1.

An initial public offering (IPO) occurs when a firm that is not currently publicly traded issues stock to the public.

Ans: True Level: Basic Subject: Initial Public Offerings Type: Concepts

2. An general cash offer is an offering of debt or equity securities to fewer than 40 investors.

Ans: False Level: Basic Subject: General Cash Offering Type: Concepts

3. More than half of new corporate debt issued is sold via a private placement.

Ans: True Level: Basic Subject: General Cash Offering Type: Concepts

4. The risk that new securities will be sold at a loss is transferred from the issuing firm to the underwriter in best efforts underwriting.

Ans: False Level: Basic Subject: Underwriters Type: Concepts

5. The Western Power Company, a regional electric utility, sells 500,000 shares of common stock to investors at large. This is most likely to be a "best efforts" offering.

Ans: False Level: Basic Subject: Best Efforts Type: Concepts

6. "Best efforts" underwriting is the most common type of underwriting in Canada.

Ans: False Level: Basic Subject: Best Efforts Type: Concepts

7. Empirical evidence suggests that, on average, the shares in initial public offerings have not been significantly underpriced.

Ans: False Level: Basic Subject: Underpricing Type: Concepts

8. According to the textbook, the market value of a firm's outstanding shares are most likely to fall upon the announcement of a new equity offering.

Ans: True Level: Basic Subject: Offerings and Firm Value Type: Concepts

9. According to the textbook, direct flotation costs and the offering size (as measured by gross proceeds) are positively related.

Ans: False Level: Basic Subject: Flotation Costs Type: Concepts

10. One of the drawbacks of a rights offering is that the price of the stock falls, harming existing stockholders.

Ans: False Level: Basic Subject: Rights Offerings Type: Concepts

11. All else equal, the greater the subscription price of shares in a rights offering, the smaller the number of rights needed to buy one new share.

Ans: False Level: Basic Subject: Rights Offerings Type: Concepts

12. Large rights offerings are more common in industrialized nations other than Canada.

Ans: True Level: Basic Subject: Rights Offerings Type: Concepts

13. Assuming a price greater than zero, it is virtually impossible to overprice a rights offer.

Ans: False Level: Basic Subject: Rights Offerings Type: Concepts

14. Historically, general cash offers have had average flotation costs higher than pure rights offerings.

Ans: True Level: Basic Subject: Rights Offerings Type: Concepts

15. The financing provided for start-up, often high-risk, private business enterprises is called:
A) Venture capital.
B) Junk bonds.
C) Flotation costs.
D) Initial public offerings.
E) Financial futures.

Ans: A Level: Basic Subject: Venture Capital Type: Definitions

16. The legal document describing details of the issuing corporation and its security offering to potential investors is called the ______________.
A) offering prospectus
B) tombstone advertisement
C) letter of comment
D) Regulation A statement
E) rights offering

Ans: A Level: Basic Subject: Prospectus Type: Definitions

17. Advertisements in, for example, The National Post announcing a corporation's public offering of securities, along with a list of the investment banks handling the offering,
are called:
A) Red herrings.
B) Tombstones.
C) Green Shoes.
D) Registration statements.
E) Letters of comment.

Ans: B Level: Basic Subject: Tombstone Type: Definitions

18. A corporation's first sale of equity made available to the public is called a(n):
A) Share repurchase program.
B) Shelf registration filing.
C) Private placement.
D) Seasoned equity offering (SEO).
E) Initial public offering (IPO).

Ans: E Level: Basic Subject: Initial Public Offerings Type: Definitions

19. ___________ is a stock or bond issue that is sold to the general public on a first come, first served basis.
A) An initial public offering
B) A rights offering
C) A general cash offering
D) A seasoned issue
E) A private issue

Ans: C Level: Basic Subject: General Cash Offering Type: Definitions

20. The investment banks that act as intermediaries between the company issuing securities and the investing public are called __________________.
A) privileged intermediaries
B) venture capitalists
C) underwriters
D) standby investors
E) primary investors

Ans: C Level: Basic Subject: Underwriters Type: Definitions

21. A group of underwriters formed to share the risk in marketing and distributing a sale of securities to the investing public is called a(n) __________________.
A) cartel
B) syndicate
C) cooperative venture capital system
D) oligopoly
E) insider consortium

Ans: B Level: Basic Subject: Underwriting Syndicate Type: Definitions

22. The difference between the underwriters' buying price and the offering price of the securities to the public is called the ________________.
A) spread
B) underpricing
C) filing fee
D) new issue premium
E) extortion premium

Ans: A Level: Basic Subject: Underwriting Spread Type: Definitions

23. Underwriting where the syndicate buys the entire issue from the issuing firm, assuming full financial responsibility for any unsold shares, is called a _____________
offering.
A) best efforts
B) shelf
C) direct rights
D) private placement
E) firm commitment

Ans: E Level: Basic Subject: Firm Commitment Offers Type: Definitions

24. Underwriting where the syndicate sells as much of the issue as possible, but can return unsold securities to the issuing firm without any further financial responsibility, is
called a:
A) Best efforts offering.
B) Shelf offering.
C) Direct rights offering.
D) Private placement offering.
E) Firm commitment offering.

Ans: A Level: Basic Subject: Best Efforts Type: Definitions

25. If an underwriter buys securities from an issuing firm and sells them directly to a small number of investors, the underwriter has
A) used best efforts underwriting
B) a bought deal
C) a firm commitment offer
D) a larger bid-ask spread on the securities
E) used regular underwriting to sell the securities

Ans: B Level: Basic Subject: Bought Deal Type: Definitions

26. The contract provision whereby the underwriting syndicate may, at their option, purchase additional securities from the issuing corporation at the initial offering price is
called (the) :
A) Regulation A.
B) Red herring provision.
C) Green Shoe provision.
D) Best efforts option.
E) Direct rights option.

Ans: C Level: Basic Subject: Overallotment Option Type: Definitions

27. The phenomenon where the price of newly-issued shares in the marketplace increases above the initial offering price is called ________________.
A) Green Shoe pricing
B) yield burning
C) yield bumping
D) underpricing
E) aftermarket support

Ans: D Level: Basic Subject: IPO Underpricing Type: Definitions

28. A public offering of securities where existing shareholders of the firm have the first opportunity to buy the new securities, exclusive from the general public, is called a:
A) Best efforts offer.
B) Firm commitment offer.
C) General cash offer.
D) Rights offer.
E) Red herring offer.

Ans: D Level: Basic Subject: Rights Offer Type: Definitions

29. The beginning of the period when stock trades in the market without a recently declared right is called the:
A) Pre-issue date.
B) Aftermarket.
C) Declaration date.
D) Holder-of-record date.
E) Ex-rights date.

