

D. lend funds to established companies that are faltering.

E. none of the options is correct.

70. A corporate venture capital firm 

A. has publicly-traded common stock.

B. provides equity funds to companies that already have publicly traded common stock.

C. is a subsidiary of a nonfinancial corporation.

D. provides debt funding to only to established corporations.

E. is subject to more stringent disclosure requirements than other venture capital firms.

71. The dominant form of institutional venture capital firms operate as a

A. Corporation.

B. Subsidiary of a financial company.

C. Bank holding company.

D. Limited partnership.

E. General partnership.

72. Venture capital firms assess two major issues when deciding to invest in a company. Which of the following indicates these issues?

A. Company management and other funding secured by the company.

B. A proven company track record and the risk-return tradeoff of an investment.

C. Potential for a high return on investment and an easy exit strategy.

D. Funding requested and company financial statements.

E. Company’s potential to generate profits and the funds available to the venture capital company.

73. In market-making 

A. principal transactions that are two-way transactions on behalf of customers, such as a dealer working for a fee or commission.

B. principal transactions when market makers take long or short positions and seek profits on price movements.

C. market makers take inventory positions to stabilize the market in the securities.

D. principal transactions that are two-way transactions on behalf of customers, such as a dealer working for a fee or commission and principal transactions when market makers take long or short positions and seek profits on price movements.

E. principal transactions that are two-way transactions on behalf of customers, such as a dealer working for a fee or commission and market makers take inventory positions to stabilize the market in the securities.

74. Which of the following is NOT considered a trading activity of securities firms? 

A. Position trading.

B. Pure arbitrage.

C. Liquidity trading.

D. Risk arbitrage trading.

E. Program trading.

75. Pure arbitrage trading involves 

A. buying blocks of securities in anticipation of some information release.

B. purchase of stock in a company being acquired and the sale of stock in the acquiring company.

C. exploitation of a difference between a company's current value and its estimated liquidation value.

D. purchasing an asset in one market at one price and selling it immediately in another market at a higher price.

E. simultaneous purchase and sale of similar shares in a single market.

76. The largest category of assets for securities firms as of 2015 was 

A. receivables from other broker-dealers.

B. securities purchased under agreement to resell.

C. receivables from customers.

D. exchange membership.

E. long position in securities and commodities.

77. The largest category of liabilities of securities firms as of 2015 was 

A. bank loans payable.

B. securities sold under repurchase agreements.

C. payables to customers.

D. short positions in securities and commodities.

E. payables to non-customers.

78. In comparison to a typical commercial bank, an investment bank is likely to have 

A. lower levels of capital.

B. higher reliance on long-term debt.

C. lower levels of repurchase agreements.

D. higher levels of net interest margin.

E. higher levels of loans to customers.

79. National full-line investment and securities firms 

A. may specialize in providing service to both retail and corporate customers.

B. usually serve only as discount brokers without offering investment advice.

C. specialize more in corporate finance with very low activity in trading securities.

D. are more highly regulated than smaller firms.

E. are those owned by commercial banks.

80. The management of pools of assets by securities firms is considered to be the function of 

A. market making.

B. investment banking.

C. trading.

D. investing.

E. cash management.

81. Creating a secondary market in an asset by a securities firm involves the function of 

A. cash management.

B. investing.

C. market making.

D. trading.

E. investment banking.

82. Participation in the activities relating to the underwriting and distribution of new issues of debt and equity by a securities firm involves the function of 

A. investing.

B. merger and acquisitions.

C. market making.

D. investment banking.

E. trading.

83. Offering bank deposit-like accounts to individual customers by a securities firm involves 

A. the function of investing.

B. the function of cash management.

C. the function of market making.

D. the function of trading.

E. the function of investment banking.

84. The primary advantage to the investor of a securities firm cash management account (CMA) over commercial bank deposit accounts is that 

