Series 79 Diagnostic 2 Qs

Book value and tangible book value are best used to value and compare depository institutions like ____________

banks

Lower PEG would be __________ value than higher PEG

better

In a fixed exchange ratio, only the number of shares of the acquirer's stock to be exchanged for each share of the target's stock is fixed, NOT the value offered. Therefore, _____________ assume the risk of share price movements depending on which direction each company's stock moves between the time the definitive agreement is signed and when the deal closes.

both the target and acquirer

A modified Dutch auction tender allows the purchaser to ________________ during the auction process, depending on investor acceptance. For example, to attract more bidders, the ________ can be raised.

change the price range / range

As underwriters take indications of interest and allocate them to customers, the shares are said to be _________

circled

A 424(b) is a _________________ for a new issue. It must be received by investors no later than trade settlement. It can also be delivered electronically.

final prospectus

An underwriting with __________________ provides an underwriter with a fixed or pre-set amount of deal revenue based on their allocation, regardless of the number of securities actually sold by that underwriter.

fixed economics

For a U.S. Treasury security, bond equivalent yield is ________________ than discount yield.

greater

Under Regulation M Rule 104, an underwriter can stabilize a new issue no higher than the most recent transaction price or the best independent bid, whichever is ____________

greater

Sections 4(a)(2) and 4(a)(5) of the securities Act of 1933 permit ____________________ to ________________ while avoiding the filing of a registration statement.

private placements / accreddited investors

If a conflict of interest exists for a firm that underwrites an IPO, the conflict must be prominently disclosed in the ________________ and a __________________ must be hired to conduct due diligence.

prospectus / qualified independent underwriter

The term 'actively-traded securities' is defined in Rule 101 of Regulation M. These are securities that have an ADTV of at least ___ million and are issued by an issuer whose common equity securities have a public float of at least _____ million. Under Regulation M, actively traded securities are not subject to a restricted period.

$1 / $150

A research report is defined as any analysis of equities with a recommendation that is sent to at least __ recipients.

15

FINRA Rule 5130 requires the bookrunning manager to file an initial list of distribution participants and their underwriting commitments and also a final list. The final list is due not later than _____ business days after the offering date.

3

A company can qualify as a WKSI in one of two ways: 1) have a public float of at least $____ held by non-affiliates, including both voting and non-voting stock or 2) have issued at least $____ of non-convertible securities, other than common equity.

700 million / 1 billion

Return on Invested Capital

= (EBIT - Taxes) /Average Invested Capital

Effective Multiple

= (multiple x purchase multiple) / (multiple + synergies)

Average Invested Capital

= Average of "Total stockholders' equity" + average net debt (total debt - cash)

Inventory turns

= COGS / Inventory

Return on Equity =

= Net Income / Average shareholders equity

Jones Securities, Inc. is the lead underwriter for NewCo, which plans to sell 5 million shares of stock to the public at an offering price of $27.00 per share. The manager's fee is $.25, the underwriting fee is $.20 and the full takedown is $.85. What is the total spread?

A) $1.10 The total spread is the manager's fee of $.25 plus the $.85 full takedown, for a total of $1.10. The underwriting fee is a component of the full takedown, so is not taken into account in the calculation. The takedown includes both the underwriting fee and the selling concession.

An underwriter wishes to engage in stabilization of an issue's price. The offering price is $25 a share and the highest bid for the security in the principal market where it trades is $24. No stabilizing bid may be made at a higher price than

A) $24.00 No stabilizing bid can be made at a price higher than the lower of: 1) the offering price; or 2) highest bid for the security in the principal market where it trades. In this case, the lower of those prices is $24

A preliminary prospectus must be delivered to a potential purchaser no later than

A) 48 hours prior to the mailing of the confirmation of sale A preliminary prospectus when used in conjunction with an IPO is required to be delivered by the broker-dealer at least 48 hours prior to the confirmation of sale

All of the following investors would be considered Qualified Institutional Buyers EXCEPT A) An individual investor with a securities portfolio of $75 million. B) A broker dealer managing a securities portfolio for clients of $75 million C) A manufacturing company with a securities portfolio of $110 million D) An investment company registered under the Investment Company Act of 1940

A) An individual investor with a securities portfolio of $75 million. Under Rule 144A, Qualified Institutional Buyers (QIBs) are defined as: -Insurance Companies -Investment Companies -Business Development Companies -Investment Advisers -Broker dealers owning and investing discretionary assets of at least $10 million -Any other institution with discretionary assets of at least $100 million

By following the provisions of SEC Rule 10b-18, an issuer is allowed a safe harbor for the purchase of its

A) Common Stock The Rule 10b-18 safe harbor only applies to open market purchases by an issuer of its common stock. It does not apply to any other type of security even if related to the common stock, such as warrants, options, or single stock futures.