Ans: E Level: Basic Subject: Ex-Rights Date Type: Definitions

30. The date on which existing shareholders are designated as the recipients of stock rights is called the:
A) Pre-issue date.
B) Offering date.
C) Declaration date.
D) Holder-of-record date.
E) Ex-rights date.

Ans: D Level: Basic Subject: Holder-Of-Record Date Type: Definitions

31. A rights offering in which the underwriting syndicate agrees to purchase the unsubscribed portion of the issue is called ________________.
A) standby underwriting
B) best efforts underwriting
C) firm commitments underwriting
D) direct fee underwriting
E) tombstone underwriting

Ans: A Level: Basic Subject: Standby Underwriting Type: Definitions

32. The privilege that allows (existing) shareholders to purchase unsubscribed shares in a rights offering at the subscription price is called the ______________ privilege.
A) standby
B) oversubscription
C) open offer
D) new issues
E) overallotment

Ans: B Level: Basic Subject: Oversubscription Privilege Type: Definitions

33. A loss in shareholder value, measured in terms of percentage ownership in the firm, market value of the firm, book value of equity, or earnings per share, is known as
_______________.
A) oversubscription
B) underpricing
C) dilution
D) rights pricing
E) downsampling

Ans: C Level: Basic Subject: Dilution Type: Definitions

34. Direct business loans from a limited number of investors to a corporation, with maturity typically ranging from one to five years, are called:
A) Private placements.
B) Debt SEOs.
C) Notes payable.
D) Debt IPOs.
E) Term loans.

Ans: E Level: Basic Subject: Term Loans Type: Definitions

35. Loans provided directly from a limited number of investors to a corporation, with maturities typically in excess of five years, are called:
A) Private placements.
B) Debt SEOs.
C) Notes payable.
D) Debt IPOs.
E) Term loans.

Ans: A Level: Basic Subject: Private Placements Type: Definitions

36. The capital provided to build a prototype is called ______ financing.

A) Private
 B) Mezzanine
C) First-stage
D) IPO
E) Secondary

Ans: C Level: Basic Subject: First-Stage Financing Type: Definitions

37. The term "introduction market" refers to:

A) The stage of financing where the new product is first presented to the public.
B) The importance of personal contacts in the venture capital market.
C) An exit strategy whereby the angel investors cash out of the business.
D) The first banking relationship a new firm establishes.
E) The first issue of securities to the public.

Ans: B Level: Basic Subject: Introduction Market Type: Definitions

38. A report given to potential investors that contains information about a security offering but does not include any pricing information is called a(n):
A) Registration statement.
B) SEC Regulation A publication.
C) Green Shoe.
D) Red herring.
E) Tombstone.

Ans: D Level: Basic Subject: Red Herring Type: Definitions

39. The first public offering of securities by a firm can be described as a(n):
A) Unseasoned rights offering.
B) Unseasoned cash offering.
C) Unseasoned Green Shoe.
D) Seasoned rights offering.
E) Seasoned cash offering.

Ans: B Level: Basic Subject: Unseasoned Cash Offering Type: Definitions

40. A type of underwriting where the firm receives the agreed-upon amount and the underwriter assumes all of the risk is called a _______underwriting.
A) Guaranteed
B) Green Shoe
C) Firm commitment
D) Red herring
E) Best efforts

Ans: C Level: Basic Subject: Firm Commitment Underwriting Type: Definitions

41. The decrease in the market price of the outstanding securities when new securities are issued is referred as the:
A) Float cost.
B) Abnormal return.
C) Spread.
D) Underpricing effect.
E) Tombstone effect.

Ans: B Level: Basic Subject: Abnormal Return Type: Definitions

42. The action that is based on the preemptive privilege that allows current shareholders to maintain their percentage ownership in a corporation is called a(n):
A) Rights offering.
B) Green Shoe provision.
C) Standby underwriting.
D) Oversubscription privilege.
E) Ex-right.

Ans: A Level: Basic Subject: Rights Offering Type: Definitions

43. First stage financing is also commonly known as ________________.

A) seed money
B) mezzanine level financing
C) balcony level financing
D) vulture capital
E) a university endowment fund

Ans: A Level: Basic Subject: Venture Capital Type: Concepts

44. Which of the following is true about gaining access to venture capital?
A) It is relatively easy to gain access to the venture capital market provided you have a good product.
B) Venture capitalists often choose their investments by reviewing unsolicited proposals.
C) The venture capital market is very much an "introduction" market; that is, you need personal contacts to gain access.
D) Venture capitalists rarely rely on informal networks of lawyers, accountants, and bankers to help identify potential investments.
E) If you wish to gain access to venture capital financing, it would likely do you little good to know someone who obtained venture capital themselves.

Ans: C Level: Basic Subject: Access To Venture Capital Type: Concepts

45. Which of the following is/are important in choosing a venture capitalist?

I. The financial strength of the venture capitalist.
II. References regarding how successful the venture capitalist has been in the past.
III. The venture capitalist's exit strategy.
A) I only
 B) I and III only
C) I and II only
D) II and III only
E) I, II, and III

Ans: E Level: Basic Subject: Choosing A Venture Capitalist Type: Concepts

46. Which of the following is correct about the steps a firm takes in issuing securities to the public?
A) Unless the number of authorized shares of common stock must be increased, management need not obtain approval from the board of directors
B) Management must file a preliminary prospectus with the OSC and to potential investors
C) While the OSC studies the proposal the company may begin selling shares
D) A red herring contains the final selling price of the securities
E) A final prospectus need not be delivered to purchasers if the investor received a red herring

Ans: B Level: Basic Subject: Issuing Securities Type: Concepts

47. Which of the following correctly describes the sequence of events in a new issue?
A) Distribution of "red herring"; approval of the board of directors; distribution of prospectus; sale of securities
B) Approval of the board of directors; distribution of prospectus; distribution of a "red herring"; sale of securities
C) Distribution of "red herring"; distribution of prospectus; approval of the board of directors; sale of securities
D) Approval of the board of directors; distribution of a "red herring"; distribution of prospectus; sale of securities
E) Approval of the board of directors; distribution of prospectus; sale of securities; distribution of a "red herring"

Ans: D Level: Basic Subject: New Issue Type: Concepts

48. Which of the following is a characteristic of an IPO?

A) They are usually sold as a private placement.
B) Small issues are predominately sold on a firm commitment basis.
C) The general form of offer is a rights offering.
D) IPOs are typically overpriced.
E) Determination of the correct offering price is relatively difficult.