A. no FDIC insurance is required on CMAs.

B. no regulatory oversight of CMAs.

C. they make it easier to buy and sell securities using funds from the CMA.

D. CMAs guarantee higher rates of return than money market deposit accounts.

E. Regulation Q interest rate ceilings do not apply to CMAs.

85. The process of providing custody and escrow services, clearance and settlement services, and research and other advisory services by a securities firm involves the function of 

A. mergers and acquisitions.

B. market making.

C. investment banking.

D. back-office functions.

E. cash management services.

86. Which of the following is NOT a back-office service function in the securities industry? 

A. Correspondent banking services.

B. Escrow services.

C. Clearance of securities transactions.

D. Research services.

E. Services related to settlement of securities transactions.

87. An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called 

A. risk arbitrage.

B. an agency transaction.

C. best efforts underwriting.

D. pure arbitrage.

E. a principal transaction.

88. Soft dollars is a term often used in reference to the portion of a fee or commission that is allocated to 

A. research and other advisory services.

B. custody and escrow services.

C. clearance and settlement services.

D. banking services.

E. back office services.

89. Securities firms have equity ratios that are lower than those for commercial banks because their balance sheets contain a larger portion of 

A. illiquid assets.

B. current liabilities.

C. long term liabilities.

D. fixed assets.

E. liquid assets.

90. Program trading involves 

A. online trading services provided to customers by electronic trading securities firms.

B. computer-driven buying or selling of baskets of 15 or more stocks by institutional traders.

C. purchase and sale of assets that are potentially but not necessarily equivalent.

D. buying blocks of securities in anticipation of some information release.

E. providing a platform for customers to trade without the use of a broker.

91. Legislation designed to deter money laundering by implementing practices to identify and verify those seeking to open an account were instituted by the

A. National Securities Markets Improvement Act of 1996.

B. Sarbanes-Oxley Act of 2002.

C. U.S.A. Patriot Act of 2003.

D. Financial Services Modernization Act of 1999.

E. Bank Holding Company Act of 1956.

92. The U.S.A. Patriot Act (2003) requires financial services firms to 

A. verify the identity of any person seeking to open an account.

B. maintain records of the information used to verify a person's identity.

C. determine whether a person opening an account is on a list of suspected terrorists.

D. All of the options.

E. verify the identity of any person seeking to open an account and determine whether a person opening an account is on a list of suspected terrorists.

93. The Securities Investor Protection Corporation (SIPC) protects investors against losses of up to ____ on securities firm failures. 

A. $100,000

B. $200,000

C. $500,000

D. $1,000,000

E. $25,000,000

94. According to SEC Rule 415, 

A. larger corporations can register their new issues with the SEC up to two years in advance.

B. firms should disclose soft dollar arrangements to their clients.

C. large investors are allowed to begin trading privately placed securities among themselves.

D. firms are required to maintain records of the information used to verify the identity of a person opening an account.

E. publicly held companies must disclose all material information that might affect investment decisions to all investors at the same time.

95. Identify a major reason behind the increase in domestic underwriting activity during the 1990s. 

A. Enhanced non-trading profits.

B. High long-term interest rates.

C. Low long-term dividend rates.

D. Growth in the asset-backed securities market.

E. Decreased securitization of debt.

96. Which of the following is true about reverse repurchase agreements? 

A. They are securities purchased under agreements to resell.

B. They account for less than 5 percent of assets of broker-dealers.

C. They amount to 40.8 percent of total liabilities and equity of broker-dealers.

D. They are treated as liabilities.

E. They are securities temporarily lent in exchange for cash received.

97. Which of the following is a self-regulatory organization involved in the day-to-day regulation of trading practices? 

A. Securities and Exchange Commission.

B. New York Stock Exchange.

C. Securities Investor Protection Corporation.

D. Chicago Board of Trade.

E. All of the options.

98. Considering the securities firms and investment banking industries, The National Securities Markets Improvement Act (NSMIA) of 1996 

