Questions Chapter 16

1) TOYSrYOU needs to raise $5 million. If the subscription price is $10, the stock price is $12.50, and there are
4,000,000 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
[A] :You need to review this computation in section 16.8.
[B] :You need to review this computation in section 16.8.
[C] :You are correct!
[D] :You need to review this computation in section 16.8.
[E] :You need to review this computation in section 16.8.

2) In _____ the risk of selling an issue falls on 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
[A] :You are correct!
[B] :In this form of offering the underwriting syndicate merely does its best to sell the securities, returning unsold
securities to the issuing firm. Review section 16.4.
[C] :In this form of offering the underwriting syndicate merely does its best to sell the securities, returning unsold
securities to the issuing firm. Review section 16.4.
[D] :Where the risk falls depends on the type of underwriting involved. Review section 16.4.
[E] :In spite of the fact that there is a general cash offer, where the risk falls depends on the type of underwriting
involved. Review section 16.4.

3) A general cash offer is an offering of debt or equity securities to fewer than 40 investors.
[A] True
[B] False
[A] :Private placements and private equity issues usually refer to offerings of debt and equity securities, respectively,
to fewer than 35 investors. Review section 16.3.
[B] :You are correct!

4) Which of the following is (are) correct regarding flotation costs?

I. On average, there are substantial economies of scale in issuing securities.
II. The costs of issuing debt securities are greater than the costs of issuing equity securities.
III. On average, it costs more to float a seasoned offering than an IPO.
IV. Convertible bonds are cheaper to issue than straight bonds.
[A] I only
[B] IV only
[C] I and IV only
[D] I, II, and IV only
[E] II and III only
[A] :You are correct!
[B] :Straight bonds are cheaper than convertible bonds to issue. Review section 16.7.
[C] :Straight bonds are cheaper than convertible bonds to issue. Review section 16.7.
[D] :At least one of these options is incorrect. Review section 16.7.
[E] :Neither of these options is correct. Review section 16.7.

5) An initial public offering (IPO) occurs when a firm that is not currently publicly traded issues stock to the public.
[A] True
[B] False
[A] :You are correct!

[B] :If the firm were already publicly traded, how could it have an initial public offering? Review section 16.3.

6) The underwriter's primary form of compensation in a firm commitment issue is the:

[A] up-front, direct fees.
[B] spread.
[C] amount by which the shares are underpriced.
[D] fees earned from joining the syndicate.
[E] income earned on the Green Shoe provision.
[A] :While these might be involved, they are not the primary means of compensation in this form of public offering.
Review section 16.4.
[B] :You are correct!
[C] :The underwriter must sell at the offering price and, therefore, does not capture the underpricing as profit. Review
section 16.4.
[D] :While these might be involved, they are not the primary means of compensation in this form of public offering.
Review section 16.4.
[E] :Underwriter compensation is greater than that earned via a Green Shoe provision. Review section 16.4.

7) According to the textbook, the market value of a firm's outstanding shares will most likely fall upon the
announcement of a new equity offering.
[A] True
[B] False
[A] :You are correct!
[B] :This is one of the costs of issuing new shares of stock. Review section 16.6.

8) Venture capitalists usually do not actively participate in running the firm.

[A] True
[B] False
[A] :They typically require active participation in the day-to-day activities of the firm. Review section 16.1.
[B] :You are correct!

9) Venture capitalists frequently hold voting preferred stock giving them various priorities in the event the company is
sold or liquidated.
[A] True
[B] False
[A] :You are correct!
[B] :In particular, preferred stock places them ahead of the existing common shareholders in the event of a sale or
liquidation. Review section 16.1.

10) The direct costs of issuing equity include which one 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
[A] :This is not a direct cost. Review section 16.7.
[B] :You are correct!
[C] :This is not a direct cost. Review section 16.7.
[D] :This is not a direct cost. Review section 16.7.
[E] :This is not a direct cost. Review section 16.7.

11) Which one 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 shares 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 sales of the firm must be declining if new equity sales need to
be sold.
[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 shares will be in great demand and
prices usually drop when demand rises.
[A] :If the stock is overvalued then they would be selling when the price is high, not low. Review section 16.6.
[B] :Issuing new equity may indicate the firm has too much debt or too little liquidity. Review section 16.6.
[C] :The firm could be selling shares because sales are increasing and the firm needs funds for expansion. Review
section 16.6.
[D] :You are correct!
[E] :Additional shares are more likely to lead to an oversupply of shares and a corresponding price drop. Review
section 16.6.

12) Which of the following statements accurately described actions performed by underwriters?
I. They stand by, ready to take up the slack if some of the shares in a best-efforts offering are not purchased.
II. They purchase and resell extra shares from the issuer in an oversubscribed offering.
III. They spread the risk of issuing the securities by forming a syndicate.
IV. They stand ready to repurchase shares from the investing public during the aftermarket.
[A] I, II, and III only
[B] II, III, and IV only
[C] I, III, and IV only
[D] I, II, and IV only
[E] I, II, III, and IV
[A] :At least one of these choices is incorrect. Review section 16.4.
[B] :You are correct!
[C] :At least one of these choices is incorrect. Review section 16.4.
[D] :At least one of these choices is incorrect. Review section 16.4.
[E] :At least one of these choices is incorrect. Review section 16.4.

13) Which one of the following statements is correct for the following public, interstate issues?
[A] Cindy, Co. must file only a brief offering statement with the SEC for its $6 million, 10-year bond issue.
[B] Zybit Co. must file only a brief offering statement with the SEC for its $5.75 million equity issue.
[C] Kismet, Inc. need not file an offering statement with the SEC for its $7 million, 6 month bond issue.
[D] Calamity, Inc. need not file with the SEC for its private placement issue (20 investors) of $5.5 million in long-term
bonds and public issue of $6.25 million in equity.
[E] Bullet, Inc. need not file an offering statement with the SEC if it sells its $6 million equity issue to fewer than 40
investors.
[A] :Since this is a large long-term bond issue, a brief statement cannot be used. Review section 16.2.
[B] :Since the issue size exceeds $1.5 million, a brief statement cannot be used. Review section 16.2.
[C] :You are correct!
[D] :Since the equity issue is so large, a brief statement cannot be used. Review section 16.2.
[E] :If there were fewer than 35 investors, this response would be correct. Review section 16.2.