Ans: E Level: Basic Subject: Initial Public Offerings Type: Concepts

49. All of the following terms EXCEPT ___________ could be associated with an initial public offering of common stock.
A) tombstone
B) red herring
C) preliminary prospectus
D) holder-of-record date
E) underpricing

Ans: D Level: Basic Subject: Initial Public Offerings Type: Concepts

50. To reduce repetitive filing requirements for new issues by large companies, the OSC offers the __________ that allows companies that meet the criteria to produce only a
short prospectus when issuing securities.
A) tombstone
B) red herring
C) preliminary prospectus
D) prompt offering prospectus
E) seasoned herring

Ans: D Level: Basic Subject: POP (prompt offering prospectus) Type: Concepts

51. Which of the following is true about underwriting securities?

A) The issuing firm, not the underwriter, bears all the risk from adverse price movements in a firm commitment sale.
B) The method of marketing securities to the public is usually specified by the issuing firm, not the underwriter.
C) The issuing firm, not the underwriter, will generally set the price for the offering.
D) The spread earned by the underwriter is the difference between the price the underwriter pays for the security and the offering price of the security.
E) It is common for a number of underwriters to form a syndicate so that the risk in marketing a security issue falls on the lead underwriter.

Ans: D Level: Basic Subject: Underwriters Type: Concepts

52. Each of the following is sometimes performed by underwriters EXCEPT:

A) They stand ready to take up the slack if some of the shares in a best-efforts offering are not purchased
B) They purchase and resell extra shares from the issuer in an oversubscribed offering
C) They spread the risk of issuing the securities by forming a syndicate
D) They provide advice to the issuing firm
E) They act as an intermediary between the company selling the securities and the investing public

Ans: A Level: Basic Subject: Underwriters Type: Concepts

53. In ________ the risk of selling an issue falls to the underwriting syndicate.
A) firm commitment underwriting
B) best efforts underwriting with a green shoe provision
C) best efforts underwriting
D) initial public offerings
E) a general cash offer

Ans: A Level: Basic Subject: Firm Commitments Type: Concepts

54. The underwriter's compensation in a firm commitment issue is/are

A) up-front, direct fees
B) the spread
C) the amount by which the shares are underpriced
 D) fees earned from joining the syndicate
E) only the income earned on the Green Shoe provision

Ans: B Level: Basic Subject: Firm Commitments Type: Concepts

55. Which of the following is correct regarding Green Shoe provisions?

A) They rarely exist in either debt or equity offerings.
B) They typically expire 30 days after the issue date.
C) They typically involve at least 115% of the newly-issued shares.
D) They are a benefit to the firm and a cost to the underwriting syndicate.
E) They allow the lead underwriter to purchase additional shares at the offer price, but the remaining members of the syndicate must pay the going market price.

Ans: B Level: Basic Subject: Green Shoe Provision Type: Concepts

56. If the underwriter wishes to have the option to make additional profits if an IPO is oversubscribed, they may ask that the underwriting contract contain a _________.
A) protective covenant
B) tombstone clause
C) preemptive right provision
D) Regulation A provision
E) Green Shoe provision

Ans: E Level: Basic Subject: Green Shoe Provision Type: Concepts

57. Recently, an underwriter completed a sale of stock in an over-subscription. The underwriter can purchase additional shares at the offering price less fees and commissions
if there is
A) a red herring
B) a Green Shoe provision
C) an aftermarket
D) a registration period
E) a moratorium

Ans: B Level: Basic Subject: Overallotment Option Type: Concepts

58. Which of the following is true about IPOs?

A) there is a moral hazard problem
B) there is not a moral hazard problem
C) their sale in the marketplace is stable
D) the underpricing is usually small (e.g., 1%)
E) IPOs are not underpriced if best efforts is used by the underwriter

Ans: A Level: Basic Subject: Moral Hazard Type: Concepts

59. Which of the following parties will likely benefit the most from the overpricing of a new, IPO common stock issue handled on a firm-commitment basis?
A) Existing bondholders
B) The underwriter
C) New shareholders who purchase stock during the aftermarket
D) The issuing firm
E) New shareholders who purchase stock from the underwriting syndicate

Ans: D Level: Basic Subject: Underpricing Type: Concepts

60. Which of the following is true if new shares are sold at an offering price that is too low? (Assume a firm commitment offering. )
A) Underwriters suffer a financial loss because they are less likely to be able to sell all of the shares offered.
B) Markets in general suffer because this is a misallocation of scarce resources.
C) Investors in general suffer a financial loss because they purchase shares at a price less than their true value.
D) Investors in general suffer because the more underpriced offerings there are, the less likely additional IPOs will follow.
E) The shareholders of the issuing firm suffer an opportunity loss because shares were sold at less than their true value.

Ans: E Level: Basic Subject: Underpricing Type: Concepts

61. A rationale for the underpricing of "penny stocks" is

A) they must be underpriced to compensate investors for risk
B) all stocks have a subscription price of $20
C) they are not underpriced
D) they don't pay dividends
E) that when they are issued, dilution effects lower the share price

Ans: A Level: Basic Subject: Small Capitalization Stocks Type: Concepts

62. Bob tells his broker to buy 100 shares of stock in every IPO that comes along, regardless of the issuer, because he has heard about the tremendous price increases in the
first week of trading. Bob will likely:
A) Lose money, on average, because the most underpriced issues will likely be oversubscribed.
B) Make money, on average, because underwriters typically underprice new issues.
C) Lose money, on average, because he will tend to get few shares from overpriced issues.
D) Make money, on average, because issues tend to be oversubscribed, allowing him to cover his losses on bad purchases.
E) Make money, on average, because it is unlikely an IPO's price will ever decline.

Ans: A Level: Basic Subject: Winner's Curse Type: Concepts

63. Empirical evidence suggests that the market price of a firm's existing shares are most likely to decline upon the announcement of a new equity issue. Which of the
following have been advanced as possible explanations for this phenomenon?
I. Issuing new equity requires the firm to incur substantial issue costs.
II. An equity issue is a signal that the firm may have too little liquidity.
III. Management will issue equity only when it believes that existing shares are undervalued.
 A) I only
B) III only
C) I and II only
D) II and III only
E) I, II, and III

Ans: C Level: Basic Subject: Offerings and Firm Value Type: Concepts

64. Which of the following is a reason why the stock price of a firm might drop when a seasoned equity issue is announced?
A) Managers know the stock is overvalued, so they are selling it while the price is low
B) Issuing new equity may indicate the firm has too little debt or excess liquidity
C) Stockholders are just acknowledging the fact that if the firm were to issue debt instead, existing shareholders would have to share the gain with the new investors
D) It is expensive to issue securities and stockholders are just recognizing the loss in value the firm will incur by paying out this money
E) There may be a simple supply and demand problem, that is, the additional share will be in great demand and price usually drops when demand rises

