Ch. 15 & 18 Study Set

The SEC has jurisdiction over offerings of $______ or more

1.5M

In a going private transaction, _____ of the equity of a publicly held firm is purchased by a small group of investors, with the firm's current senior management usually maintaining or increasing their ownership stakes 85% 80% 100% 40% 55%

100%

The SEC states new issues must be registered a least _____ days beforehand

20

Regarding the roadshow, the quiet period lasts until _____ days after the stock begins trading.

40

In special carve-outs, at least _____ of the subsidiary's stock is typically retained by the parent company. 15% 20% 30% 80% 55%

80%

Which of the following statements regarding financial securities is NOT accurate? a) A security can be created by the pledging of specific assets, resulting in the creation of asset-backed securities. b) Publicly traded financial instruments have greater liquidity than privately placed financial instruments. c) Credit card balances might be used as collateral for asset-backed securities. d) A financial security refers to both publicly traded financial instruments and privately placed financial instruments. e) The process of creating a financial security is called securitization.

A financial security refers to both publicly traded financial instruments and privately placed financial instruments

Which of the following statements regarding shelf registrations is NOT accurate? Shelf registration is a way to get around the 20-day waiting period for subsequent issues. With shelf registration, a company could decide at 10 a.m. to sell securities and have the sale completed before noon. A firm must have less than $150 million in stock held by outside investors to be allowed to use shelf registration. With shelf registration, the master registration statement filed with the SEC is updated with a short-form statement just prior to each subsequent individual offering. There are lower flotation costs with shelf registrations.

A firm must have less than $150 million in stock held by outside investors to be allowed to use shelf registration

Which of the following statements regarding the roadshow is NOT accurate? a) Potential investors ask questions during a roadshow presentation, but the management team may not give any information that is not in the registration statement. b) During a roadshow presentation, the management team may not make any forecasts or express any opinions about the value of their company. c) A quiet period begins when the registration statement is made effective and lasts until the day the stock begins trading. d) Book-building is the main purpose of a road show. e) The purpose of the quiet period is to create a level playing field for all investors by ensuring that they all have access to the same information.

A quiet period begins when the registration statement is made effective and lasts until the day the stock begins trading

Which of the following statements regarding the underwriting spread is NOT accurate? a) The underwriting spread is the percentage of gross proceeds the investment bank collects as a fee. b) The underwriting spread is often set at 7%. c) All of the costs of the IPO, including the underwriting spread, are passed along to the new shareholders. d) The underwriting cost is factored into the equation used to determine the offer price. e) All of these statements are accurate.

All of the costs of the IPO, including the underwriting spread, are passed along to the new shareholders.

(T/F): The average long-term debt-to-equity ratio diverges widely for different business sectors, but sub-sector industries within a sector generally have a narrow dispersion of ratios.

False

Which of the following statements regarding market timing are accurate? a) Managers try to issue stock when they perceive the market to be undervalued. b) Firms tend to issue stock when stock prices and interest rates are low. c) Firms tend to issue debt when stock prices and interest rates are high. d) Firms tend to issue debt when stock prices and interest rates are low. e) Managers tend to issue debt after big stock run-ups.

Firms tend to issue debt when stock prices and interest rates are low

Which of the following statements regarding issuing and owning securities is NOT accurate? a) The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC. b) When a corporation's shares are owned by a few individuals, we say that the firm is closely, or privately, held. c) Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. d) It is possible for a firm to go public and yet not raise any additional new capital for the firm itself. e) When stock in a closely held corporation is offered to the public for the first time, the transaction is called going public, or an IPO, and the market for such stock is called the new issue, or IPO, market.

Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares

Which of the following statements related to the primary elements of SEC regulation is accurate? a) The SEC has jurisdiction over all interstate public offerings of $1 million or more. b) Newly issued securities must be registered with the SEC at least 60 days before they are publicly offered. c) A buyer of new securities must receive a prospectus within 20 days of purchase. d) If the SEC approves the issue, it will be responsible for any penalties assessed for investor losses due to inaccurate information. e) If the registration statement or prospectus contains misrepresentations or omissions of material facts, then any purchaser who suffers a loss may sue for damages.

