Chapter 11
When dealers wish to execute trades for customer orders before a stock is officially listed on an exchange, the trades occur on which market or exchange? a)Grey market b)Greensheet market c)Private market d)TSX Venture Exchange
a)A market sometimes develops for a security as a result of the distribution of a Red Herring Prospectus and/or advisors' use of a greensheet. Dealers wishing to either execute customers' orders or support the issue before the official listing can do so through the grey market, which is an unofficial OTC market.
If a company is in financial difficulty and in negotiations with the government for concessions and a potential bailout, which of the following trading orders would most likely be implemented if the government decides to refinance the company's debt? a)Halt in Trading b)Delayed Opening c)Suspension of Trading d)Temporary Trade Interruption
a)A temporary Halt in Trading is ordered to allow significant news to be reported and widely disseminated. The Canadian government's intention to refinance the debt of Air Canada and mediate with its unions could have resulted in massive buying activity on the stock. The TSX placed a Halt in Trading on the stock of Air Canada until the announcements were made and distributed through the media.
ECE Inc., which trades on the TSX, is about to announce the acquisition of a major competitor and wants to make sure that the information is released everywhere at the same time. What could it ask the exchange to do to facilitate the dissemination of this information? A. Request a halt in trading. B. Request a temporary interruption of trading. C. Request a suspension in trading. D. Request a temporary delisting.
a)A temporary halt in the trading of a security can be ordered or arranged at any time to allow significant news to be reported and widely disseminated (e.g., a pending merger or a substantial change in dividends or earnings). Score: 1/1
ABC company has 15.5 million shares issued of which 15 million are outstanding. Company X owns 4 million shares and Pension Fund Y owns 1 million shares. What is the public float of ABC? A. 10 million shares. B. 10.5 million shares. C. 11.5 million shares. D. 15 million shares.
a)Public float refers to the part of issued shares that are outstanding and available for trading by the public. Public float excludes shares owned in large blocks by institutions.
The capital pool company (CPC) program of the TSX Venture Exchange imposes funding and price limits for an issuer. What IPO offering price range is permitted when using this program? a)$0.15 to $0.30 b)$0.30 to $1.50 c)$0.50 to $1.00 d)$1.00 to $5.00
a)Raising funds through a normal IPO is usually not viable for small private companies. The TSX Venture Exchange created the CPC program to enable such companies to issue securities in a cost-effective manner. To ensure only small private companies use the program, the TSX stipulates that issuers must raise between $200,000 and $1,900,000 with shares priced between $0.15 and $0.30.
Which of the following is not a disadvantage of listing? A. Additional controls on management. B. Too much information available. C. Market indifference. D. Additional costs to the company.
b) * Additional controls on management: After listing, restrictions with respect to such matters as stock options (those issued for internal use only), reporting of dividends, issue of shares for assets, etc., are put in place. * Additional costs to the company: A listing fee and subsequent annual sustaining fee that must be paid to the exchange(s) when a class of shares is listed. Additional fees may be charged as well. Market indifference: Low trading volume in a listed company is a matter of public record.
Sydney is starting up a new small business selling computer parts and needs some financing. He has always been very successful at sales but is poor at the details of running the administration side of the business. Recommend a business structure that would work best for Sydney. A. Sole proprietorship. B. Partnership. C. Corporation. D. Cooperative.
b)A partnership, involves two or more persons contributing to the business, whether it be capital or expertise required to run the enterprise. A partner could be chosen who has capital to contribute and also has expertise in running a business. A corporation may be too expensive as he is just starting out. A sole proprietorship won't give him the capital or the support he needs on the admin side.
When risk capital is raised by junior corporations by means of treasury share underwritings through a stock exchange, it is priced at a discount to market value. What is the maximum discount permitted by the exchange? a)0% to 20% b)10% to 25% c)15% to 30% d)40% to 55%
b)A treasury share underwriting by a junior corporation through a stock exchange is usually priced below the stock's prevailing market price. The discount can be no greater than a stated schedule of percentages: 10% to 25%, depending on the market price of the shares.
The Government of Canada is issuing $1.25 billion in new fixed-coupon marketable bonds. The table below lists the competitive bids from the government securities distributors. What yield will be awarded to the firms who submitted a non-competitive tender? Bidder Competitive Bid Yield Size 1 4.021% $250 million 2 4.026% $250 million 3 4.033% $250 million 4 4.044% $250 million 5 4.051% $250 million 6 4.062% $250 million A. 4.021 B. 4.035 C. 4.040 D. 4.062
b)Bids can also be submitted on a non-competitive tender basis, whereby the bid is accepted in full by the Bank of Canada and bonds are awarded at the auction average. The first 5 bidders would be successful. The non-competitive yield is an average of these five bids.