Ans: D Level: Basic Subject: Equity Issues & Price Drops Type: Concepts

65. The legal fees paid by a firm are a(n) ___________ of issuing securities.
A) direct cost
B) spread cost
C) abnormal return
D) indirect cost
E) Green Shoe option cost

Ans: A Level: Basic Subject: Issuance Costs Type: Concepts

66. The direct costs of issuing equity include which of the following?
A) Underpricing
B) Filing fees
C) Green Shoe option
D) Costs of management time spent working on the new issue
E) Abnormal returns

Ans: B Level: Basic Subject: Issue Costs Type: Concepts

67. Which of the following is NOT a cost of issuing securities

A) legal fees, filing fees, taxes
B) losses related to underpricing
C) the spread
D) losses on share value one year after the issue
E) abnormal returns on seasoned offerings

Ans: D Level: Basic Subject: Costs Of Issuing Type: Concepts

68. Which of the following is/are accurate regarding the costs of issuing securities?
I. Substantial economies of scale exist as related to issuance size.
II. Underpricing for firm commitment offers is typically larger than for best efforts.
III. The costs of underpricing can exceed direct issuance costs.
IV. The total costs involved with seasoned issues are typically higher than for IPOs.
A) I and III only
B) II and IV only
C) I, II, and III only
D) III and IV only
E) I, II, III, and IV

Ans: A Level: Basic Subject: Issuance Costs Type: Concepts

69. ____________ considered an indirect flotation cost.

A) The underwriter's spread is
B) Underpricing is
C) Filing fees are
D) Legal fees are
E) Taxes incurred as a result of the issue are

Ans: B Level: Basic Subject: Indirect Flotation Costs Type: Concepts

70. The direct costs of issuing equity include all EXCEPT which of the following?
A) Underpricing
B) Taxes
C) Spread
D) Filing fees
E) Legal fees

Ans: A Level: Basic Subject: Issue Costs Type: Concepts

71. In Air Canada's 1989 second public offering, shareholders who purchased securities
A) lost 24%
B) gained 24%
C) had favourable long-term performance
D) were overpriced by 24%
E) were the result of a rights offering

Ans: B Level: Basic Subject: Air Canada Type: Concepts

72. To finance expansion into Japan, General Motors sells 1,000,000 shares of common stock to investors at large. This is an example of a(n)
A) private placement
B) seasoned new issue
C) rights offer
D) Regulation A offering
E) initial public offering

Ans: B Level: Basic Subject: Seasoned New Issue Type: Concepts

73. You hear on the news that an underwriter is participating in an equity issue on a standby basis. Thus, you know this must be a(n) ______________.
A) rights offering
B) IPO
C) seasoned offering
D) cash offering
E) firm commitment offering

Ans: A Level: Basic Subject: Rights Offerings Type: Concepts

74. If a firm's articles of incorporation contains ___________, the firm is required to complete all seasoned equity sales via a rights offering.
A) a privileged subscription
B) a Green Shoe provision
C) an overallotment option
D) a preemptive right
E) a restrictive covenant

Ans: D Level: Basic Subject: Rights Offerings Type: Concepts

75. Which of the following regarding rights offerings is false?

A) Pure rights offerings are typically cheaper than other types of offers.
B) Rights offerings protect the proportionate interest of existing stockholders.
C) Rights offerings protect against underpricing.
D) Shareholders that choose not to participate in the offering cannot sell their rights to others.
E) The price drop in a rights offering can be greater than in a cash offering.

Ans: D Level: Basic Subject: Rights Offerings Type: Concepts

76. As an existing shareholder you have the right to participate in a privileged subscription. This gives you the ability to do each of the following EXCEPT:
A) Maintain your percentage ownership in the firm.
B) Sell some of your rights to another party.
C) Receive the rights even after you have sold the stock, provided you sell before the holder-of-record date.
D) Exercise your rights and then sell the new stock you just acquired.
E) Incur a loss of wealth if you let your rights expire unexercised.

Ans: C Level: Basic Subject: Rights Offerings Type: Concepts

77. Before executing a rights offering, management should address each of the following EXCEPT:
A) How much less than the existing stock price should the subscription price be set
B) How many shares will each stockholder be required to buy
C) How many shares have to be sold
D) What will the rights offering do to the price of the existing stock
E) How much money needs to be raised by the offering

Ans: B Level: Basic Subject: Rights Offerings Type: Concepts

78. In a rights offering, the price of a share will drop by approximately the value of a right on the _____________ date.
A) standby
B) record
C) announcement
D) expiration
E) ex-rights

Ans: E Level: Basic Subject: Ex-Rights Pricing Type: Concepts

79. In a rights offering, existing shares begin to trade ex-rights four trading days _____________.
A) prior to the holder-of-record date
B) after the announcement date
C) prior to the announcement date
D) after the holder-of-record date
E) prior to the expiration date

Ans: A Level: Basic Subject: Ex-Rights Trading Type: Concepts

80. You own 7.5% of the stock in IBME Corporation. IBME is planning to issue new shares of stock in the near future via a rights offering. From your background in
corporate finance you realize that you will experience a(n) ___________ as a result of the issue if you sell your rights.
A) loss of wealth
B) dilution of book value
C) increase in shares
D) dilution of percentage ownership
E) dilution of relative purchasing power

Ans: D Level: Basic Subject: Rights Offering & Dilution Type: Concepts

81. Which of the following is NOT a type of dilution that may be associated with new equity offerings?
A) Dilution of book value.
 B) Dilution of market value.
C) Dilution of proportionate ownership.
D) Dilution of earnings per share.
E) Dilution of venture capital.

Ans: E Level: Basic Subject: Dilution Type: Concepts

82. Which of the following is/are considered to be private debt?

I. Private placements
II. General cash offers
III. Term loans
IV. Venture capital
A) I only
B) II only
C) III only
D) I and III only
E) I, II, III, and IV

Ans: D Level: Basic Subject: Long-Term Debt Type: Concepts

83. From the viewpoint of the borrower, an advantage of the issuance of private debt over the issuance of public debt is ______________.
A) that public debt is likely to have fewer restrictive covenants
B) public debt avoids the cost of OSC registration
C) private debt typically has lower distribution costs
D) that it is easier for issuers and security holders to negotiate, in the event of default, in the case of public debt than it is with private debt
E) that the interest rate on privately placed debt is usually higher than that on public debt

Ans: C Level: Basic Subject: Long-Term Debt Type: Concepts

84. Which of the following are correct statements concerning venture capitalists?
I. Venture capital firms generally pool funds from various sources.
II. Venture capitalists tend to be long-term investors.
III. Venture capitalists tend to avoid involvement in the actual running of a business.
IV. Venture capitalists are often given a 40% share in the firm's equity.
A) I only
B) I and IV only
C) II and IV only
D) I, II, and III only
E) I, III, and IV only

Ans: B Level: Intermediate Subject: Venture Capitalist Type: Concepts

85. Which of the following are differences between direct private long-term debt financing and public issues of debt?
I. Direct placements are less likely to have restrictive covenants
II. Registration costs are lower for direct placements
III. Direct placements are limited to a total value of $10 million
IV. It is easier to renegotiate a term loan or private placement in the event of a default.
A) I only
B) II and IV only
C) I and IV only
D) I, II, and III only
E) I, II, III, and IV

Ans: B Level: Intermediate Subject: Direct Placements vs. Public Issues Type: Concepts

86. A seasoned equity offering:

A) Must be a cash offer.
B) Must be a private offering.
C) Involves the sale of treasury stock.
D) Involves the issuance of new shares.
E) Involves venture capitalists.