Company A has a very young workforce. Company B has a relatively old workforce. Both companies have pension plan funding ratios of .85. If interest rates decline, which company's funding ratio is more vulnerable?

A) Company A For companies, pension liabilities are similar to debts. The younger the workforce, the longer into the future the promise to pay benefits extends. A promise to a 30-year old worker (who will begin collecting benefits at around age 60) is similar to a bond with a 30-year maturity. If interest rates decline, the discounted value of a 30-year obligation increases, and this will impact the pension funding ratio negatively. A company with an older workforce also will be negatively affected by declining rates, but the impact will be less because the "time horizon" until pension payout is shorter

A GARP investor is screening for acquisition candidates, using a PEG ratio of 1.00 or better as an acceptable level. Company A has a P/E ratio of 12. Company B has a P/E ratio of 10. Company C has a P/E ratio of 8. Which metric produces a company that is acceptable?

A) Company A has a growth rate above 12% GARP investors prefer low PEG ratios (less than 1.0). PEG = P/E ratio divided by earnings growth rate. To get to a PEG of 1.0 or lower, growth rate needs to be at or above P/E

What remedy exists if the corporate board of directors' minute book are unsigned? I. The chairman of the board may sign the minute book after the meeting. II. The corporate secretary may sign the minute book after the meeting. III. The meeting will have to be reconvened in order for the proceedings to become official. IV. As long as 75% of the directors were present at the meeting the minutes may be left unsigned.

A) I and II The corporate secretary or the Chairman of the Board may sign the minute book if left unsigned.

Which two of the following risks are typically identified during buyer due diligence in the first round? I. Financial projections trajectory II. Depth and nature of management team III. Target company end markets IV. Details of growth strategies

A) I and III The target's financial projections trajectory is shared early in the first round as part of the teaser or CIM, as are the target's end markets. The depth and nature of the target's management team, on the other hand, as well as the details of its growth strategies are often not identified until the second round when the management presentation takes place and the data room is opened. Reference: T

Which of these tax-advantaged vehicles is most appropriate for hundreds of investors? A) Master limited partnership B) Subchapter S-Corporation C) Subchapter C-Corporation D) Real Estate Investment Trust

A) Master limited partnership Of the options listed, MLPs are most appropriate for lots of investors as they can do a public offering of stock For example, publicly traded private equity firms are MLPs. S-corps are taxadvantaged but are limited to 100 shareholders. C-corps do not offer tax advantages as they pay corporate income tax. REITs are the best answer when referring to real estate investments or income earning investments.

Which of the following is true regarding the provision of an offering circular in a private placement? A) Qualified Institutional Buyers are never required to receive an offering document. B) Accredited investors are always required to receive an offering document. C) Non-accredited investors are always to receive an offering document. D) An offering document is never required

A) Qualified Institutional Buyers are never required to receive an offering document. An offering circular is a formal written offer to sell securities that sets forth the facts for a business enterprise that a prospective inventor needs to make an informed investment decision. Under 144A, Qualified Institutional Buyers (QIBs) are never required to receive an offering circular. Under Regulation D, non-accredited investors are required to receive an offering circular unless it is under Rule 504 (i.e. less than $10mm). In that case, an offering circular is not required for any investors. Note that prior to March 15, 2021 the Rule 504 limit was $5mm

The market risk premium refers to which of the following?

A) The spread of the expected market return over the risk-free rate The market risk premium is the spread of the expected market return over the riskfree rate. Finance professionals, as well as academics, often differ over which historical time period is most relevant for observing the market risk premium. The risk-free rate is the expected rate of return obtained by investing in a "riskless" security. Beta is a measure of the covariance between the rate of return on a company's stock and the overall market return (systematic risk), with the S&P 500 traditionally used as a proxy for the market. Cost of equity is the required annual rate of return that a company's equity investors expect to receive (including dividends).

Which one of the following is not an exempt security? A) municipal bond unit investment trust B) common stock of a commercial bank supervised by a federal authority C) debenture issued by a nonprofit organization D) US Government savings bond

A) municipal bond unit investment trust It's important to remember all the categories of exempt securities: U.S. government, nonprofit organizations, municipal bonds, short-term debt up to 270 days maturity, bank securities, and Eurodollars. Make sure not to confuse municipal bonds (debt instruments), which are exempt from federal registration, with municipal funds and municipal unit trusts, which are not exempt from federal registration.