If the registration statement or prospectus contains misrepresentations or omissions of material facts, then any purchaser who suffers a loss may sue for damages

Which of the following statements regarding Regulation D is NOT accurate? Regulation D can be used by companies with registered stock. Regulation D permits the sale of securities to accredited investors but places restrictions on the subsequent trading of those securities. Regulation D enables companies to raise new capital quickly but with higher flotation costs. Regulation D can be used to issue equity or debt. Regulation D allows smaller companies greater access to the capital markets.

Regulation D enables companies to raise new capital quickly but with higher flotation costs.

Which of the following is NOT a primary element of SEC regulation of the secondary markets? a) The SEC regulates all national stock exchanges, requiring companies to file annual reports similar to the registration statement with both the SEC and the exchange. b) The SEC has control over trading by corporate insiders, requiring officers, directors, and major stockholders to file monthly reports of changes in their holdings. c) The SEC has the power to prohibit manipulation by such devices as pools or wash sales. d) Through margin requirements, the SEC has control over credit used to buy securities. e) The SEC has control over the proxy statement and the way the company uses it to solicit votes.

Through margin requirements, the SEC has control over credit used to buy securities.

(T/F): Because of increasingly relaxed regulations that culminated in the repeal of the Glass-Steagall Act in 1999, there is no longer a clear delineation between investment banks, brokerage firms, and commercial banks.

True

In a nonregistered private placement, the company may issue securities to _____ accredited investors and to _____ nonaccredited investors a) 35; an unlimited number of b) an unlimited number of; 35 c) 35; 35 d) 100; 35 e) an unlimited number of; an unlimited number of

an unlimited number of; 35

A(n) _____ is a private limited partnership established to invest in start-up companies. venture capital fund portfolio company unicorn angel investor general partnership

angel investor

When investment banks operate hedge funds, they are involved in which of the following activities? a) asset management b) matchmaking c) securitization d) underwriting e) trading operations

asset management

A decrease in the debt ratio will normally have no effect on: firm-unique risk. business risk. systematic risk. total risk. financial risk.

business risk

Financial risk is the additional risk placed on the ____as a result of the decision to finance with_____. a) debtholders; equity b) debtholders; debt c) common stockholders; debt d) common stockholders; equity e) preferred stockholders; equity

common stockholders, debt

All of the following are primary advantages of a firm going private EXCEPT: a) administrative cost savings. b) increased managerial incentives. c) increased managerial flexibility. d) decreased financial leverage. e) increased shareholder oversight and participation.

decreased financial leverage

When a parent corporation sells to the public a portion of its subsidiary's stock, but retains full control as the parent, it is called a(n): a) equity carve-out. b)partial public offering. c) spin-out d) equity carve-out, partial public offering, or spin-out. e) spin-off.

equity carve-out, partial public offering, or spin-out

Haussenflauxen Inc. plans to recapitalize, which means it intends to: a) change its dividend policy. b) move the location of its headquarters. c) exchange one form of financing for another. d) invest in new equipment. e) issue new stock.

exchange one form of financing for another

When a firm announces a seasoned equity offering, the stock price tends to: remain steady. rise by around 2% to 4%, suggesting that investors believe that firms issue equity when it is undervalued. rise by around 4% to 6%, suggesting that investors believe that firms issue equity when it is undervalued. fall by around 2% to 4%, suggesting that investors believe that firms issue equity when it is overvalued. fall by around 9% to 10%, suggesting that investors believe that firms issue equity when it is overvalued.

fall by around 2% to 4%, suggesting that investors believe that firms issue equity when it is overvalued

(T/F): According to the signaling theory of capital structure, the use of debt financing signals to investors that the firm's managers think that the future does not look good, otherwise the managers would be able to raise equity on reasonable terms and would not need to turn to debt.

false

(T/F): Because of stringent regulations, there are clear distinctions between investment banks, brokerage firms, and commercial banks.

false

(T/F): Firm A has a higher degree of business risk than Firm B. Firm A can offset this by increasing its operating leverage.