Ans: D Level: Basic Subject: Seasoned Equity Offering Type: Concepts

87. Which of the following are given as reasons why many IPOs are underpriced?
I. To counteract the winner's curse
II. To help prevent lawsuits against underwriters
III. To reward large institutional investors
IV. To meet the Regulation A requirements of the OSC
A) II and III only
B) I and II only
C) II, III, and IV only
D) I, II, and III only
E) I, II, III, and IV

Ans: D Level: Intermediate Subject: Unerpriced IPOs Type: Concepts

88. Which of the following are costs of a secondary equity offering?

I. Spread
II. Underpricing
III. Green shoe option
IV. Indirect expenses
A) I and IV only
B) II and IV only
 C) I, III, and IV only
D) I, II, and IV only
E) I, II, III, and IV

Ans: C Level: Intermediate Subject: Secondary Equity Offering Type: Concepts

89. Which one of the following is correct about security offerings?

A) One of the costs of an IPO is the abnormal return.
B) The underwriting spread tends to be a constant percentage regardless of the offering size.
C) The costs of selling equity are less than the costs of selling debt.
D) The Green Shoe option covers overallotments at the market price.
E) There are economies of scale in both equity and bond offerings.

Ans: E Level: Intermediate Subject: Security Offerings Type: Concepts

90. A publicly traded firm has decided to issue 1 million new shares of common stock at the current market price of $10 per share. An underwriting syndicate pays the firm
$9.3 million for the entire issue and then markets the shares at $10 each. This is an example of a(n):
A) Indirect cost.
B) Lock-up agreement pricing.
C) Firm commitment underwriting.
D) A best-efforts underwriting.
E) An underpricing situation.

Ans: C Level: Intermediate Subject: Firm Commitment Underwriting Type: Concepts

91. The option to purchase shares of newly issued stock in order to maintain your current ownership percentage is done:
A) By placing a subscription agreement with the lead underwriter.
B) By placing a standing order with your personal broker to buy shares at the offer price.
C) Through a rights offering as set forth by the preemptive rights provision in the articles of incorporation.
D) Through an options process as agreed to by the shareholders in a special proxy vote.
E) Through the transfer agent as set forth in the Green Shoe provision of the articles of incorporation.

Ans: C Level: Intermediate Subject: Rights Type: Concepts

92. The Tindy Co. has set a record date of Friday, July 22 for their rights offering. What is the ex-rights date?
A) Monday, July 18
B) Tuesday, July 19
C) Wednesday, July 20
D) Friday, July 22
E) Monday, July 25

Ans: A Level: Basic Subject: Ex-Rights Date Type: Concepts

93. Wilson Enterprises set a record date of Tuesday, March 16 for their rights offering. Which one of the following statements is correct given this information?
A) Investors who purchase shares on Friday, March 12 will receive rights on shares.
B) The ex-rights date is Thursday, March 11.
C) The ex-rights date is Sunday, March 14.
D) The first date to purchase shares ex-rights is Monday, March 15.
E) The last date to purchase shares cum rights is Tuesday, March 9.

Ans: E Level: Intermediate Subject: Ex-Rights Date Type: Concepts

94. Jon owns 12,000 shares of Do it Write, Inc. The shares are currently priced at $27 a share. Jon just received a rights offering with a price of $23 plus 4 rights. Jon would
like to purchase 4,000 shares of this new offering. To do this, Jon should:
A) Exercise his entire offer that will give him the total shares he desires.
B) Request an oversubscription of 4,000 shares at the offer price.
C) Exercise his entire option and wait for another offer to buy the balance of the shares he desires.
D) Exercise his entire option and oversubscribe for 1,000 shares.
E) Exercise his entire option and agree to a standby underwriting.

Ans: D Level: Intermediate Subject: Oversubscription Privilege Type: Concepts

95. Which one of the following statements concerning private debt is correct?
A) It is more expensive to issue private debt than public debt.
B) Private debt often is more restrictive than public debt.
C) It is easier to renegotiate public debt than it is private debt.
D) Private placements have shorter maturity periods than term loans.
E) Private debt tends to have lower interest rates than public debt.

Ans: B Level: Intermediate Subject: Debt Type: Concepts

96. Which one of the following statements is correct about a rights offering?
A) If the rights are selling at a price equal to their actual value, then a shareholder will neither win nor lose by selling their rights.
B) If the market price of a right is less than the actual value of the right, then shareholders can gain by selling their rights in the open market.
C) When the market price of a right is equal to the actual value of the right the shareholders will gain by exercising their rights.
D) If the market price of a right is greater than the actual value of the right, then shareholders can gain by purchasing additional rights in the marketplace and exercising
those rights.
E) If both the market price of the right and the market price of the stock are underpriced compared to their ex-right values, then an investor is guaranteed a profit if they
purchase additional rights.

Ans: A Level: Intermediate Subject: Rights Offering Type: Concepts

97. Which one of the following statements comparing debt versus equity offerings is correct?
A) Debt offerings are more expensive due to the indenture agreement.
 B) Debt offerings dilute ownership more than equity offerings do.
C) Debt offerings are more likely to be privately placed than equity offerings.
D) Equity registrations require an indenture agreement.
E) Equity offerings must be registered with the OSC, whereas debt offerings do not.

Ans: C Level: Intermediate Subject: Debt Versus Equity Offerings Type: Concepts

98. Which one of the following statements concerning a prospectus is correct?

A) The purpose of a prospectus is to provide information to potential investors.
B) The preliminary prospectus, or red herring, must contain the price at which the security will be issued.
C) The prospectus generally does NOT discuss the use of the funds raised by the offering.
D) The prospectus shows the minimum expected return investors should expect from an investment in the offered shares.
E) A prospectus is not required if the offering is only for debt securities.