A. appointed the Federal Reserve System as the primary regulator of the industry.

B. diminished the role of the National Association of Securities Dealers (NASD) in regulating the industry.

C. allowed individual states the right to require registration of firms operating in the state.

D. effectively affirmed the SEC as the primary regulator of the industry.

E. required all firms in the industry to maintain minimum amounts of capital.

99. Functions of the Financial Industry Regulatory Authority (FINRA) include all of the following EXEPT 

A. Closing securities firms and investment banks that violate its regulations.

B. Authoring the rules that govern the activities of securities firms.

C. Works to support investor education.

D. Examines securities firms for compliance with regulation.

E. Enforcing the rules governing the activities of securities firms.

100. The primary function of the Security Investor Protection Corporation (SIPC) is to 

A. investigate member securities firms.

B. regulate member securities firms.

C. prosecute cases of fraud within securities firms.

D. oversee accounting practices of securities firms and investment banks.

E. Restore customer cash and securities of bankrupt or insolvent securities firms.

101. Which of the following 2 firms survived as investment banks following the most recent financial crisis? 

A. Morgan Stanley and Bear Stearns.

B. Goldman Sachs and Merrill Lynch.

C. Lehman Brothers and Morgan Stanley.

D. Merrill Lynch and Lehman Brothers.

E. None of the options.

102. Which of the following investment banks is no longer in business as a result of the most recent financial crisis? 

A. Morgan Stanley.

B. Bear Stearns.

C. Lehman Brothers.

D. Goldman Sachs.

E. Merrill Lynch.

103. Which of the following two investment banks were acquired by financial services holding companies during the most recent financial crisis? 

A. Merrill Lynch and Bear Stearns.

B. Goldman Sachs and Morgan Stanley.

C. Bear Stearns and Lehman Brothers.

D. Merrill Lynch and Morgan Stanley.

E. Lehman Brothers and Goldman Sachs.

104. Which of the following two investment banks were granted approval to be chartered as commercial banks during the most recent financial crisis? 

A. Merrill Lynch and Bear Stearns.

B. Goldman Sachs and Morgan Stanley.

C. Bear Stearns and Lehman Brothers.

D. Merrill Lynch and Morgan Stanley.

E. Lehman Brothers and Goldman Sachs.

105. As of 2015, approximately ________ of the industry total brokerage fee income was generated by firms operating as subsidiaries of commercial bank holding companies. 

A. 15 percent

B. 25 percent

C. 40 percent

D. 50 percent

E.65 percent

106. As of 2015, approximately ________ of the industry total brokerage fee income was generated by firms operating as subsidiaries of commercial bank holding companies. 

A. $12.1 billion

B. $10.3 billion

C. $16.5 billion

D. $32.4 billion

B. $40.3 billion

107. One of the primary reasons that investment banks were allowed to convert to bank holding companies during the recent financial crisis was recognition that 

A. their operating activities were too risky and they needed the cushion of bank deposits to alleviate funding risks.

B. the industry had acquired too much capital during the previous decade.

C. bank holding companies needed the ability to underwrite new issues of corporate securities.

D. it was the only way an investment bank could qualify for federal bailout funds.

E. the Federal Reserve was unable to purchase troubled assets from investment banks, but they could from bank holding companies.

  An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share.

108. How much money does TWResearch receive? 

A. $105,000,000.

B. $150,000,000.

C. $112,000,000.

D. $125,000,000.

E. $110,000,000.

Feedback: TWResearch, Inc. will receive $10.50 per share × 10,000,000 shares = $105,000,000

109. What is the profit (loss) to the investment banker? 

A. Profit of $1,000,000.

B. Profit of $2,000,000.

C. Profit of $7,000,000.

D. Loss of $7,500,000.

E. Loss of $1,000,000.

Feedback: The investment banker will have a profit of $7,000,000.
($11.20 - $10.50) × 10,000,000 shares = $0.70 per share × 10,000,000 = $7,000,000

110. If the investment bank can sell the shares for $9.75 per share, how much money does TWResearch receive? 

A. $105,000,000.

B. $150,000,000.

C. $112,000,000.

D. $125,000,000.

E. $110,000,000.

Feedback: This is a firm commitment offering, so TWResearch still receives $105,000,000
$10.50 per share × 10,000,000 shares

