Question 1

Which one of the following would not be included among the benefits of shelf registration?

Accepted Answer

Shelf registration allows issuers to register a large amount of securities for issuance over a period of time, typically up to three years, without having to file additional registration statements with the SEC. This reduces the lead time for security issuance and allows issuers to take advantage of favorable market conditions and search for the best underwriting terms. However, there is no provision for exempting the issuer from the requirement to file additional registration statements with the SEC for five years. Therefore, option B is not included among the benefits of shelf registration.

Question 2

Shelf registration was enacted to allow:

Accepted Answer

Shelf registration allows for a joint filing for multiple issues of a single security, making the process more efficient and cost-effective for issuers. Choice A is incorrect as insider trading is not related to shelf registration. Choice B is incorrect as the prospectus must be distributed before the sale of securities begins. Choice C is incorrect as syndication is not directly related to shelf registration.

Question 3

Private placement of debt securities occurs more frequently in:

Accepted Answer

Private placement of debt securities is more common in smaller firms as they may have difficulty accessing funding through public markets. Larger firms often have more options for financing, including public markets, and may not need to rely on private placements for debt financing. The use of venture capitalists or convertible bonds may play a role in the decision to pursue private placement, but it is not necessarily a defining factor.

Question 4

Which one of the following statements is incorrect concerning private placements?

Accepted Answer

Private placements can be used to finance a variety of securities including corporate debt, equity, and hybrid securities. While it is true that public debt issuances generally make up a larger portion of the debt market, private placements can still represent a significant portion of corporate financing.

Question 5

The consent of a corporation's stockholders must be received prior to any:

Accepted Answer

Stockholders' consent is typically required for an increase in authorized capital, as it involves amending the corporate charter, which affects shareholder rights.

Question 6

An IPO was offered to the public at $18 a share with the issuing firm receiving $16.50 of that amount.The issuer incurred $750,000 in legal and administrative costs.At the end of the first trading day,the stock was priced at $22.40 a share.What was the total dollar cost,including both direct and indirect costs,of issuing the securities if 225,000 shares were offered?

Accepted Answer

Total cost = [($22.40 − 16.50) × 225,000] + $750,000 = $2,077,500

Question 7

A firm has just issued $250 million of equity which caused its stock price to drop by 3%.Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue.

Accepted Answer

Loss in value = 0.03 × $1 billion = $30 million

Question 8

What was the market price of a share of stock before a rights issue,if one share of new stock could be purchased at $100 for every four shares that were previously owned? The stock price after the successful rights issue was $200.

Accepted Answer

$200 = [$100 + (4 × P_Old)] / (1 + 4); P_Old = $225

Question 9

How much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally,the firm pays $600,000 in legal fees.

Accepted Answer

Net proceeds = [($40 / 1.10) × 250,000] − $600,000 = $8,490,909

Question 10

Who bears the bulk of the cost of underpricing an IPO?

Accepted Answer

The pre-IPO shareholders bear the bulk of the cost of underpricing because they sell their shares at a lower price than they could have if the IPO was priced higher.

Question 11

Which one of these terms applies to a public company offering new shares to the general public?

Accepted Answer

A general cash offer is when a public company offers new shares to the general public, as opposed to a rights offer which is directed at existing shareholders.

Question 12

Companies offering smaller security issues may prefer to issue them through a:

Accepted Answer

Private placements are generally cheaper than public issues due to lower regulatory and marketing costs, making them preferable for smaller security issues.

Question 13

If a corporation's management,with its superior knowledge of proposed investments,considers a security issue to be underpriced,it may react by:

Accepted Answer

If management believes the security is underpriced, they may forgo the issuance to avoid selling at a lower value than they believe is fair, thus protecting existing shareholders' interests.

Question 14

When securities are issued under a rights issue:

Accepted Answer

A rights issue allows existing shareholders to purchase additional shares at a discounted price, which gives them the opportunity to expand their holdings in the company.

Question 15

One reason that underpricing of new issues occurs more frequently than overpricing is that:

Accepted Answer

Underwriters want to reduce the risk of a firm commitment, which means they guarantee to sell the entire issue at a fixed price to the issuer. Underpricing ensures that the issue is sold out quickly, reducing the underwriters' exposure to potential losses. Overpricing, on the other hand, may lead to unsold shares, leaving the underwriters with an unsold inventory.

Question 16

One reason for an underwriters' syndication is to:

Accepted Answer

Underwriters' syndication helps to reduce the risk of selling a large issue by spreading it among different underwriters, who then share the risk and responsibility for selling the securities. This allows issuers to raise large amounts of capital with the support of a group of underwriters. It also helps to provide more liquidity in the secondary market, as the securities are sold through a larger network of underwriters. The other options (A, C, and D) are not the primary reasons for underwriters' syndication.

Question 17

What would you expect to be the market price of stock after a sold-out rights issue,if each existing shareholder purchases one new share at $60 for each three that he or she currently holds,and the current share price is $100?

Accepted Answer

New price = [$60 + (3 × $100)] / (1 + 3) = $90

Question 18

Issue costs for equity are higher than those for debt for all of the following reasons except:

Accepted Answer

Equity issues actually have economies of scale, meaning that the cost per dollar of issuance decreases as the size of the offering increases. Therefore, option D is incorrect. Options A, B, and C are all valid reasons why issue costs for equity are higher than those for debt.

Question 19

The enactment of shelf registration is likely to have increased:

Accepted Answer

Shelf registration allows issuers to register securities in advance and sell them over a two-year period while complying with disclosure requirements. This has led to increased competition among underwriters, as they can no longer rely on exclusive agreements with issuers to sell securities, and instead must compete with each other to win business. Therefore, the enactment of shelf registration is likely to have increased competition among underwriters.

The other choices are incorrect because:

A) The cost of issuing new securities may be reduced due to the efficiency gains from shelf registration, as issuers can now quickly access the capital markets without having to go through the registration process each time they want to issue new securities.

B) The interests of venture capitalists are not directly affected by shelf registration, as it applies only to securities offered to the public and not to private placements.

D) The underpricing of securities is not directly affected by shelf registration, as underpricing is largely driven by market demand and the perceived quality of the issuer and the security being offered.

Question 20

If a new stock offering were overpriced and could be sold,then the:

Accepted Answer

If a new stock offering is overpriced and sold, the existing shareholders would benefit because the company would raise more capital than the stock is worth, potentially increasing the value of their shares.

Quiz 15: Venture Capital, IPOs, and Seasoned Offerings