Ans: A Level: Intermediate Subject: Prospectus Type: Concepts

99. The number of rights required to purchase one share is computed as the _____ price plus rights equivalent in number to the number of:
A) Market; shares offered divided by the number of outstanding shares.
B) Market; outstanding shares divided by the number of shares offered.
C) Option; shares offered divided by the number of outstanding shares.
D) Subscription; shares offered divided by the number of outstanding shares.
E) Subscription; outstanding shares divided by the number of shares offered.

Ans: E Level: Intermediate Subject: Number Of Rights Type: Concepts

100. The primary purpose of a standby underwriting is to:

A) Ensure that all investors who desire shares in the offering are able to purchase them.
B) Guarantee that a secondary underwriter can fulfill the responsibilities of the primary underwriter should the primary underwriter be unable to fulfill its obligations to
the issuer.
C) Have additional shares of stock registered with the OSC in case of an oversubscription.
D) Ensure the issuer sells the entire offering of securities.
E) Allow the market price to be adjusted downward if needed to sell the desired number of shares.

Ans: D Level: Intermediate Subject: Standby Underwriting Type: Concepts

101. The BB Drum Co. recently raised several million dollars in an initial public offering. BB received $22 per share from the underwriter, the offering price was $25 per
share, and the market price rose to $28 on the first day of trading. The spread paid by BB was _______.
A) 12.0%
B) 13.6%
C) 24.0%
D) 27.3%
E) 28.0%

Ans: B Level: Basic Subject: Underwriting Spread Type: Problems

102. The BangBang Drum Company recently raised several million dollars in an initial public offering. BangBang received $22 per share from the underwriter, the offering
price was $25 per share, and the market price rose to $28 on the first day of trading. The initial return investors earned on the stock was _______.
A) 12.0%
B) 13.6%
C) 24.0%
D) 27.3%
E) 30.0%

Ans: A Level: Basic Subject: Initial Return Type: Problems

103. A firm faces direct costs of 8% of the amount of cash raised for new security sales. How much capital needs to be raised if initial project outlays total $6 million?
A) $5.520 million
B) $6.480 million
C) $6.522 million
D) $6.640 million
E) $6.750 million

Ans: C Level: Basic Subject: Financing Needs Type: Problems

104. A firm faces direct costs of 8% of the amount of cash raised for new security sales. If $6 million needs to be raised for a new project, what is the total dollars of flotation
costs?
A) $0
B) $480,000
C) $521,739
D) $542,726
E) $750,000

Ans: C Level: Basic Subject: Flotation Costs Type: Problems

105. A firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $10 million via a rights offering. The subscription price is $100 per share. How
many rights are required to purchase one of the new shares?
A) 0.1
B) 1.2
C) 2.0
D) 4.8
E) 8.0

Ans: E Level: Basic Subject: Number Of Rights Needed Type: Problems

106. A firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What
is the value of a right?
A) $2.00
B) $3.33
C) $4.00
D) $6.67
E) $20.00

Ans: B Level: Basic Subject: Value Of A Right Type: Problems

107. A firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What
is the ex-rights price?
A) $100.00
B) $113.33
C) $115.50
D) $116.67
E) $120.00

Ans: D Level: Basic Subject: Ex-Rights Price Type: Problems

108. A firm has 800,000 shares outstanding at a market price of $120 a share. It wants to raise $16 million via a rights offering. The subscription price is $100 per share. What
will the firm be worth after the offering?
A) $96.0 million
B) $98.4 million
C) $105.0 million
D) $112.0 million
E) $115.8 million

Ans: D Level: Basic Subject: Market Value Of The Firm Type: Problems

109. TOYSrYOU plans to raise $8 million in a rights offering. If management sets the subscription price at $2 per share and the current market price is $2.50 per share, how
many shares need to be sold in the rights offering?
A) 1,000,000
B) 1,666,667
C) 2,800,000
D) 3,200,000
E) 4,000,000

Ans: E Level: Basic Subject: Shares In A Rights Offering Type: Problems

110. TOYSrYOU needs to raise $5 million in a rights offering. If the subscription price is $10 per share, the stock price is $12.50 per share, and there are 4 million shares
outstanding, how many rights are required to purchase one of the new shares?
A) 0.1
B) 4.8
C) 8.0
D) 1.2
E) 2.0

Ans: C Level: Basic Subject: Number Of Rights Needed Type: Problems

111. TOYSrYOU needs to raise $5 million in a rights offering. If the subscription price is $10 per share, the stock price is $12.50 per share, and there are 4 million shares
outstanding, what is the value of a right?
A) $0.14
B) $0.28
C) $1.04
D) $2.50
E) $5.00

Ans: B Level: Basic Subject: Value Of A Right Type: Problems

112. TOYSrYOU needs to raise $5 million in a rights offering. If the subscription price is $10 per share, the stock price is $12.50 per share, and there are 4 million shares
outstanding, what will the stock sell for ex-rights?
A) $7.50
B) $11.46
C) $12.22
D) $12.36
E) $12.50

Ans: C Level: Basic Subject: Ex-Rights Price

Use the following to answer questions 113-117:

Classique, Inc., a manufacturer of reproduction parts for classic automobiles, needs to raise $2 million via a rights offering. The subscription price is $2 per share. The firm
currently has 2 million shares outstanding, and the current market price per share is $6.

113. How many rights are required to purchase one share?

A) 1
B) 2
C) 4
D) 5
E) 10

Ans: B Level: Basic Subject: Rights Needed Type: Problems

114. What is the value of a right?
A) $0.75
B) $0.98
C) $1.17
D) $1.33
E) $5.99

Ans: D Level: Basic Subject: Value Of A Right Type: Problems

115. What is the ex-rights price of the firm's stock?

A) $2.00
B) $4.67
C) $4.83
D) $5.25
E) $6.00

Ans: B Level: Basic Subject: Ex-Rights Price Type: Problems

116. What will the firm be worth following the rights offering?
A) $12.00 million
B) $14.00 million
C) $15.25 million
D) $16.50 million
E) $18.00 million

Ans: B Level: Basic Subject: Market Value of a Firm Type: Problems

117. Assume that Classique decides to set the subscription price at $4 rather than $2. Now what will the value of a right be? (Assume all other information remains the same.)
A) $0.25
B) $0.40
C) $0.80
D) $1.20
E) $2.50

Ans: B Level: Basic Subject: Value Of A Right Type: Problems

118. A company has decided to raise $20 million in capital by issuing 500,000 new shares of common stock in a rights offering. Currently there are 1.5 million shares
outstanding. What will each current shareholder have to provide to purchase one share of this new offering?
A) $13.33 plus .33 rights
B) $13.33 plus 3 rights
C) $30.00 plus .33 rights
D) $40.00 plus .33 rights
E) $40.00 plus 3 rights