false

(T/F): Merton Miller built on the Modigliani and Miller (MM) model by excluding the effects of corporate taxes and then adding the effect of personal taxes.

false

(T/F): The acronym IPO stands for "independent public offering."

false

(T/F): The announcement of a carve-out is typically associated with a stock price decrease for the parent company.

false

(T/F): Two firms operate in different industries, but they have the same expected EPS and the same standard deviation of expected EPS. Thus, the two firms must have the same financial risk.

false

All of the following are advantages of going public EXCEPT: a) going public increases liquidity and allows founders to harvest their wealth. b) going public allows founders to diversify. c) going public facilitates raising new corporate cash. d) going public establishes a value for the firm. e) going public reduces owner/manager control.

going public reduces owner/manager control

Firms with large amounts of marketable fixed assets are likely to use: a) large amounts of mortgage bonds. b) large amounts of short-term debt. c) large amounts of unsecured debt. d) equity over debt financing. e) none of these options.

large amounts of unsecured debt

Regulation D enables companies to raise new capital quickly and with _______ flotation costs.

lower

The market timing theory assumes that: a) managers will issue debt when they believe stock market prices are abnormally high. b) stock prices are neither underpriced nor overpriced. c) managers often do not agree with the market consensus. d) markets are efficient. e) managers will issue new equity when they believe interest rates are abnormally low.

managers often do not agree with the market consensus

The SEC has the power to prohibit _________ by such devices as pools or wash sales.

manipulation

All of the following are illegal or questionable practices related to stock trading EXCEPT: insider trading. pools. wash sales. spinning. margin calls.

margin calls

When investment banks find potential targets for acquirers, they are said to be involved in which of the following activities? a) asset management b) matchmaking c) securitization d) underwriting e) trading operations

matchmaking

The SEC has control over trading by corporate insiders, requiring officers, directors, and major stockholders to file _________ reports of changes in their holdings.

monthly

(T/F): A firm must have ____ than $150 million in stock held by outside investors to be allowed to use shelf registration

more

Recapitalizing should result in all of the following EXCEPT: a) a decrease in WACC. b) an increase in shareholder wealth. c) an increase in the stock price. d) an increase in the value of operations. e) none of these are exceptions.

none of these are exceptions

When making capital structure decisions, managers should consider all of the following EXCEPT: a) tax benefits. b) expected cost of financial distress. c) asymmetric information. d) conditions in the stock and bond markets. e) none of these options is an exception.

none of these options is an exception

For most start-ups, the first round of external financing comes through: a) one or two angel investors. b) a public offering of stock. c) a dozen or more venture capitalists. d) bond issues. e) a unicorn portfolio company.

one or two angel investors

When corporate officers, directors, or major stockholders are found to have engaged in insider trading, any short-term profits made from it must be: a) turned over to the SEC. b) turned over to the corporation. c) turned over to the Federal Reserve Board. d) penalty taxed by the IRS. e) given to charity.

penalty taxed by the IRS

Merton Miller, working independently without Franco Modigliani, developed a theory that stated that, other things held constant: a) debt costs increase with financial leverage. b) financial distress and agency costs reduce the value of using corporate debt. c) personal taxes have no effect on the value of using corporate debt. d) personal taxes lower the value of using corporate debt. e) personal taxes increase the value of using corporate debt.

personal taxes lower the value of using corporate debt

The value of a firm's operations is determined by the: future value of its expected future free cash flows discounted at its weighted average cost of capital. present value of its expected future free cash flows discounted at its weighted average cost of capital. present value of its future net income discounted at the weighted average cost of capital. future value of its expected future net income discounted at the weighted average cost of capital. present value of its expected future net income discounted at the risk-free rate.

present value of its expected future free cash flows discounted at its weighted average cost of capital.