In a business combination that requires a vote of shareholders to approve a proposed deal, involving a change of securities, a prospectus

A) must be delivered prior to the vote SEC Rule 153a requires that a prospectus be delivered prior to the vote, in business combinations that depend on a shareholder vote and involve a change of securities.

George, a research analyst, is asked by his firm's investment banking department to participate in a meeting at which investment bankers will hone their due diligence for becoming lead manager in an upcoming IPO. George covers MN Enterprises, the company that will IPO. It is not yet an investment banking client, and it also is not an Emerging Growth Company. In what capacity can George participate in this meeting?

A) none This type of meeting is called a bakeoff prep. The bankers want to obtain information that will help them win underwriting business. In general, bankers and analysts can communication with each other in the presence of compliance personnel. But they cannot participate in joint due diligence to prepare for a bakeoff pitch, unless the issuer is an Emerging Growth Company.

A free writing prospectus is required to contain a legend informing investors that

A) the issuer has filed a registration and prospectus, which should be read before investing. The free writing prospectus legend must be similar to this one: "The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering."

Section 403 of the Sarbanes-Oxley Act requires disclosures by any stockholder who holds a beneficial interest (directly or indirectly) in

B) 10% or more of any class of any equity The disclosure must be filed by directors or officers of the issuer and any stockholder who holds (directly or indirectly) 10% or more of any equity security.

The typical length of a lock-up agreement for an issuer's executives after a new issuance of securities is

B) 180 days The standard length of a lock-up agreement is 180 days, or six months. However, lock-up period can last as long as 365 days, and sometimes as little as 120 days. This prohibits company executives from selling their shares immediately after a new issue and creating negative perception surrounding the company's stock price

ABC, a public company is making an all-cash offer to acquire the shares of XYZ, another public company. Acceptance or rejection of the offer depends on a majority vote of XYZ's shareholders. Which documents must be delivered to XYZ's shareholders?

B) A proxy only The proxy is required in all business combinations that require a shareholder vote. The prospectus is required in all offers for securities that involve a shareholder vote. The prospectus is not required in an all-cash offer

All the following are exempt from the registration requirements of the Securities Act of 1933 except A) A rated municipal bonds B) AAA rated corporate bonds C) US Treasury bonds D) Domestic bank securities

B) AAA rated corporate bonds Corporate bonds are not exempt from registration under the Securities Act of 1933. Also note that while domestic bank securities are exempt from registration, the securities of domestic bank holding companies are not exempt.

In the event the lead bookrunner of a follow-on offering seeks to exercise an overallotment option, at what point is the distribution deemed completed?

B) After the securities have been distributed and trading restrictions are terminated Only when all of the securities have been distributed, and after any stabilization and trading prohibitions have been terminated, can the distribution be deemed completed.

A Chapter 7 bankruptcy filing I. results in the liquidation of an insolvent firm II. allows corporations to discharge debts III. usually wipes out equity holders

B) I and III only A Chapter 7 bankruptcy case usually results in the liquidation of an insolvent firm, with its assets distributed to creditors and equity holders wiped out. This type of filing allows individuals, not partnerships or corporations, to discharge debts. For this reason, Chapter 7 filings are rare in the corporation world

All of the following are key sections of a definitive agreement EXCEPT A) Representations and Warranties B) Non-solicitation C) Transaction Structure D) Closing conditions

B) Non-solicitation A non-solicitation (or no-hire) provision is found in the Confidentiality Agreement - this prevents prospective buyers from soliciting to hire (or hiring) target employees for a designated time period. Definitive Agreements contain an overview of the transaction structure (as well as deal mechanics), representations and warranties, pre-closing commitments (including covenants), closing conditions, termination provisions, and indemnities (if applicable), as well as associated disclosure schedules and exhibits

Based on demand for an IPO, the underwriter would like to exercise the green shoe clause. Which of the following is FALSE? A) The green shoe clause can result in additional profit to the underwriter. B) The issuer must approve before the green shoe can be exercised. C) The green shoe clause is not required to be exercised in full. D) The green shoe clause can be exercised if the stock is trading below the IPO price.

B) The issuer must approve before the green shoe can be exercised. T he green shoe clause allows the underwriter to increase the size of the deal by up to 15% to satisfy demand. It can be exercised in full or in part and can be exercised at any price (even though it is likely exercised with the stock is trading above the IPO price). Once the green shoe is disclosed in the prospectus the issuer does not get to approve of its exercise - it is at the discretion of the underwriter.