Ans: E Level: Intermediate Subject: Rights Offering Type: Problems

119. A shareholder currently owns 500 shares of ABC. Each share is currently priced at $15. The company has just released a rights offering at $12 plus 4 rights. What is the
value of one right?
A) $0.25
B) $0.60
C) $.072
D) $1.50
E) $3.00

Ans: B Level: Intermediate Subject: Rights Offering Type: Problems

120. The Wisdom Company has 1.5 million shares of common stock outstanding at a market price of $15. The company has just announced a rights offering that requires
$11.00 plus 3 rights to purchase one share. What is the value of one right?
A) $1
B) $2
C) $3
D) $4
E) $5

Ans: A Level: Intermediate Subject: Rights Offering Type: Problems

121. Tomas currently owns 300 shares of APP, Inc. that have a total market value of $5,460. What will the value of his total holdings be if he exercises the rights offer he just
received of $14 plus 2 rights.
A) $5,780
B) $6,300
C) $7,560
D) $8,130
E) $9,660

Ans: C Level: Intermediate Subject: Rights Offering Type: Problems

122. Dr. Doodle wants to raise $18 million through a rights offering. The offering has a subscription price of $9, the current market price is $11, and there are 6 million shares
outstanding. How many rights are required to purchase one of the new shares?
A) 2
B) 3
C) 4
D) 5
E) 6
 Ans: B Level: Basic Subject: Number Of Rights Required Type: Problems

123. Mister Noodle wants to raise $24 million though a rights offering. The current market price of the stock is $18, the subscription price is $16, and there are 4 million shares
of stock outstanding. How many shares need to be sold in the rights offering?
A) 1.33 million
B) 1.50 million
C) 2.67 million
D) 3 million
E) 6 million

Ans: B Level: Basic Subject: Number Of Shares In Rights Offering Type: Problems

124. Tell-Al, Inc. has 8 million shares of common stock outstanding at a market price of $22. The company has just announced a rights offering for $27 million at a
subscription price of $18. What is the ex-rights price?
A) $20.00
B) $20.88
C) $21.02
D) $21.37
E) $21.76

Ans: D Level: Intermediate Subject: Ex-Rights Price Type: Problems

125. The Purple Nickel is seeking to raise $8 million though a rights offering. Two rights will be required to purchase each new share of stock. Currently, there are 1.6 million
shares outstanding at a market price of $12 per share. What is the ex-rights price?
A) $11.00
B) $11.33
C) $11.50
D) $11.58
E) $11.77

Ans: B Level: Intermediate Subject: Ex-Rights Price Type: Problems

126. The Green Hornet wants to raise $25 million in a rights offering. The stock price is $48 a share, the subscription price is $40 a share, and there are 4 million shares
outstanding. What is the value of one right?
A) $0.97
B) $1.03
C) $1.08
D) $1.11
E) $1.33

Ans: C Level: Intermediate Subject: Value Of A Right Type: Problems

127. Southern Tier Express has 6 million shares outstanding at a market price as of today, July 25, of $18 a share. They also have a $40 million rights offering at a subscription
price of $10, a record date of July 15, and a market price of $3.10 per right. Janet currently owns 100 shares of Southern Tier Express stock. Which one of the following
actions should Janet take if she feels bearish about the stock for the long-term?
A) Purchase 300 additional rights on the open market, exercise all of her rights, and then sell all of her shares on the open market.
B) Sell her 100 shares ex-rights plus sell her rights on the open market
C) Sell her shares cum-rights in the open market
D) Sell her rights on the open market and retain her 100 shares of stock
E) Do nothing with the rights offering.

Ans: A Level: Challenge Subject: Rights Arbitrage Opportunity Type: Problems

128. The Sour Pickle Company has 1.6 million shares of common stock outstanding, a current total book value of $48 million, and a current market value of $64 million.
Angelina owns 5,000 shares of stock in the Sour Pickle Company. The company is in the process of issuing an addition 16,000 shares of common stock at the market price
to pay a fine recently imposed on them by the government. The issuance of the new shares will not affect company revenues, costs, or total market value. Current
shareholders have a preemptive right. Assume there are no costs associated with the stock offering and that Angelina does not participate in the new stock offering. Which
of the following statements are true concerning this situation?
I. The new book value will be $30.10 a share.
II. The new book value of Angelina's shares will be $148,500.
III. The market value of the common stock should decline to $39.60 a share.
IV. Angelina's ownership of the company after the new offering will be 0.31%.
A) I and IV only
B) II and III only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, III, and IV

Ans: D Level: Challenge Subject: Dilution Type: Problems

129. The Big Burger Co. has 225,000 shares of stock outstanding at a market price of $45. If the firm issues another 25,000 shares at a price of $40, what will happen to the
market price of the stock?
A) Decrease by 1%
B) Decrease by 3%
C) Decrease by 10%
D) Decrease by 11%
E) Decrease by 12.5%

Ans: A Level: Intermediate Subject: Dilution Type: Problems

130. The Mighty K Co. needs $14 million to finance a new project. The company plans to issue new shares of common stock at a price of $19 per share to fund this project.
The underwriting fee is 7%. How many new shares of stock must company issue?
A) 688,637
B) 788,421
 C) 789,098
D) 792,303
E) 801,357

Ans: D Level: Intermediate Subject: Flotation Costs Type: Problems

131. Fun 'N Fast Games needs $21 million to finance their latest venture. The company plans to fund this project by issuing new shares of common stock at a market price of
$46 a share. The indirect costs of the issue are $85,000, the direct costs are $900,000, and the underwriting spread is 7.5%. How many shares of stock must Fun 'N Fast
issue to fully fund their venture?
A) 480,168
B) 513,780
C) 516,686
D) 519,307
E) 521,033

Ans: C Level: Intermediate Subject: Flotation Costs Type: Problems

132. A firm has 1.6 million shares outstanding at a book value of $4.31 a share. The earnings per share are $0.32 and the price-earnings ratio is 24. What is the market-to-book
ratio?
A) 1.64
B) 1.78
C) 1.83
D) 1.88
E) 1.92

Ans: B Level: Intermediate Subject: Market-To-Book Ratio Type: Problems

133. You place an order with your broker to purchase 1,000 shares of the next two IPOs to be offered. Rumor has it that one of them will be overpriced by $3 and the other will
be underpriced by $4. The offer price on both is $20. Any issue that is underpriced will only be half filled. What is your expected dollar return on these two IPOs?
A) -$2,000
B) -$1,000
C) 0
D) $1,000
E) $2,000

Ans: B Level: Intermediate Subject: IPO Underpricing Type: Problems

Use the following to answer questions 134-137:

Happy Jax, Inc. currently has 12 million shares of common stock outstanding, no preferred stock, and no debt. The book value per share is $22 and the market price per share is
$16. Current net income is $130,000. The company needs $38 million to fund a new distribution warehouse which will improve net income by $65,000 each year. Assume the
price-earnings ratio remains constant and that the new equity is issued to fund the warehouse project.