14) The BangBang Drum Company recently raised several million dollars in an initial public offering. BangBang
received $22.00 per share from the underwriter, the offering price was $25.00 per share, and the market price rose to
$28.00 on the day of the offering. The initial return investors earned on the stock was _____ percent.
[A] 12.0
[B] 13.6
[C] 24.0
[D] 27.3
[E] 30.0
[A] :You are correct!
[B] :You need to review this computation in section 16.7.
[C] :You need to review this computation in section 16.7.
[D] :You need to review this computation in section 16.7.
[E] :You need to review this computation in section 16.7.

15) More than half of new corporate debt issued is sold via a private placement.
[A] True
[B] False
[A] :You are correct!
[B] :This is the most common method of issuing new corporate debt. Review section 16.10.

16) Before executing a rights offering, management should address which of the following questions?
I. How much less than the existing stock price should the subscription price be?
II. How many shares will each stockholder be required to buy?
III. What will the rights offering do to the price of the existing stock?
IV. How much money needs to be raised by the offering?
[A] I and IV only
[B] II, III, and IV only
[C] I, II, and IV only
[D] I, III, and IV only
[E] I, II, III, and IV
[A] :Shouldnt they also want to know how the current stock price will be affected? Review section 16.8.
[B] :The company cannot require any stockholder to buy additional shares. Review section 16.8.
[C] :The company cannot require any stockholder to buy additional shares. Review section 16.8.
[D] :You are correct!
[E] :The company cannot require any stockholder to buy additional shares. Review section 16.8.

17) At each stage of financing for a firm, the value of the founder's stake typically grows and the probability of
success rises.
[A] True
[B] False
[A] :You are correct!
[B] :Obtaining financing as the firm grows requires the firm to have an increasing chance of survival. Review section
16.1.

18) Which of the following statements are correct concerning the costs of issuing securities?
I. Substantial economies of scale exist based on issuance size.
II. The costs of issuing debt are generally less than the costs of issuing equity.
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] II, III, and IV only
[E] I, II, III, and IV
[A] :Correct, but there is at least one more correct option. Review section 16.7.
[B] :At least one of these responses is incorrect. Review section 16.7.
[C] :You are correct!
[D] :At least one of these responses is incorrect. Review section 16.7.
[E] :At least one of these responses is incorrect. Review section 16.7.

19) Security issues of less than $5 million are exempted from SEC registration because they:
[A] do not need approval from the board of directors.
[B] are exempt from the Securities Exchange Act of 1934.
[C] are exempt by the Green Shoe provision.
[D] governed by SEC Regulation A.
[E] are exempt from the Securities Act of 1933.
[A] :These small issues still must be approved by the board of directors. Review section 16.2.
[B] :While this act relates to SEC registrations, it does not specifically exempt small issues from the registration
requirements. Review section 16.2.
[C] :This relates to public offerings but does not exempt small issues from the registration requirements. Review
section 16.2.

[D] :You are correct!

[E] :While this act relates to SEC registrations, it does not specifically exempt small issues from the registration
requirements. Review section 16.2.

20) Which of the following statements regarding the issuance of securities to the public are correct?
I. The first step in issuing new securities is to obtain the approval of the board of directors.
II. The price of a share of stock will drop immediately after the stock goes ex-rights.
III. A tombstone is an advertisement used by underwriters to convey information about a new public offering.
IV. For some small or short-term bond issues it may not be necessary to file a registration statement with the SEC.
[A] I and III only
[B] II and III only
[C] I, II, and IV only
[D] II, III, and IV only
[E] I, II, III, and IV
[A] :Correct, but there is at least one more correct option. Review section 16.2.
[B] :Correct, but there is at least one more correct option. Review section 16.2.
[C] :A tombstone is an advertisement used by underwriters to announce a public offering. Review section 16.2.
[D] :Securities can not be issued without the approval of the board. This is the first step. Review section 16.2.
[E] :You are correct!

21) _____ is an agreement in which the shareholders are allowed to purchase the unsubscribed portion of a rights
issue at the subscription price.
[A] Standby underwriting
[B] Firm commitment underwriting
[C] Best efforts underwriting
[D] A Green Shoe provision
[E] An oversubscription privilege
[A] :This agreement requires the underwriter to purchase the unsubscribed portion of the rights offering. Review
section 16.8.
[B] :This term does not relate to rights offerings. Review section 16.8.
[C] :This term does not relate to rights offerings. Review section 16.8.
[D] :This term does not relate to rights offerings. Review section 16.8.
[E] :You are correct!

22) Large rights offerings are more common in industrialized nations other than the U.S.
[A] True
[B] False
[A] :You are correct!
[B] :This is a part of the rights offering puzzle. Review section 16.8.

23) Which one of the following correctly describes a difference between privately placed and publicly offered debt
issues?
[A] Private placements must be registered with the SEC.
[B] Public issues are likely to have more restrictive covenants.
[C] Public issues are typically easier to renegotiate during financial distress.
[D] Costs are typically lower for private placements.
[E] A private issue may be shelf registered while a public issue may not.
[A] :Unlike public issues, private placements need not be registered with the SEC. Review section 16.10.
[B] :Public issues are likely to have fewer restrictive covenants than private issues. Review section 16.10.
[C] :Public issues are typically more difficult to renegotiate during financial distress since there are more parties to
deal with than in a private placement. Review section 16.10.
[D] :You are correct!
[E] :Private issues cannot be shelf registered, public issues can. Review section 16.10.

24) A firm faces direct costs of 8.0% of the amount of cash raised in financing a new project. How much 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
[A] :You need to review this computation in section 16.7.
[B] :You need to review this computation in section 16.7.
[C] :You are correct!
[D] :You need to review this computation in section 16.7.
[E] :You need to review this computation in section 16.7.

25) Best efforts underwriting is the most common type of underwriting in the United States.
[A] True
[B] False
[A] :Firm commitment underwriting is the most popular method of issuing new securities. Review section 16.4.
[B] :You are correct!

26) The BB Drum Company recently raised several million dollars in an initial public offering. BB received $22.00 per
share from the underwriter, the offering price was $25.00 per share, and the market price rose to $28.00 on the day
of the offering. The spread paid by BB was _____ percent.
[A] 12.0
[B] 13.6
[C] 24.0
[D] 27.3
[E] 28.0
[A] :You are correct!
[B] :You need to review this computation in section 16.7.
[C] :You need to review this computation in section 16.7.
[D] :You need to review this computation in section 16.7.
[E] :You need to review this computation in section 16.7.