111. If the investment bank can sell the shares for $9.75 per share, what is the profit (loss) to the investment banker? 

A. Profit of $1,000,000.

B. Loss of $7,500,000.

C. Profit of $7,000,000.

D. Loss of $7,000,000.

E. Loss of $1,000,000.

Feedback: The investment banker will have a loss of $7,500,000
($9.75 - $10.50) × 10,000,000 = -$7,500,000

An investment banker agrees to underwrite an issue of 10 million shares of stock for Rochester Industries on a best-efforts basis. The investment banker is able to sell 8 million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share sold.

[Reference: 4-112]

112. How much money does Rochester Industries receive? 

A. $15,000,000.

B. $84,000,000.

C. $76,200,000.

D. $82,200,000.

E. $110,000,000.

[Refer to: 4-112]

Feedback: Rochester Industries receives $82,200,000
($10.50 - $0.225) × 8,000,000 = $10.275 × 8,000,000 = $82,200,000

113. What is the profit to the investment banker if it is able to sell 8 million shares for $10.50 per share? 

A. Profit of $1,000,000.

B. Loss of $7,500,000.

C. Profit of $7,000,000.

D. Loss of $7,000,000.

E. Profit of $1,800,000.

[Refer to: 4-112]

Feedback: The profit to the investment banker is $1,800,000
$0.225 per share × 8,000,000 shares sold = $1,800,000

114. If the investment bank sells 8 million shares for $9.75 per share, how much money does Rochester Industries receive? 

A. $76,200,000.

B. $84,000,000.

C. $105,000,000.

D. $82,200,000.

E. $78,000,000.

[Refer to: 4-112]

Feedback: At a price of $9.75, Rochester Industries receives $76,200,000
($9.75 - 0.225) × 8,000,000 = $9.525 per share × 8,000,000 shares = $76,200,000

115. What is the profit to the investment banker it sells 8 million shares for $9.75 per share? 

A. Profit of $1,000,000.

B. Loss of $7,500,000.

C. Profit of $7,000,000.

D. Loss of $7,000,000.

E. Profit of $1,800,000.

[Refer to: 4-112]

Feedback: At a price of $9.75, the profit to the investment banker is unchanged since the compensation relies only on the number of shares sold.
$0.225 per share × 8,000,000 = $1,800,000

116. If the investment bank were able to sell all 10 million shares for $12.75 per share, how much money does Rochester Industries receive? 

A. $127,500,000.

B. $125,250,000.

C. $105,675,000.

D. $102,000,000.

E. $99,000,000.

[Refer to: 4-112]

Feedback: Rochester Industries would receive $125,250,000 if 10,000,000 shares were sold for $12.75 per share.
($12.75 - 0.225) × 10,000,000 = $12.525 per share × 10,000,000 shares = $125,250,000.

117. What would be the profit to the investment banker it were able to sell all 10 million shares for $12.75 per share? 

A. Profit of $2,250,000.

B. Loss of $7,500,000.

C. Profit of $7,500,000.

D. Loss of $3,000,000.

E. Profit of $3,750,000.

[Refer to: 4-112]

Feedback: The investment banker would earn $2.250.000
$0.225 per share × 10,000,000 shares = $2,250,000

An investment banker agrees to underwrite an issue of 5 million shares of stock for NetChoice, Inc. on a firm commitment basis. The investment banker pays $31.50 per share to NetChoice, Inc. for the 5 million shares of stock. It then sells those shares to the public for $30.00 per share.