What is an advantage for an issuer to use the Short Form Prospectus System? A. The issuer has less continuous disclosure requirements to fulfill. B. It shortens the time period by which a new issue may be offered to the public. C. It helps selling the issue in the public. D. It permits the issue to be offered in all Canadian jurisdictions automatically.
b)Certain issuers may access capital markets without the necessity of preparing a full preliminary and final prospectus prior to a distribution. The Short Form Prospectus System may be used only by certain senior reporting issuers. These are issuers who have made public distributions and who are subject to continuous disclosure requirements of annual financial and other required information. The short form prospectus works on the theory that much of the information that would be included in a full prospectus is already available and widely known because of this continuous disclosure. The system shortens the time period and streamlines the procedures by which qualified issuers can access Canadian securities markets through prospectus offerings. The system used for issuing short form prospectuses was substantially overhauled as of December 30, 2005 resulting in certain previous requirements being eliminated and the system becoming more streamlined. Under the new system, an issuer is permitted to use a short form prospectus if it: * files electronically using SEDAR; * is a reporting issuer in at least one Canadian jurisdiction; * is up to date in its filings in every Canadian jurisdiction in which it is a reporting issuer; * has filed current annual financial statements and a current AIF in at least one Canadian jurisdiction in which it is a reporting issuer; * is not an issuer whose operations are ceased or whose principal asset is cash, cash equivalents or exchange listing (i.e., capital pool companies); and * has equity securities listed and posted for trading or quoted on a short form eligible exchange (i.e., TSX, TSX V Tiers 1 and 2 and CNQ). Under certain circumstances a long form prospectus will still be required.
An investor purchased 1,000 shares of XYZ.com (an incorporated company) for $25 each. The company was subsequently sued for $750 million for breach of contract (equivalent to $75/share). The company later declared bankruptcy with unpaid debts equivalent to $15/share and the investor still held the shares at that point. What is the total amount that the shareholder lost on this investment? A. $15 per share. B. $25 per share. C. $40 per share. D. $75 per share.
b)Shareholders of a corporation have limited liability with respect to the company. They are not liable for debts of the company even in the event of bankruptcy. The maximum that can be lost is the shareholder's investment in the company. In this case, the investor will lose her entire investment of $25,000 or $25/share. She is not liable for any potential judgement in the lawsuit nor for the debts owed after the bankruptcy of the company.
A company sells 1 million shares at $27.50/share to the financing group which sells them to the banking group for $28.00/share. The lead underwriter receives a fee of $0.50 per share. The shares are sold to the public for $30.00/share. What is the amount of the proceeds to the company? A. $27.0 million B. $27.5 million C. $28.0 million D. $30.0 million
b)The company sells 1 million shares to the financing group for $27.50/share. Therefore, the total proceeds are 1 million x $27.50 or $27.50 million. The $0.50/share underwriting commission is reflected in the cost to the banking group of $28.00. The total underwriting cost is $2.50/share, that is, the difference between the $30.00 price to the public and the $27.50 proceeds to the company.
When submitting an application to be listed on a recognized exchange, which of the following is not required? a)Sample share certificates b)At least six years of profit/loss statements c)Copies of the company charter d)Written legal opinion by the company's counsel verifying all corporate matters
b)The listing application must be accompanied by: Copies of the charter The current prospectus Financial statements, including three to five years of profit/loss statements Sample share certificates Annual reports Written legal opinion verifying all corporate matters
Which of the following statements best describes the role of escrowed shares? a)The authorized shares of a company that have not yet been issued. b)An incentive for an underwriter to act as a principal rather than an agent. c)Shares that have been repurchased by the issuer and held in treasury. d)Shares held aside to satisfy a greenshoe option if the market value rises above the offering price.
b)To entice an underwriter to act as a principal in a bought deal rather than as an agent for a best efforts offering, junior companies may grant treasury share options to the underwriter. Optioned shares are set aside and held in escrow by a trust to be released to the beneficiary, based on a formula tied to business progress and/or results. The shares can be released from escrow only with the consent of an exchange administrator or a securities administrator.
Liz owns shares in GRN Inc. She strongly believes in companies being socially responsible to their shareholders and to the environment. She hears that some of the Directors on the Board of Directors agree with this position and some do not. At the next Annual Meeting the direction of the company in regards to this issue may be decided. Unfortunately, the Annual Meeting is in Vancouver and Liz lives in Halifax and cannot attend. What can she do to make sure that her voice is heard and that her vote counts? A. She should send an information circular to all the directors stating her point of view. B. Unfortunately there is nothing she can do unless she makes the effort to be at the meeting. C. She can sign a proxy which will give a proxy holder of her choice the right to attend the meeting on her behalf and vote. D. She can ask to have her shares put into a voting trust, leaving instructions as to how they are to be voted.
c)A proxy is a power of attorney given by a shareholder that gives a designated person the authority to vote the shareholder's stock at a shareholders' meeting. Under the federal act and many provincial acts, the proxy holder need not be a shareholder of the company. A proxy is given for one meeting and all adjournments thereof.