27) Which one of the following correctly describes the sequence of events in a new issue?
[A] filing of registration statement; approval of the board of directors; distribution of prospectus; sale of securities
[B] approval of the board of directors; distribution of prospectus; filing of a registration statement; sale of securities
[C] filing of registration statement; distribution of prospectus; approval of the board of directors; sale of securities
[D] approval of the board of directors; filing of a registration statement; distribution of prospectus; sale of securities
[E] approval of the board of directors; distribution of prospectus; sale of securities; filing of a registration statement
[A] :At a minimum, approval from the board of directors must be received before any of the other actions can be
taken. Review section 16.2.
[B] :The registration statement must be filed before the prospectus can be distributed. Review section 16.2.
[C] :At a minimum, approval from the board of directors must be received before any of the other actions can be
taken. Review section 16.2.
[D] :You are correct!
[E] :At a minimum, the sale of securities comes last. Review section 16.2.

28) Which of the following is NOT a type of dilution potentially 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
[A] :This is a type of dilution that can be linked to new equity offerings. Review section 16.9.
[B] :This is a type of dilution that can be linked to new equity offerings. Review section 16.9.
[C] :This is a type of dilution that can be linked to new equity offerings. Review section 16.9.
[D] :This is a type of dilution that can be linked to new equity offerings. Review section 16.9.
[E] :You are correct!

29) Which of the following are direct costs of issuing securities?

I. legal fees related to the issuance of the securities
II. management time spent working on the securities issue
III. the decrease in the price of existing shares when additional shares are issued
IV. the gross spread
[A] I and III only
[B] II and IV only
[C] I and IV only
[D] II and III only
[E] I and II only
[A] :At least one of these choices is incorrect. Review section 16.7.
[B] :At least one of these choices is incorrect. Review section 16.7.
[C] :You are correct!
[D] :At least one of these choices is incorrect. Review section 16.7.
[E] :At least one of these choices is incorrect. Review section 16.7.

30) Which of the following are qualifications required for a firm to use Rule 415?
I. The issuer must not have had a violation of the Securities Act of 1934 in the past two years.
II. The company must be rated investment grade.
III. The aggregate market value of the firm's outstanding stock must be more than $150 million.
IV. The firm cannot have defaulted on its debt in the past three years.
[A] I only
[B] II only
[C] II, III and IV
[D] I and III only
[E] I, II, III, and IV
[A] :This response would be correct if it said three years rather than two. Review section 16.11.
[B] :Correct, but there is at least one more correct option. Review section 16.11.
[C] :You are correct!
[D] :At least one of these responses is incorrect. Review section 16.11.
[E] :At least one of these responses is incorrect. Review section 16.11.

31) You presently 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. You will experience a(n) _____ as a result of the issue if you sell your rights.
[A] loss of wealth
[B] dilution of your book value
[C] increase in the number of shares you own
[D] dilution of your percentage of ownership
[E] dilution of your relative purchasing power
[A] :If market prices are rational, you should not lose money if you sell the rights. Review section 16.8.
[B] :Book value dilution does not depend on whether or not you sell your rights. Review section 16.9.
[C] :If you sell your rights, you give up the option of acquiring additional shares at the subscription price. Review
section 16.8.
[D] :You are correct!
[E] :There is no dilution of relative purchasing power involved in selling rights. Review section 16.8.

32) Empirical evidence indicates that, upon the announcement of a new equity offering, the market value of the
issuing firm's outstanding debt _____, while the market value of its common stock_____:
[A] changes very little; rises.
[B] falls; rises.
[C] changes very little; falls.
[D] rises; changes very little.
[E] rises; falls.
[A] :At least one of these responses is incorrect. Review section 16.6.
[B] :Both of these responses are incorrect. Review section 16.6.
[C] :You are correct!
[D] :Both of these responses are incorrect. Review section 16.6.
[E] :At least one of these responses is incorrect. Review section 16.6.

33) 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 after issue. Bob will most 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 fall.
[A] :You are correct!
[B] :He will lose money, on average. Review section 16.5.
[C] :He will lose money, on average, but not for this reason. Review section 16.5.
[D] :He will lose money, on average. Review section 16.5.
[E] :He will lose money, on average. Review section 16.5.

34) A registration statement becomes effective _____ days following its filing with the SEC unless the SEC sends a
letter of comment suggesting changes.
[A] 10
[B] 20
[C] 30
[D] 40
[E] 50
[A] :This is not the correct number of days. Review section 16.2.
[B] :You are correct!
[C] :This is not the correct number of days. Review section 16.2.
[D] :This is not the correct number of days. Review section 16.2.
[E] :This is not the correct number of days. Review section 16.2.

35) Historically, general cash offers have had average flotation costs higher than pure rights offerings.
[A] True
[B] False
[A] :You are correct!
[B] :Rights offerings are typically the cheapest way to issue stock. Review section 16.8.

36) The _____ allows shareholders to purchase unsubscribed shares at the subscription price in a rights offering.
[A] overallotment provision
[B] take-out provision
[C] Green Shoe provision
[D] standby agreement
[E] oversubscription privilege
[A] :This term does not relate to a rights offering. Review section 16.8.
[B] :This term does not relate to a rights offering. Review section 16.8.
[C] :This term does not relate to a rights offering. Review section 16.8.
[D] :This term relates to the right of the underwriter to buy the unsubscribed portion of the offering. Review section
16.8.
[E] :You are correct!

37) The _____ is the difference between the price the issuing firm receives for its securities and the offer price.
[A] initial return
[B] abnormal return
[C] Green Shoe option
[D] spread
[E] seed money
[A] :The initial return relates to the period after the shares have been issued and begin trading, not the transaction
that occurs before the shares are issued. Review section 16.4.
[B] :The abnormal return relates to the period after the shares have been issued and begin trading, not the
transaction that occurs before the shares are issued. Review section 16.4.

[C] :This term does not fit this definition. Review section 16.4.
[D] :You are correct!
[E] :This relates to venture capital financing and does not relate to the deal between the underwriter and the issuing
firm. Review section 16.4.