Using the Black-Scholes option pricing model to value equity, which of the following factors is replaced by the value of the firm? a) risk-free rate b) volatility of the market value of the underlying asset c) price of the underlying asset d) time to expiration e) strike price

price of the underlying asset

The SEC has control over the ______ statement and the way the company uses it to solicit votes.

proxy

A repurchase of stock does all of the following EXCEPT: a) increases the percentage of debt in the capital structure. b) reduces the number of shares outstanding. c) reduces earnings per share. d) reduces cash. e) reduces shareholder wealth.

reduces shareholder wealth

If long-term interest rates are high by historical standards and are expected to fall, managers will be: a) reluctant to use a call provision. b) reluctant to issue short-term debt. c) reluctant to issue long-term debt. d) anxious to issue long-term debt. e) reluctant to use floating-rate debt.

reluctant to issue long-term debt

The SEC regulates all national ________ ______, requiring companies to file annual reports similar to the registration statement with both the SEC and the exchange.

stock exchanges

When a firm goes private due to an MBO, it means that: a) the financing for the buyout involves substantial borrowing. b) the current management group has acquired the company. c) the outside funding for the buyout has come from a private equity fund. d) it has gone private as a result of a malicious takeover. e) multiple parties are involved in the transaction.

the current management group has acquired the company

(T/F) Optimizing the capital structure should cause the WACC to decrease, the value of operations to increase, shareholder wealth to increase, and the stock price to increase

true

(T/F): "IPO" stands for "initial public offering,"

true

(T/F): "Symmetric information" is one of Modigliani and Miller's (MM) more questionable assumptions that outside stockholders have the same information about a firm's future prospects as its managers. The introduction of asymmetric information led to the development of the signaling theory of capital structure, which postulated that firms are reluctant to issue new stock because investors will interpret such an act as a signal that the firm's managers are worried about its future. Other actions give off different signals, and the end result is that capital structure is affected by managers' perceptions about how their financing decisions will affect investors' views of the firm and thus its value.

true

(T/F): A corporation is said to be publicly owned if its shares are held by the investing public, which may include individuals, other corporations, and institutional investors.

true

(T/F): As part of its IPO duties, the investment bank (or its parent company) holds an inventory of the company's stock.

true

(T/F): As the term is generally used, a financial security refers to a publicly traded financial instrument as opposed to a privately placed instrument.

true

(T/F): By assuming that bankruptcy was not possible, Modigliani and Miller (MM) developed the trade-off theory, which states that a firm's value first rises with the use of debt due to the tax shelter of debt, but later falls as more debt is added because the potential costs of bankruptcy begin to more than offset the tax shelter benefits. Under the trade-off theory, an optimal capital structure exists.

true

(T/F): If the investment bank underwrites the initial public offering, it guarantees the sale of all of the stock being issued

true

(T/F): In Modigliani and Miller's second article, the authors concluded that a firm's value would be maximized, and its cost of capital minimized, if it used (almost) 100% debt, assuming the existence of corporate income taxes. However, their model did not take into account bankruptcy costs. The existence of bankruptcy costs leads to the assumption of an optimal capital structure where the debt ratio is less than 100%.

true

(T/F): Some notable economists believe that the existence of debt forces managers to focus on cash flow and to refrain from spending too much of the firm's money on private plane travel and other "perks," a situation that becomes an advantage to the stockholders. This is one of the factors that led to the rise of LBOs and private equity firms.

true

(T/F): The announcement of a carve-out (as opposed to the completion) is typically associated with a stock price increase for the parent company.

true

(T/F): The stock of a closely held corporation is illiquid.

true

(T/F): Two firms could have identical financial and operating leverage yet have different degrees of business risk.

true

(T/F): U.S. companies raise more equity through private placements than through public placements?

true

Firms are accused of bait and switch when they: a) issue stock dividends instead of cash dividends. b) use borrowed funds to invest in riskier assets than lenders anticipated. c) use retained earnings to invest in risky assets. d) issue stock and use the proceeds to pay off debt. e) issue debt to repurchase stock.

use borrowed funds to invest in riskier assets than lenders anticpated

The safest all-around financing strategy, in regards to managing the maturity of debt, is to: a) base decisions on investor expectations. b) schedule it to mature as quickly as is feasible. c) schedule it to mature as far into the future as is feasible. d) base decisions on expected interest rate levels and forecasts. e) use maturity matching.

use maturity matching