[Reference: 4-118]

118. How much money does NetChoice, Inc. receive? 

A. $150,000,000.

B. $157,500,000.

C. $112,000,000.

D. $125,000,000.

E. $105,000,000.

[Refer to: 4-118]

Feedback: NetChoice will receive $157,500,000
$31.50 per share × 5,000,000 shares = 157,500,000

119. What is the profit (loss) to the investment banker? 

A. Profit of $7,500,000.

B. Profit of $2,000,000.

C. Profit of $7,000,000.

D. Loss of $7,500,000.

E. Loss of $2,000,000.

[Refer to: 4-118]

Feedback: The investment bank will lose $7,500,000
($30.00 - 31.50) × 5,000,000 = -$1.50 per share × 5,000,000 = ($7,500,000)

120. If the investment bank can sell the shares for $34 per share, how much money does NetChoice, Inc. receive? 

A. $150,000,000.

B. $157,500,000.

C. $112,000,000.

D. $125,000,000.

E. $105,000,000.

[Refer to: 4-118

Feedback: It is a firm commitment offering so regardless of what the public pays, NetChoice receives $31.50 per share,
$31.50 per share × 5,000,000 shares = $157,500,000

121. If the investment bank can sell the shares for $34 per share, what is the profit (loss) to the investment banker? 

A. Profit of $12,500,000.

B. Profit of $10,000,000.

C. Profit of $7,000,000.

D. Loss of $7,500,000.

E. Loss of $12,500,000.

[Refer to: 4-118]

Feedback: At $34 per share, the investment bank makes a profit of $12,500,000.
($34.00 - $31.50) × 5,000,000 = $2.50 per share × 5,000,000 shares = $12,500,000

 An investment banker agrees to underwrite an issue of 5 million shares of stock for NetChoice, Inc. on a best-efforts basis. The investment banker is able to sell 4.5 million shares for $31.00 per share and it charges NetChoice, Inc. $0.375 per share sold.

[Reference: 4-122]

122. How much money does NetChoice, Inc. receive? 

A. $139,500,500.

B. $137,812,500.

C. $155,000,000.

D. $153,125,000.

E. $105,000,000.

[Refer to: 4-114]

Feedback: NetChoice receives
($31.00 - $0.375) × 4,500,000 = $30.625 per share × 4,500,000 shares = $137,812,500

123. What is the profit to the investment banker if it is able to sell 4.5 million shares for $31 per share? 

A. Profit of $1,875,000.

B. Loss of $1,275,000.

C. Profit of $1,687,500.

D. Loss of $3,125,000.

E. Profit of $3,125,500.

[Refer to: 4-122]

Feedback: Profit to investment bank is $0.375 per share × $4,500,000 shares = $1,687,500

124. If the investment bank sells 4.5 million shares for $29 per share, how much money does NetChoice, Inc. receive? 

A. $145,000,000.

B. $130,500,000.

C. $143,125,000.

D. $128,812,500.

E. $115,762,500.

[Refer to: 4-122]

Feedback: At $29.00 per share NetChoice receives
($29.00 - $0.375) ×4,500,000 = $28.625 per share × 4,500,000 shares = $128,812,500

125. What is the profit to the investment banker it sells 4.5 million shares for $29 per share? 

A. Profit of $1,687,500.

B. Loss of $2,487,500.

C. Profit of $1,875,000.

D. Loss of $3,125,000.

E. Profit of $3,125,500.

[Refer to: 4-122]

Feedback: At a price of $29.00, the profit to the investment banker is unchanged since the compensation relies only on the number of shares sold.
$0.375 per share × 4,500,000 = $1,387,500

126. If the investment bank were able to sell all 5 million shares for $35, how much money would NetChoice, Inc. receive? 

A. $195,675,000.

B. $187,500,000.

C. $130,250,000.

D. $175,000,000.

E. $173,125,000.

[Refer to: 4-122]

Feedback: All 5 million shares sold for $35.00 per share would provide NetChoice $173,125,000
($35.00 - $0.375) × 5,000,000 = $34.625 × 5,000,000 = $173,125,000

127. What is the profit to the investment banker if all 5 million shares were sold for $35 per share? 

A. Profit of $1,275,000.

B. Loss of $1,875,000.

C. Profit of $1,875,000.

D. Loss of $3,125,000.

E. Profit of $3,125,500.

[Refer to: 4-122]

Feedback: The investment bank would receive $1,875,000
$0.375 per share × 5,000,000 shares = $1,875,000