38) A bond issue is considered private if it is sold to no more than _____ investors.
[A] 10
[B] 34
[C] 36
[D] 49
[E] 50
[A] :This cutoff point is too small. Review section 16.3.
[B] :You are correct!
[C] :This cutoff point is too large. Review section 16.3.
[D] :This cutoff point is too large. Review section 16.3.
[E] :This cutoff point is too large. Review section 16.3.

39) _____will cause an existing investor in a firm to lose value as a result of the firm issuing new securities.
[A] A rights offering
[B] A Green Shoe provision
[C] Dilution
[D] When a stock goes ex-rights, it
[E] An underwriter spread that is too small
[A] :As long as the investor exercises the rights or sells them, there is no loss of value in a rights offering. Review
section 16.8.
[B] :Whether or not a Green Shoe provision causes an investor to lose value is debatable. There is a better choice.
Review section 16.4.
[C] :You are correct!
[D] :As long as the investor exercises the rights or sells them, there is no loss of value in a rights offering. Review
section 16.8.
[E] :A small spread will harm the underwriter, not the investor. Review section 16.7.

40) _____ is an agreement in which the underwriter is legally bound only to attempt to sell the securities in a public
offering for the firm.
[A] Standby underwriting
[B] Best efforts underwriting
[C] Firm commitment underwriting
[D] A Green Shoe provision
[E] An oversubscription privilege
[A] :This term relates only to rights offerings and does not relate to who bears the risk of selling the shares in an
offering. Review section 16.4.
[B] :You are correct!
[C] :In this type of offering, the underwriter agrees to purchase the entire issue of a public offering and then attempts
to resell the issue. Review section 16.4.
[D] :The Green Shoe provision does not relate to who bears the risk of selling the securities in an offering. Review
section 16.4.
[E] :This term relates only to rights offerings and does not relate to who bears the risk of selling the shares in an
offering. Review section 16.4.

41) As an existing shareholder you have the right to participate in a privileged subscription that gives you the ability to
do each of the following EXCEPT:
[A] maintain your percentage of ownership.
[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 ex-rights 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.
[A] :Rights offerings allow you to maintain your percentage of ownership. Review section 16.8.
[B] :Rights offerings allow you to sell some of your rights to another party. Review section 16.8.
[C] :You are correct!

[D] :Rights offerings allow you to exercise your rights and then sell the new stock you just acquired. Review section
16.8.
[E] :In a rights offering you will incur a loss of wealth if you let your rights expire unexercised. Review section 16.8.

42) Which one of the following statements concerning underwriting is correct?

[A] The issuing firm, not the underwriter, bears all of 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 company, not the underwriter, will generally set the price for a security issue.
[D] The spread, or income received by the underwriter, is the difference between the price paid by the investor and
the price the underwriter pays for 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.
[A] :This statement would be true for a best efforts sale. Review section 16.4.
[B] :The underwriter usually determines the marketing strategy. Review section 16.4.
[C] :It is usually the underwriter that sets the price. Review section 16.4.
[D] :You are correct!
[E] :The syndicate is formed to share the risk, not to focus it on one party. Review section 16.4.

43) Venture capitalists are generally not long-term investors.

[A] True
[B] False
[A] :You are correct!
[B] :Venture capitalists try to invest in firms that will provide them with a reasonably early exit so that they can then
invest in other new firms. Review section 16.1.

44) A firm has 800,000 shares outstanding, selling for $120 a share. It wants to raise $16,000,000 via a rights
offering. The subscription price is $100 a share. What is the ex-rights price?
[A] $100.00
[B] $113.33
[C] $116.50
[D] $116.67
[E] $120.00
[A] :You need to review this computation in section 16.8.
[B] :You need to review this computation in section 16.8.
[C] :You need to review this computation in section 16.8.
[D] :You are correct!
[E] :You need to review this computation in section 16.8.

45) Empirical evidence suggests that the market price of a firm's existing shares will most likely fall upon the
announcement of a new equity issue. Which of 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
[A] :Correct, but there is at least one more correct option. Review section 16.6.
[B] :They will likely only issue equity when they believe the shares are overvalued, not undervalued. Review section
16.6.
[C] :You are correct!
[D] :At least one of these responses is incorrect. Review section 16.6.
[E] :At least one of these responses is incorrect. Review section 16.6.

46) Which one of the following statements is correct concerning IPOs?

[A] An IPO is usually sold as a private placement.
[B] Small issue IPOs are predominately sold on a firm commitment basis.
[C] The general form of offer for an IPO is a rights offer.
[D] IPOs are typically overpriced.
[E] The determination of the initial price for an IPO is relatively difficult.
[A] :If it were private, it wouldn't be an initial public offering. Review section 16.3.
[B] :Small issues are predominately sold on a best efforts basis. Review section 16.4.
[C] :The general form is a cash offer. Review section 16.8.
[D] :IPOs are typically underpriced. Review section 16.5.
[E] :You are correct!

47) If a firm plans a public issue of new securities but needs the money at different stages over the coming two years,
the firm may be a candidate for a:
[A] shelf registration.
[B] private placement.
[C] rights offering.
[D] firm commitment underwriting.
[E] multiplex cash offering.
[A] :You are correct!
[B] :This is not a public issue. Review section 16.11.
[C] :This financing comes all at once, not over a period of two years. Review section 16.11.
[D] :This financing comes all at once, not over a period of two years. Review section 16.11.
[E] :There is no such type of offering. Review section 16.11.

48) 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 2,000,000 shares outstanding, and the current
market price per share is $6. What is the value of a right?
[A] $0.75
[B] $0.98
[C] $1.17
[D] $1.33
[E] $5.99
[A] :You need to review this computation in section 16.8.
[B] :You need to review this computation in section 16.8.
[C] :You need to review this computation in section 16.8.
[D] :You are correct!
[E] :You need to review this computation in section 16.8.

49) You hear on the news that an underwriter is participating in an equity issue on a standby basis. You know the
type of offer must be a(n) _____ offer.
[A] rights
[B] initial public
[C] seasoned
[D] cash
[E] firm commitment
[A] :You are correct!
[B] :There is no standby underwriting with this type of offer. Review section 16.8.
[C] :This response begs the question of how the seasoned offer is carried out, such as whether it is a cash offering
or a rights offering. There is a better response. Review section 16.8.
[D] :There is no standby underwriting with this type of offer. Review section 16.8.
[E] :There is no standby underwriting with this type of offer. Review section 16.8.

50) The option giving the underwriter the ability to purchase additional shares of stock at the offer price is called:
[A] a shelf registration.
[B] a Green Shoe provision.
[C] dilution.
[D] standby underwriting.