134. What is the book value per share after the new issue is completed?
A) $21.01
B) $22.69
C) $23.75
D) $24.83
E) $25.17

Ans: A Level: Intermediate Subject: Book Value Per Share Type: Problems

135. What will the earnings per share be after the new issue is completed?
A) $0.012
B) $0.014
C) $0.015
D) $0.016
E) $0.018

Ans: B Level: Intermediate Subject: Earnings Per Share Type: Problems

136. What is the market price of one share of stock after the new issue is completed?
A) $13.99
B) $14.29
C) $14.73
D) $15.06
E) $16.00

Ans: E Level: Intermediate Subject: Stock Price Type: Problems

137. What is the market-to-book ratio after the new shares of stock are issued?
A) .70
B) .76
C) .88
D) 1.43
E) 1.47

Ans: B Level: Intermediate Subject: Market To Book Ratio Type: Problems

138. What are the pros and cons of using a venture capitalist?
Ans: The primary advantage of using a venture capitalist is to gain access to the capital required for firm growth, when traditional capital funding sources may be closed to
the firm. In addition, a venture capitalist assists in the management of the firm, providing industry experience and expertise, and may provide valuable contacts for
suppliers and/or customers of the firm. A major drawback of using a venture capitalist is that the owners must give up a substantial fraction of their ownership in the
firm.
 Level: Intermediate Subject: Venture Capital Pros And Cons Type: Essays

139. The text lists five key considerations in choosing a venture capitalist. List and briefly explain four of these.
Ans: The five listed in the text are: financial strength, style, references, contacts, and exit strategy.

Level: Intermediate Subject: Venture Capital Considerations Type: Essays

140. Describe the basic procedure for a new issue. Do you think the OSC plays an important role in the new issue process?
Ans: Students are first asked to recite the material in section 15.2. The question then becomes more interesting. Just what does the OSC do? Better students will include
some discussion of ensuring the accuracy of the information provided to investors, and perhaps touch on market efficiency.

Level: Intermediate Subject: New Issue Process Type: Essays

141. What would be wrong with eliminating the OSC from the security-issuance process?
Ans: The question asks students to imagine how new issues would occur in a world without the OSC. This leaves things wide open and really challenges students to
employ economic reasoning. Would the quality of information provided to investors decline? Would firms find it worthwhile to misrepresent themselves? Would
private "rating/certification" agencies for new equity issues arise? The possibilities for expansion of this question are endless.

Level: Intermediate Subject: OSC Type: Essays

142. Suppose you are the chief financial officer of a small computer software development firm. Your firm needs $10 million to exploit investment opportunities that will
allow it to retain its position in the software market. What type(s) of security(ies) might be most appropriate for your firm? What type(s) of offerings might be most
appropriate? (Assume your firm is past the venture capital stage. )
Ans: Better students will recognize that this firm is likely to (A) be in the early stages of its life-cycle, (B) entail a significant amount of risk, and (C) consist primarily of
"non-equipment" assets (patents, human capital, etc.). As such, common equity is probably called for. Other issues that might be addressed include (A) is the firm
currently publicly traded? (the question doesn't specify), (B) is loss of control a fear?, (C) is it more appropriate to use a "best efforts" rather than a "firm
commitment" offering?, and (D) will the market be receptive to yet another software firm?

Level: Intermediate Subject: New Issue Process Type: Essays

143. Why is it so difficult to determine the appropriate price for an IPO? Who do you think has the most input: the issuing firm, the underwriter, or investors? Explain.
Ans: It is impossible to accurately determine the market value of something that is not yet traded. While the issuing firm surely impacts the general offering price,
ultimately the investors determine the acceptable price range via their submitted orders to the underwriters.

Level: Challenge Subject: Pricing An IPO Type: Essays

144. One argument that explains why IPOs are underpriced, on average, is that underwriters underprice issues to avoid being sued by angry customers. Why, then, shouldn't
you indiscriminately buy shares of stock in every IPO that comes out?
Ans: This is a relatively easy question requiring students to know that even though IPOs are underpriced, on average, the more underpriced the issue, the more likely it is
the issue will be oversubscribed). By buying indiscriminately, the investor will experience the winner's curse of buying only the full amount in undersubscribed issues.
Furthermore, much of the average positive returns on IPOs is attributable to small, speculative issues. By averaging the returns, it obscures the fact that investors can
and do lose money on IPOs.

Level: Challenge Subject: IPO Underpricing Type: Essays

145. Why might a firm consider raising equity via a rights offering rather than via a general cash offer? What are the disadvantages? If you are a stockholder in the firm, which
would you prefer?
Ans: The major advantage to the firm with a rights offering is the lower level of flotation costs, which can result in especially significant savings if an underwriter is not
employed. Arguments against using rights include: 1. underwriters increase the stock price, 2. underwriters provide insurance against failed offerings, 3. the
proceeds from a cash offer will be available sooner than with a rights offer, 4. underwriters provide a wider distribution of ownership, and 5. consulting advice from
underwriters may be beneficial. None of these provides a complete explanation for why rights offerings are used so little in Canada. As for the shareholder, a rights
offer causes no financial harm unless the shareholder fails to exercise or sell their rights. The shareholder benefits due to the lower issuance costs for the firm, along
with the right to protect their proportionate ownership interest in the firm.

Level: Challenge Subject: Rights Offerings Type: Essays

146. Why do you think debt offerings are more common than equity offerings and typically much larger as well?
Ans: For one thing, debt offerings are much cheaper. For another, debt matures and must be replaced, while equity does not. Furthermore, it is much easier to determine
the selling price for debt than it is for selling equity.

Level: Challenge Subject: Debt vs. Equity Type: Essays

147. Considering that issuing debt is cheaper than issuing equity; that debt is a less expensive form of financing; and that debt issues tend to be larger in size, why do firms
have secondary equity offerings? Why not just issue debt securities once the IPO is complete?
Ans: This question should get students to compare and contrast debt versus equity securities based on their overall understanding of a firm's financial structure. One
primary factor that should be mentioned is that debt must be repaid while equity is a more permanent form of financing. Also, current debt may have established
parameters within the indenture agreement on the amount of additional debt that can be acquired. As with any situation, some debt tends to increase profits but there is
a saturation point above which debt becomes too burdensome and leads to bankruptcy.

Level: Intermediate Subject: Debt Offerings Type: Essays