Due to weaker demand than anticipated, XYZ broker-dealer stabilizes an IPO immediately after syndication. Which of the following is true regarding stabilization expenses? A) They are deducted from the manager's fee B) They are deducted from the underwriting fee C) They are deducted from the selling concession D) The issuer pays the cost of stabilization

B) They are deducted from the underwriting fee All syndicate expenses, including stabilization expenses, are deducted from the underwriting fee.

A valuation multiple that is used as a multiple of unlevered financial statistics such as sales, EBITDA, and EBIT is also known as a

B) enterprise value multiple Given that enterprise value represents the interests of both debt and equity holders, it is used as a multiple of unlevered financial statistics such as sales, EBITDA, and EBIT.

To qualify for a long-term capital gains tax rate, a piece of machinery purchased by a corporation and sold at a gain would need to be

B) held for more than one year. Remember that the holding period to qualify for favorable long-term capital gains tax treatment is more than one year. For capital assets held a year or less, ordinary income tax treatment applies. Capital gains are taxed in the year of sale.

Company A expects free cash flow of $75mm during the next fiscal year. An analyst covering the company estimates a discount rate of 8% and a long-term growth rate of 2%. What is the company's estimated enterprise value?

C) $1.25 billion This question is best answered by using the perpetuity formula: Enterprise Value = Cash Flow / (discount rate ? growth rate) = $75mm / 6%. Since the $75mm cash is already given as next year's value, it is not necessary to multiply the numerator by "(1 + g)."

Company A acquires Company B for $80mm. Company B expects EBIT next year of $12mm and pays tax at a 21% rate. Assuming a discount rate of 10%, what is the economic profit of the acquisition for Company A?

C) $1.48 million Economic profit (i.e. economic value added) = (After-Tax EBIT) - (Purchase price x discount rate) = ($12m x (1 - 21%)) - ($80mm x 10%) = $1.48 million.

Why might a seller choose to pursue a dividend recapitalization rather than a sale of the company? I. Potential buyers are sidelined II. It preserves equity upside to share in future growth III. It increases the company's equity value IV. Favorable debt capital markets

C) I, II, and IV only In a dividend recap, the company issues debt to pay a dividend to existing shareholders. This is an alternative to an outright sale in a scenario where there are no buyers available, the seller wants to unlock additional value before a sale, or when the cost of borrowing is relatively cheap. Additional leverage does not increase equity value. Assuming a fixed enterprise value, it actually decreases equity value.

An exception to registration requirements under the Securities Act of 1933 is made for an issuer that offers an exchange of its own securities under certain conditions. What conditions must be satisfied? I. Exchange must be limited to common stock II. Exchange must be limited to existing holders III. Exchange must not include commission paid to brokers

C) II and III The exception applies to exchange offers made only to its existing securities holders and not involving commissions or other remuneration paid to brokers, directly or indirectly.

In which scenarios does the acquirer need to file a registration statement? I. Where an "affiliate" is part of the buyout group II. When shares are issued as part of the purchase consideration for a public target III. Target market capitalization greater than $1bn IV. When public debt securities are issued as part of the purchase consideration for a public target

C) II and IV When a public acquirer issues shares as part of the purchase consideration for a public target, the acquirer is typically required to file a registration statement/prospectus (S-4) in order for those shares to be freely tradable by the target's shareholders. Similarly, if the acquirer is issuing public debt securities (or debt securities intended to be registered) to fund the purchase, it must also file a registration statement/prospectus. The registration statement/prospectus contains the terms of the issuance, material terms of the transaction, and purchase price detail. It may also contain acquirer and target financial information, including on a pro forma basis to reflect the consummation of the transaction (if applicable, depending on the materiality of the transaction).

In an IPO, a member of the selling group agrees to sell shares on a best-efforts basis, taking on no risk for share allocations unsold. In return for this role, the member receives a portion of the selling concession. This clawback is referred to as

C) a reallowance. If underwriters keep some portion of the selling concession for themselves, rather than sharing it with the selling group, the clawback is called the reallowance

Under Rule 433, a "bona fide electronic road show" is a presentation that uses written communication to offer securities by

C) any graphic means A bona fide electronic road show is an offering, other than a prospectus, that uses written communication transmitted by any graphic means. These means include PowerPoint, internet, audio or video tape, and computer networks

Which of these securities is likely most sensitive to fluctuating interest rates? A) 30-year convertible corporate bond. B) 20-year 12% corporate bond C) 10-year 8% corporate bond D) 10-year zero coupon bond

D) 10-year zero coupon bond Long-term, low-coupon bonds are most sensitive to fluctuating interest rates. In this case, that is the 10-year zero coupon bond. The long-term convertible bond will be more tied to the underlying equity due to its convertibility.