[E] a firm commitment offering.

[A] :This is not the correct definition of a shelf registration. Review sections 16.4 and 16.11.
[B] :You are correct!
[C] :This is not the correct definition of dilution. Review sections 16.4 and 16.9.
[D] :This is not the correct definition of standby underwriting. Review section 16.4.
[E] :This is not the correct definition of a firm commitment offering. Review section 16.4.

51) Which of the following terms are generally associated with an initial public offering of common stock?
I. tombstone
II. red herring
III. preliminary prospectus
IV. underpricing
[A] I and III only
[B] II and IV only
[C] I, III, and IV only
[D] I, II, and III only
[E] I, II, III, and IV
[A] :Correct, but there is at least one more correct option. Review sections 16.2 and 16.5.
[B] :Correct, but there is at least one more correct option. Review sections 16.2 and 16.5.
[C] :Red herring is another name for a preliminary prospectus. Review section 16.2.
[D] :Arent most IPOs underpriced? Review section 16.5.
[E] :You are correct!

52) _____, the underwriter agrees to purchase the entire issue of a public offering, and then attempts to resell the
issue.
[A] In standby underwriting
[B] In firm commitment underwriting
[C] In best efforts underwriting
[D] By exercising a Green Shoe provision
[E] By exercising an oversubscription privilege
[A] :This term relates only to rights offerings and does not relate to who bears the risk of selling the shares in an
offering. Review section 16.4.
[B] :You are correct!
[C] :In this case, the underwriter only sells what it can and returns the rest of the shares to the issuer. Review section
16.4.
[D] :The Green Shoe provision does not relate to who bears the risk of selling the securities in an offering. Review
section 16.4.
[E] :This term relates only to rights offerings and does not relate to who bears the risk of selling the shares in an
offering. Review section 16.4.

53) One of the drawbacks of a rights offering is that the price of the stock falls, harming existing stockholders.
[A] True
[B] False
[A] :The existing stockholders receive valuable rights that make up for the drop in stock price. Review section 16.8.
[B] :You are correct!

54) According to the textbook, direct flotation costs and the offering size (as measured by gross proceeds) are
positively related.
[A] True
[B] False
[A] :This answer implies there are no economies of scale in issuing securities. Review section 16.7.
[B] :You are correct!

55) _____ is defined as an issue of securities offered for sale to the general public on a cash basis.
[A] An initial public offering

[B] A rights offering

[C] A general cash offering
[D] A seasoned issue
[E] A private issue
[A] :This is not the correct definition of an initial public offering. Review section 16.5.
[B] :This is not the correct definition of a rights offering. Review section 16.8.
[C] :You are correct!
[D] :This is not the correct definition of a seasoned issue. Review section 16.3.
[E] :This is not the correct definition of a private issue. Review section 16.3.

56) More than _____ percent of all debt is issued privately.

[A] 5
[B] 10
[C] 25
[D] 50
[E] 75
[A] :You need to review the facts regarding issuance of long-term debt in section 16.10.
[B] :You need to review the facts regarding issuance of long-term debt in section 16.10.
[C] :You need to review the facts regarding issuance of long-term debt in section 16.10.
[D] :You are correct!
[E] :You need to review the facts regarding issuance of long-term debt in section 16.10.

57) _____ considered an indirect flotation cost.

[A] The underwriter's spread is
[B] Time spent by management is
[C] Filing fees are
[D] Legal fees are
[E] Taxes incurred as a result of the issue are
[A] :This is a direct flotation cost. Review section 16.7.
[B] :You are correct!
[C] :These are a direct flotation cost. Review section 16.7.
[D] :These are a direct flotation cost. Review section 16.7.
[E] :These are a direct flotation cost. Review section 16.7.

58) 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 over allotment option
[D] a preemptive right
[E] a restrictive covenant
[A] :A rights offering is called a privileged subscription, so this term does not relate to the articles of incorporation.
Review section 16.8.
[B] :A Green Shoe provision relates to the deal between the underwriter and the issuer and does not relate to the
articles of incorporation. Review section 16.8.
[C] :An over allotment option relates to the deal between the underwriter and the issuer and does not relate to the
articles of incorporation. Review section 16.8.
[D] :You are correct!
[E] :Restrictive covenants relate to bonds, not stocks. Review section 16.8.

59) 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 2,000,000 shares outstanding, and the current
market price per share is $6. What will the firm be worth following the rights offering?
[A] $12.00 million
[B] $14.00 million
[C] $16.25 million
[D] $16.50 million
[E] $18.00 million

[A] :You need to review this computation in section 16.8.

[B] :You are correct!
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You need to review this computation in section 16.8.

60) A shelf registration allows a company to issue securities over a period of up to two years rather than all at once.
[A] True
[B] False
[A] :You are correct!
[B] :This is the primary benefit of executing a shelf offering. Review section 16.11.

61) Financing for new, often high-risk companies is called:

[A] venture capital.
[B] an initial public offering.
[C] a private placement.
[D] a term loan.
[E] a seasoned issue.
[A] :You are correct!
[B] :This type of financing is typically not available for a new, high-risk company. Review section 16.1.
[C] :This type of financing is typically not available for a new, high-risk company. Review section 16.1.
[D] :This type of financing is typically not available for a new, high-risk company. Review section 16.1.
[E] :Typically, new, high-risk companies are not publicly traded so a seasoned offering is impossible. Review section
16.1.

62) 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 2,000,000 shares outstanding, and the current
market price per share is $6. How many rights are required to purchase one share?
[A] 1
[B] 2
[C] 4
[D] 5
[E] 10
[A] :You need to review this computation in section 16.8.
[B] :You are correct!
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You need to review this computation in section 16.8.

63) Recently, an underwriter completed a sale of stock in an under-subscribed IPO. Since then, the stock's price has
dropped 10%. If the stock is still in the _____ period, the principal underwriter may buy shares to support the market
price.
[A] Red Herring
[B] aftermarket
[C] shelf registration
[D] registration
[E] moratorium
[A] :A Red Herring is another name for a preliminary prospectus and has nothing to do with the market price. Review
section 16.4.
[B] :You are correct!
[C] :IPOs cannot be handled via a shelf registration. Review section 16.4.
[D] :Shares do not trade during this period. Review section 16.4.
[E] :This term does not describe the period in question. Review section 16.4.