When securities of a company listed on a stock exchange are distributed through the facilities of a Canadian stock exchange, what form of disclosure is required? a)Full Prospectus b)Simplified Prospectus c)Statement of Material Facts d)Internet Prospectus
c)Companies already listed on a Canadian stock exchange may use a less detailed Exchange Offering Prospectus or Statement of Material Facts submitted to securities administrators and the exchange. The exchange, rather than the administrator, approves or disapproves the application for a new issue, which is a Canadian innovation for the TSX Venture Exchange.
Tenzin's brother is starting up a new business. While Tenzin has no knowledge of the business, she believes her brother will be very successful. She would like to share in that success and is willing to give him some capital to get started but does not want to participate in the daily business or to be at risk for more than the amount invested. What do you suggest she do? A. Have her brother set up a sole proprietorship to avoid all liability. B. She could become a general partner in a partnership with her brother. C. She could become a limited partner in a partnership with her brother D. She could just loan her brother money.
c)General partners are involved in the day-to-day operations and are personally liable for all debts and obligations incurred in the course of business. A limited partner cannot participate in the daily business activity but liability is limited to the partner's investment. Two people can't set up a sole proprietorship. She could loan her brother money but then would only be repaid with interest so she would not participate in the profits.
What situation would cause the number of shares outstanding to be lower than the number of shares issued? A. Some shares are owned as part of a control block. B. Some shares are held by senior management of the company. C. The company redeemed some of the shares. D. The company has not yet issued all authorized shares.
c)If a company redeems or repurchases some of the issued shares, then, shares outstanding may be less than shares issued.
When participating in a new underwriting, the dealer normally prepares a thorough study of the company, the industry in which it operates, the financial position of the company, future prospects and risk factors. What is this report called? A. Initial public offering report. B. Listing agreement. C. Due diligence report. D. Offering memorandum
c)The due diligence report is prepared by the dealer when negotiations begin for the issue of new securities. The report analyses all factors about the company pertinent to the evaluation of the new issue.
Which of the following is a disadvantage of listing a stock on a recognized exchange? a)More information available b)Facilitates valuation for tax purposes c)Additional disclosure d)Increases investor following
c)The requirements of full, true and plain disclosure occur not just at the time of listing but are ongoing and require extensive annual reporting on all aspects of corporate activity and results. This additional disclosure requires considerable corporate monitoring, resources, staffing and time, making it a significant disadvantage to listing. Transparency and disclosure can make being competitive a challenging experience.
What is the ceiling imposed on the total amount of bids for a government bond offering submitted by any primary dealer? A. 25% of the total of the bonds being offered. B. 30% of the total of the bonds being offered. C. 40% of the total of the bonds being offered. D. 50% of the total of the bonds being offered.
c)The total amount of bids submitted by any primary dealer may not exceed 40% of the total amount of the bonds being offered, and a bidder may not act in collusion with another bidder.
The lead underwriter can provide after-market stabilization after the close of a new issue by using the "over-allotment option". Why would this provision help stabilize prices if the market price was above the issue price? A. Dealer purchases to cover short positions would increase the demand for the stock. B. Dealer sales to cover short positions would increase the supply of the stock. C. The extra stock available from the over-allotment option would increase the supply of stock. D. The extra stock available from the over-allotment option would increase the demand for the stock.
c)With the "over-allotment option" available, the dealer initially sells more stock than the original offer by the issuer to the public. If the market price subsequently increases above the offer price, the dealer exercises the over-allocation option and uses the additional shares to cover his short position. The extra supply will help moderate price.
When must the management of public companies solicit proxies? A. For directors' meetings. B. For management committee meetings. C. For information meetings. D. For shareholders' meetings
d)Management of public companies must solicit proxies for shareholders' meetings. A proxy and information circular must accompany the notice of a shareholders' meeting which is sent to all shareholders.
When a company's performance, activity and/or status fall below the listing standards, which of the following exchanges or boards is available? a)The TSX b)The TSX Venture Exchange c)The OTC d)The NEX
d)The NEX is a new and separate board of the TSX Venture Exchange that provides a forum for trading the stock of companies that either have low levels of business activity or do not conduct active business. A stock may be put on the NEX because it does not meet tier maintenance requirements, the CPC failed to complete a qualifying transaction (QT), or it was a TSX-listed security that would have moved to the Venture Exchange for inactivity under the existing policies.
If brokers must resort to the OTC market to trade a TSX-listed stock, what form of withdrawal of trading privilege has been invoked? a)Temporary Cease Trade Order b)Delayed Opening c)Halt in Trading d)Suspension of Trading
d)Under a Suspension of Trading order, exchange members are usually allowed to execute orders on the suspended security in the unlisted market except for those securities suspended from trading on the TSX Venture Exchange.