FINRA Rules 5130 prohibits the sale of a new issue to all of the following accounts EXCEPT A) An individual account owned by an employee of another BrokerDealer B) An individual account owned by the spouse of a Registered Representative C) An individual account owned by an attorney of the managing underwriter D) An individual account owned by a client of the managing underwriter

D) An individual account owned by a client of the managing underwriter FINRA Rule 5130 defines a restricted person as any FINRA member firm, a broker-dealer and its employees, finders or fiduciaries (i.e. attorneys and accountants) of the managing underwriter, or immediate family members of any of those persons. New issues may not be sold into an account in which a restricted person has ownership. New issues can be sold to clients of the underwriter.

Which of the following are useful when screening for precedent transactions for a given company? I. Merger proxies for comparable companies II. Target's M&A history III.SDC Platinum IV. Research report

D) I, II, III, and IV To screen for precedent transactions it is useful to search M&A databases such as SDC Platinum, which allows for the screening of M&A transactions through multiple search criteria, including SIC/NAICS codes, transaction size, form of consideration, time period, and geography, among others. Next, the banker should examine the target's M&A history and determine the multiples it has paid and received for the purchase and sale, respectively, of its businesses. It is also helpful to revisit the target's universe of comparable companies and examine the M&A history of each comparable company. Merger proxies for comparable acquisitions are useful as they typically contain excerpts from fairness opinion(s) that cite a list of selected transactions analyzed by the financial advisor(s). Finally, the banker should review equity and fixed income research reports for the target (if public), its comparable companies, and sector as they may provide lists of comparable acquisitions, including relevant financial data (for reference purposes only).

Financial buyers tend to look at which of the following in screening for attractive acquisition targets? I. Impact on their earnings per share II. Synergies with existing portfolio companies III.Potential anti-trust considerations IV. Opportunity to install trusted operating partner

D) II and IV When screening for an acquisition target, buyers look in sectors where they have experience, a proven management team, and potential portfolio synergies. They also investigate the size of the company. Financial Sponsors generally do not perform accretion/(dilution) analysis and usually do not have the same anti-trust concerns that a strategic buyer would have.

Under SEC Reg M, all of the following are considered "distribution participants" EXCEPT A) underwriters B) dealers C) prospective underwriters D) customers

D) customers A distribution participant is defined under Regulation M as any underwriter, prospective underwriter, broker, dealer or other person who has agreed to participate or is participating in a distribution. These persons are all subject to the provisions of Reg M

To qualify for an exemption under Section 4(a)(2) of the Securities Act, the purchasers of the securities must do/have all of the following EXCEPT A) the knowledge and experience to properly evaluate the risks of the investment B) access to the type of information of a statutory prospectus C) agree not to resell the securities D) manage at least $100 million in total assets

D) manage at least $100 million in total assets Investors in private offerings under Section 4(2) of the Securities Act must be "sophisticated investors," who can evaluate the risk and merits of the investment and bear the investment's economic risk. They must also receive detailed information about the offering, but they are not required to be Qualified Institutional Buyers ($100mm in assets).

Economic Value Added =

EBIAT - (WACC x Investment)

Under a fixed exchange ratio structure, the offer price per share is calculated as the ________________ multiplied by the acquirer's _______________. At an exchange ratio of 0.50 and an acquirer share price of $40.00, the offer price

Exchange ratio / share price

A large accelerated filer's fiscal year ends on September 30. By what date must it file its first quarterly 10-Q report for the next fiscal year, beginning October 1?

February 9 For large accelerated filers, a 10-Q must be filed within 40 days after the close of each fiscal quarter, except at the end of the company's fiscal 4th quarter, when a 10-K is filed. The company's first fiscal quarter ends on December 31. So the 10-Q must be filed by February 9.

In which public document, available to investors, can the underwriting agreement be found?

None - The underwriting agreement is available to all members of the underwriting group. But it is not generally made available to the public and is not required to be included in public documents.

Regulation S-K refers to the

Regulation S-K sets forth the SEC disclosure requirements for periodic reports, registration statements, and prospectuses.

A primary source for locating a company's SEC filings would be

The Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required to file forms with the SEC. AMEX, Nasdaq, and NYSE are U.S.-based stock exchanges.