64) Over the 1975 - 2003 period, the average first-day return on IPOs was closest to _____ percent.
[A] -5

[B] 0
[C] 5
[D] 10
[E] 17
[A] :This suggests IPOs are overpriced, on average. Does this sound right? Review section 16.5.
[B] :This suggests IPOs are neither overpriced nor underpriced, on average. Does this sound right? Review section
16.5.
[C] :You need to review the historical evidence regarding IPOs in section 16.5.
[D] :You need to review the historical evidence regarding IPOs in section 16.5.
[E] :You are correct!

65) 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.
[A] True
[B] False
[A] :As the subscription price rises, the number of rights needed also rises. Review section 16.8.
[B] :You are correct!

66) 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
[A] :Correct, but there is at least one more correct option. Review section 16.1.
[B] :Correct, but why wouldn't you also want to know how successful the venture capitalist has been in the past?
Review section 16.1.
[C] :Correct, but why wouldn't you also want to know the venture capitalist's exit strategy? Review section 16.1.
[D] :Correct, but why wouldn't you also be concerned about the financial strength of the venture capitalist? Review
section 16.1.
[E] :You are correct!

67) Which one of the following statements is correct 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 to the market.
[D] Venture capitalists rely little 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.
[A] :It is rarely easy to gain access to venture capital. Review section 16.1.
[B] :Venture capitalists rely mostly on networking and rarely fund unsolicited proposals. Review section 16.1.
[C] :You are correct!
[D] :Venture capitalists rely heavily on networks such as these. Review section 16.1.
[E] :Actually, knowing someone who has received venture capital is a very good way to gain access to venture
capital yourself. Review section 16.1.

68) 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.

[A] :This relates to bonds, not stocks. Review section 16.4.

[B] :There is no such type of clause. Review section 16.4.
[C] :This term relates to rights offerings, not IPOs. Review section 16.4.
[D] :This term relates to small private issues, not publicly placed IPOs. Review section 16.4.
[E] :You are correct!

69) An important difference between a direct term loan and a long-term bond is that:
[A] a term loan typically has higher issuance costs than does a public bond issue.
[B] a term loan tends to be more difficult to renegotiate than a bond issue.
[C] banks usually fund long-term bonds while term loans are provided by insurance companies and pension funds.
[D] it is easier to sell a public issue of long-term bonds than it is to obtain a bank term loan.
[E] a direct term loan avoids the cost of Securities and Exchange Commission registration.
[A] :Actually, the term loan issuance costs will be lower. Review section 16.10.
[B] :Since you are dealing with only a few (or one) parties when renegotiating a term loan versus a multitude of
parties with publicly traded debt, the term loan would be easier to renegotiate. Review section 16.10.
[C] :It is banks that usually fund term loans and insurance companies and pension funds that fund long-term bonds.
Review section 16.10.
[D] :The relative ease of selling either type of issue is a matter of debate and is not discussed in the text. Review
section 16.10.
[E] :You are correct!

70) TOYSrYOU needs to raise $5 million. If the subscription price is $10, the stock price is $12.50, and there are
4,000,000 shares outstanding, how many rights will buy a share of stock?
[A] 0.1
[B] 1.2
[C] 2.0
[D] 4.8
[E] 8.0
[A] :You need to review this computation in section 16.8.
[B] :You need to review this computation in section 16.8.
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You are correct!

71) 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 2,000,000 shares outstanding, and the current
market price per share is $6. 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
[A] :You need to review this computation in section 16.8.
[B] :You are correct!
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You need to review this computation in section 16.8.

72) Which one of the following parties will probably benefit the most from the overpricing of a new IPO of common
stock handled on a firm-commitment basis?
[A] existing bondholders
[B] the underwriter
[C] new shareholders who purchase stock in the open market during the aftermarket
[D] the issuing firm
[E] new shareholders who purchase stock from the syndicate
[A] :Bondholders do not benefit directly from stock offerings. Review section 16.5.
[B] :If the IPO is overpriced, it may be undersubscribed and, since it is being offered on a firm-commitment basis, the
underwriter actually stands to lose. Review section 16.5.

[C] :For these investors to benefit, the stock price must rise. There is nothing here that indicates it will. Review
section 16.5.
[D] :You are correct!
[E] :These shareholders have acquired the stock at a price that is too high, so they are certainly not the ones who
will benefit the most. Review section 16.5.

73) According to the figures in the text, on average, IPOs:

[A] are brought to the market in waves.
[B] are overpriced.
[C] have the same flotation costs as seasoned issues.
[D] produce negative first-day returns.
[E] are a profitable investment and you should buy shares in any IPO that hits the market.
[A] :You are correct!
[B] :IPOs are underpriced, at least on average. Review section 16.5.
[C] :IPOs are typically more expensive than seasoned issues are. Review sections 16.5 and 16.7.
[D] :On average, IPOs produce positive first-day returns. Review section 16.5.
[E] :Did you understand the idea behind the winner's curse? Review section 16.5.

74) Assuming a price greater than zero, it is virtually impossible to overprice a rights offer.
[A] True
[B] False
[A] :What if the subscription price exceeds the current stock price? Review section 16.8.
[B] :You are correct!

75) Dilution of market value is one of the types of dilution discussed in the text.
[A] True
[B] False
[A] :You are correct!
[B] :This is just one of the three forms of dilution discussed in the text. Review section 16.9.

76) A firm has 800,000 shares outstanding, selling for $120 a share. It wants to raise $16,000,000 via a rights
offering. The subscription price is $100 a 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] $116.8 million
[A] :You need to review this computation in section 16.8.
[B] :You need to review this computation in section 16.8.
[C] :You need to review this computation in section 16.8.
[D] :You are correct!
[E] :You need to review this computation in section 16.8.

77) The direct costs of issuing equity include which of the following?
I. underpricing
II. taxes
III. spread
IV. filing fees
[A] I and II only
[B] II and III only
[C] I, III, and IV only
[D] II, III, and IV only
[E] I, II, and IV only
[A] :At least one of these is incorrect. Review section 16.7.
[B] :Why are filing fees not a direct cost also? Review section 16.7.

[C] :Underpricing is not a direct cost. Review section 16.7.

[D] :You are correct!
[E] :At least one of these is incorrect. Review section 16.7.

