Question 1

Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists?

Accepted Answer

B) The long-run performance of a newly public company (three to five years from the date of issue) is inferior to the overall market return.

Question 2

The cost of issuing an IPO in the U.S. is higher than most other security issuance fees. A typical spread is ________.

Accepted Answer

The typical spread for an IPO in the U.S. is 7%, which is the fee charged by underwriters.

Question 3

Which of the following is a notable puzzle in IPOs?

Accepted Answer

The number of IPOs is highly cyclical, meaning that it varies greatly depending on market conditions and economic trends. This can make it difficult for investors to predict when IPOs will occur and which companies will go public.

Question 4

How does the total cost of issuing stock for the first time compare to the costs of other securities?

Accepted Answer

The total cost of issuing stock for the first time is substantially larger than the costs for most other securities as it involves expenses such as underwriting fees, legal fees, accounting fees, registration fees, and printing expenses.

Question 5

Dusty Corporation is issuing an IPO with an issue price of $15 per share that is expected to raise about $100 million. Which of the following is likely to be true?

Accepted Answer

The cost of an IPO includes the underwriting fee, legal fees, and other expenses, which can typically range from 5-7% of the total amount raised. Therefore, in this case, the cost of the IPO to Dusty Corporation is likely to be around $5-$7 million. It is difficult to predict whether the stock price will be less than $15 on the first trading day or whether the stock will perform well in the future, as these factors depend on various market conditions and other factors.

Question 6

How does IPO pricing puzzle financial economists?

Accepted Answer

The answer of How does IPO pricing puzzle financial economists?...

Question 7

Which of the following statements concerning the volume and number of IPOs issued over time is most correct?

Accepted Answer

The volume and number of IPOs issued over time are cyclical. This means that there are periods of increased activity and periods of reduced activity. This pattern is influenced by a variety of factors, such as market conditions, investor sentiment, and regulatory changes.

Question 8

What are some of the highlights of Google's IPO process?

Accepted Answer

The answer of What are some of the highlights of...

Question 9

What is the general long-run performance of an IPO?

Accepted Answer

The answer of What is the general long-run performance of...

Question 10

A cash offer differs from a rights offer in that in the latter shares are offered to both existing shareholders and investors at large.

Accepted Answer

In a rights offer, shares are offered to existing shareholders, allowing them to purchase additional shares at a discount, not to investors at large.

Question 11

Underpricing of an IPO would most likely be greatest in which of the following markets?

Accepted Answer

Underpricing of an IPO is generally greater in less developed and less efficient markets, such as China, where there is a higher level of information asymmetry between the issuer and investors, as well as a greater demand from retail investors who may not have access to as much information or resources to value the IPO accurately. Australia, Japan, and the United States are generally considered to have more developed and efficient markets with lower levels of underpricing.

Question 12

Managers will try to protect their existing shareholders by selling new shares at a price that correctly values or overvalues their firm, leading investors to reason that the announcement of an SEO indicates that a company is over-valued.

Accepted Answer

Managers will try to protect their existing shareholders by selling new shares at a price that correctly values or overvalues their firm, leading investors to assume that the company is over-valued.

Question 13

The announcement of an SEO usually raises a stock's price.

Accepted Answer

An SEO (Secondary Equity Offering) typically dilutes existing shares, potentially lowering the stock's price due to the increased supply of shares.

Question 14

The offer price of shares in an IPO is generally less than the price those shares sell for at the end of the first trading day. Which of the following parties suffer most from this situation?

Accepted Answer

The answer of The offer price of shares in an...

Question 15

Newly listed firms tend to perform relatively poorly in the three to five years after their IPOs.

Accepted Answer

This phenomenon is known as the " IPO underperformance puzzle" and is supported by various studies and research. The reasons for this underperformance could be attributed to various factors such as overvaluation, lack of experience in managing a public company, and pressure to meet short-term expectations from investors. However, some firms may buck the trend and perform well after the IPO.

Question 16

What are some of the advantages of going public?

Accepted Answer

The answer of What are some of the advantages of...

Question 17

How does the size of an issue affect the fees charged by underwriters?

Accepted Answer

Large issues generally have a smaller spread, but because of the larger volume, they attract much greater total fees compared to smaller issues.

Question 18

What are some of the disadvantages of going public?

Accepted Answer

The answer of What are some of the disadvantages of...

Question 19

Stock issued in an IPO usually trades significantly higher at the end of the first day of trading than the original IPO price.

Accepted Answer

This is often referred to as the "pop" or the "first-day return" and is a common phenomenon in the stock market. It occurs because there is typically more demand for shares than there are available shares in the IPO, leading to a higher price at which buyers are willing to purchase the stock. However, it's important to note that this initial price increase is not always sustained in the long term and that investing in IPOs can be risky.

Question 20

How do the transaction costs of IPO puzzle financial economists?

Accepted Answer

The answer of How do the transaction costs of IPO...

Quiz 14: Raising Equity Capital