78) 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
[A] :Correct, but there is at least one more correct option. Review section 16.10.
[B] :General cash offers are not a form of private debt. Review section 16.10.
[C] :Correct, but there is at least one more correct option. Review section 16.10.
[D] :You are correct!
[E] :At least one of these choices is incorrect. Review section 16.10.

79) A firm has 800,000 shares selling for $120 a share. It wants to raise $10,000,000 via a rights offering. The
subscription price is $100 a share. How many rights are required to purchase 1 share?
[A] 0.1
[B] 1.2
[C] 2.0
[D] 4.8
[E] 8.0
[A] :You need to review this computation in section 16.8.
[B] :You need to review this computation in section 16.8.
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You are correct!

80) Which one 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 no less than 16% 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, but not the other syndicate members, to purchase additional shares at the offer
price.
[A] :They are fairly common in stock offerings. Review section 16.4.
[B] :You are correct!
[C] :They typically involve 15% of the newly issued shares. Review section 16.4.
[D] :They are a benefit to the underwriting syndicate since they will only be exercised if the underwriter can profit
from selling the additional securities. Review section 16.4.
[E] :This option is available to all members of the syndicate. Review section 16.4.

81) Central Maine 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.
[A] True
[B] False
[A] :A public utility such as this will most likely use firm commitment underwriting. Review section 16.4.
[B] :You are correct!

82) A company has filed a registration statement with the SEC for a new stock issue. During the 20 day waiting
period, the firm can:

[A] provide investors with a preliminary prospectus.

[B] sell the new stock to interested investors.
[C] approach its board of directors to get approval of the new issue.
[D] not place a tombstone ad.
[E] not change the price for which it will ultimately sell the securities.
[A] :You are correct!
[B] :The firm cannot begin selling the stock until after the effective date of the registration statement, which is after
the waiting period. Review section 16.2.
[C] :Board of director approval must be obtained prior to the filing of the registration statement. Review section 16.2.
[D] :Tombstone ads can be placed both during and after the waiting period. Review section 16.2.
[E] :The price need not be set until after the effective date of the registration statement, which is after the waiting
period. Review section 16.2.

83) Which of the following statements regarding rights offerings are correct?
I. Pure rights offerings are typically cheaper than other types of offers.
II. Rights offerings protect the proportionate ownership of existing stockholders.
III. Rights offerings protect against underpricing.
IV. The drop in stock price will harm existing shareholders who either sell or exercise their rights.
[A] I and II only
[B] III and IV only
[C] I, II, and III only
[D] II, III, and IV only
[E] I, II, III, and IV
[A] :Correct, but there is at least one more correct option. Review section 16.8.
[B] :At least one of these choices is incorrect. Review section 16.8.
[C] :You are correct!
[D] :At least one of these choices is incorrect. Review section 16.8.
[E] :At least one of these choices is incorrect. Review section 16.8.

84) Empirical evidence suggests that, on average, the shares in initial public offerings have not been significantly
underpriced.
[A] True
[B] False
[A] :You need to review the basics of IPOs in section 16.5.
[B] :You are correct!

85) Dilution of market value occurs whenever shares of stock are issued and the market-to-book ratio is less than
one.
[A] True
[B] False
[A] :Actually, dilution of market value depends on the NPV of the project under consideration, not the market-to-book
ratio.
[B] :You are correct!

86) A firm has 800,000 shares outstanding, selling for $120 a share. It wants to raise $16,000,000 via a rights
offering. The subscription price is $100 a share. What is the value of a right?
[A] $2.00
[B] $3.33
[C] $4.00
[D] $6.67
[E] $20.00
[A] :You need to review this computation in section 16.8.
[B] :You are correct!
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You need to review this computation in section 16.8.

87) To finance expansion into Japan, General Motors sells 10,000,000 shares of common stock to the public 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.
[A] :Since GM is publicly traded, it can't do a private placement of new stock. Review section 16.3.
[B] :You are correct!
[C] :Rights offerings are made to existing shareholders, not to the public at large. Review section 16.3.
[D] :This exempts small issues from SEC registration, it does not describe GM's stock offering. Review section 16.3.
[E] :Since GM is already publicly traded, this is not an IPO. Review section 16.3.

88) Unique Auto Parts, Inc., a manufacturer of reproduction parts for classic automobiles, needs to raise $2 million
via a rights offering. The subscription price is $4 per share. The firm currently has 1,000,000 shares outstanding with
a current market price per share of $5. What will the value of a right be?
[A] $.25
[B] $.33
[C] $.40
[D] $.50
[E] $1.20
[A] :You need to review this computation in section 16.8.
[B] :You are correct!
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You need to review this computation in section 16.8.

89) The risk that new securities will be sold at a loss is transferred from the issuing firm to the underwriter in best
efforts underwriting.
[A] True
[B] False
[A] :This risk is transferred in firm-commitment underwriting, but not with best efforts. Review section 16.4.
[B] :You are correct!

90) In a rights offering, existing shares begin to trade ex-rights two 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.
[A] :You are correct!
[B] :You need to review the mechanics of rights offerings in section 16.8.
[C] :You need to review the mechanics of rights offerings in section 16.8.
[D] :You need to review the mechanics of rights offerings in section 16.8.
[E] :You need to review the mechanics of rights offerings in section 16.8.

91) Which one of the following statements 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 registration statement with the SEC unless it is a loan maturing in less than 9 months or
an issue of less than $5 million.
[C] While the SEC studies the proposal the company may NOT distribute a preliminary prospectus.
[D] At the beginning of the waiting period, the price of the securities is set.
[E] A final prospectus need not be delivered to purchasers if the investor received a red herring.
[A] :Approval must always be obtained from the board of directors. Review section 16.2.
[B] :You are correct!

[C] :Red herrings can be issued at any time during the waiting period. Review section 16.2.
[D] :The price is set on the effective date of the registration statement when selling begins in earnest. Review section
16.2.
[E] :The final prospectus must accompany the delivery of securities or confirmation of sale. Review section 16.2.

92) Which one of the following is most apt to use competitive underwriting?
[A] public utility
[B] mid-size firm
[C] small firm
[D] firms doing an initial public offering
[E] a major national retailer such as Sears
[A] :You are correct!
[B] :There is a better response since one of the other types of firms listed is essentially required to use competitive
underwriting. Review section 16.4.
[C] :There is a better response since one of the other types of firms listed is essentially required to use competitive
underwriting. Review section 16.4.
[D] :There is a better response since one of the other types of firms listed is essentially required to use competitive
underwriting. Review section 16.4.
[E] :There is a better response since one of the other types of firms listed is essentially required to use competitive
underwriting. Review section 16.4.

93) A firm pays 8.0% of the amount of cash raised in financing in direct costs. If an investment of $6 million is
required, what is the dollar amount of the flotation costs?
[A] 0
[B] 80,000
[C] $521,739
[D] $542,726
[E] $750,000
[A] :You need to review this computation in section 16.7.
[B] :You need to review this computation in section 16.7.
[C] :You are correct!
[D] :You need to review this computation in section 16.7.
[E] :You need to review this computation in section 16.7.

94) Which of the following has (have) been offered as a possible explanation for why securities in an IPO are
underpriced when they are issued?
I. Underwriters typically underprice high-priced stocks so more investors can afford them.
II. Underwriters underprice so that the average investor will lose money on initial public offerings.
III. Underwriters underprice to minimize lawsuits by investors, which could occur if they consistently overpriced
stocks.
[A] I only
[B] II only
[C] III only
[D] I and III only
[E] I, II, and III
[A] :This is not listed in the text as a motivation for underpricing securities. Review section 16.5.
[B] :This is not listed in the text as a motivation for underpricing securities. Review section 16.5.
[C] :You are correct!
[D] :At least one of these responses is incorrect. Review section 16.5.
[E] :At least one of these responses is incorrect. Review section 16.5.

95) 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
[A] :You need to review the mechanics of a rights offering in section 16.8.
[B] :You need to review the mechanics of a rights offering in section 16.8.

[C] :You need to review the mechanics of a rights offering in section 16.8.
[D] :You need to review the mechanics of a rights offering in section 16.8.
[E] :You are correct!

96) Which of the following statements are true concerning the steps involved in issuing securities to the public?
I. A full registration statement must be filed with the SEC for long-term bond issues over $5 million.
II. The underwriter can take orders for securities while the SEC is reviewing the registration statement.
III. Tombstone advertisements are used by underwriters both during and after the waiting period.
IV. During the waiting period, the firm can issue a preliminary prospectus, often called a red herring.
[A] I, II, and III only
[B] II, III, and IV only
[C] I, III, and IV only
[D] I, II, and IV only
[E] I, II, III, and IV
[A] :At least one of these choices is incorrect. Review section 16.2.
[B] :At least one of these choices is incorrect. Review section 16.2.
[C] :You are correct!
[D] :At least one of these choices is incorrect. Review section 16.2.
[E] :At least one of these choices is incorrect. Review section 16.2.

97) Which one of the following firms would qualify for shelf registration?
[A] A firm who last defaulted on debt four years ago.
[B] A firm with a total market value of $140 million in outstanding common stock.
[C] A firm whose bonds are rated just below investment grade.
[D] A firm whose last violation of the Securities Act of 1934 was two years ago.
[E] A firm undertaking a rights offering.
[A] :You are correct!
[B] :The total market value must exceed $150 million. Review section 16.11.
[C] :The firm's bonds must be rated investment grade. Review section 16.11.
[D] :The firm cannot have had a violation of this act during the past three years. Review section 16.11.
[E] :Rights offerings cannot be shelf-registered. Review section 16.11.

98) In a(n)_____, the underwriter agrees to purchase the unsubscribed portion of a rights issue.
[A] standby underwriting
[B] firm commitment underwriting
[C] best efforts underwriting
[D] Green Shoe provision
[E] oversubscription privilege
[A] :You are correct!
[B] :This term does not relate to a rights offering. Review section 16.8.
[C] :This term does not relate to a rights offering. Review section 16.8.
[D] :This term does not relate to a rights offering. Review section 16.8.
[E] :This term does not relate to a rights offering. Review section 16.8.

99) TOYSrYOU needs to raise $5 million. If the subscription price is $10, the stock price is $12.50, and there are
4,000,000 shares outstanding, what is the value of a right?
[A] $0.14
[B] $0.28
[C] $1.04
[D] $2.50
[E] $5.00
[A] :You need to review this computation in section 16.8.
[B] :You are correct!
[C] :You need to review this computation in section 16.8.
[D] :You need to review this computation in section 16.8.
[E] :You need to review this computation in section 16.8.

100) _____ is an agreement in which the underwriter is allowed to purchase additional shares of an offering at the
subscription price.
[A] Standby underwriting
[B] Firm commitment underwriting
[C] Best efforts underwriting
[D] A Green Shoe provision
[E] An oversubscription privilege
[A] :This refers to a rights offering and is exercised only if the offering is undersubscribed. Review section 16.4.
[B] :This term does not refer to the right of the underwriter to purchase additional shares. Review section 16.4.
[C] :This term does not refer to the right of the underwriter to purchase additional shares. Review section 16.4.
[D] :You are correct!
[E] :This refers to a rights offering and is exercised by shareholders, not the underwriter. Review section 16.4.

101) Wilte, Inc. plans to raise $8 million in a rights offering. If management sets the subscription price at $10 and the
current market price is $12.50, how many shares need to be sold in the rights offering?
[A] 320,000
[B] 400,000
[C] 640,000
[D] 800,000
[E] 1,200,000
[A] :You need to review this computation in section 16.8.
[B] :You need to review this computation in section 16.8.
[C] :You need to review this computation in section 16.8.
[D] :You are correct!
[E] :You need to review this computation in section 16.8.

102) The degree of underpricing of IPOs tends to increase for firms with few, if any, sales.
[A] True
[B] False
[A] :You are correct!
[B] :These stocks are speculative in nature and must offer higher potential rewards to attract investors. Review
section 16.5.

103) Which one of following occurs if new shares are sold at an offering price that is too low in a firm commitment
offering?
[A] Underwriters suffer a financial loss because they are more likely to be unable to sell all of the shares offered.
[B] Markets in general suffer because this is a sign of market inefficiency.
[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.
[A] :Since the stock is underpriced, selling the shares will likely not be a problem. Review section 16.5.
[B] :This is not a sign of inefficiency, it is a sign the underwriter guessed wrong. Review section 16.5.
[C] :The stock is underpriced, so investors who buy at the initial offering price benefit by the amount of the
underpricing. Review section 16.5.
[D] :You need to review the evidence regarding the history of IPOs. Review section 16.5.
[E] :You are correct!