79 - Knopman -2

Which of the following provisions is typically included in the Confidentiality Agreement? A) Standstill agreement B) Fee arrangement C) Preliminary value indications D) Proof of financing

A The Standstill agreement is often included in the Confidentiality Agreement. For public targets, this precludes prospective buyers from making unsolicited offers or purchases of the target's shares, or seeking to control/influence the target's management, board of directors, or policies. The fee arrangement between the investment bank and client is typically found in the engagement letter. Financing commitments are in the final bid package and preliminary bid indications are included in the first round bid submission. Textbook Reference See textbook section 6.2

In regard to the prohibition on transactions in IPO shares by restricted persons with beneficial interest, whom do the 'anti-dilution provisions' protect? A) Pre-IPO investors B) All retail investors C) Underwriters D) Company executives

A The idea is that pre-IPO investors often take great risk to fund the venture stages of development, so they should not be diluted by IPO purchase restrictions. For example, a registered rep who would otherwise be prohibited from investing in an IPO could purchase shares to maintain their proportionate ownership of the company. Textbook Reference See textbook section 10.10

Assume the market S&P has increased 15% in value this year. XYZ Corp. Stock has increased 50% during the same time period. An investor who believed XYZ Stock would be a good investment now would be A) attempting to invoke a "Barbell" investment strategy. B) attempting to invoke a "Price Momentum" investment strategy. C) attempting to invoke a "Growth at a Reasonable Price" investment strategy. D) attempting to invoke an "Aggressive Growth" investment strategy.

B A "Price Momentum" investment strategy tries to ride stocks whose prices have risen much higher and faster than the overall market. Given the fact pattern of the question, price momentum is the best choice. An "Aggressive Growth "strategy is invested 100% in equities with any dividend payments reinvested in additional equity. Textbook Reference See textbook section 1.5.10

Operating leverage is best described as A) the extent to which EBITDA growth results in growth at the asset level B) the extent to which sales growth results in growth at the operating income level

B Operating leverage is the extent to which sales growth results in growth at the operating income level; it is a function of a company's mix of fixed and variable costs. A company whose costs are primarily fixed has more operating leverage than a company with a highly variable cost structure. section 2.3.7.1

A company's stock is trading at $15.00 and paid $0.25 per share in dividends last year, which are expected to grow by 6.0%. The company's discount rate is 8.0%. What is the company's implied stock price, calculated in accordance with the dividend discount model? A) $12.50 B) $13.25

B - $13.25 Under the dividend discount model, Stock Price = last year's dividend x (1 + growth rate) / (discount rate growth rate) = $0.25 x (1 + 0.06) / (0.08 - 0.06) = $13.25. See Chapter 7. This calculation is not specifically discussed in the book but it similar to the perpetuity growth formula. section 5.7.3

The present value of a company's future free cash flow (FCF) is $77 million through the third operating year, using the year-end approach. Assuming that the cost of capital does not change, what might be the present value of the same cash flow using a mid-year convention? A) $71 million B) $84 million

B - $84mm All else being equal, the use of a mid-year convention in discounted cash flow analysis (DCF) will result in a higher valuation than year-end discounting, because free cash flow (FCF) is assumed to be received sooner. With less "time value of money" impact, the free cash flow will be worth more. DCF converts all projected free cash flows to a present value, using the weighted average cost of capital (WACC) as the discount rate. section 5.6.1

Under the rules of SEC 10b-18 an issuer with an average trading volume less than $1 million per day or a public float value below $150 million is not advised to repurchase its own securities A) within 10 minutes of the end of the trading day B) within the first hour of the opening C) within 30 minutes of the end of the trading day D) at any time

C An issuer with an average trading volume of less than $1 million per day or a public float value below $150 million is not covered under the safe harbor within the last 30 minutes of trading. Companies with higher average daily trading volume or public float value are within the safe harbor up until the last 10 minutes of trading. Textbook Reference See textbook section 13.4

What form would a "smaller reporting company" use to file its quarterly report? A) Form 10-SB B) Form 10-QB C) Form 8-K D) Form 10-Q

D Since 2008, smaller reporting companies have been subject to "scaled" reporting requirements, but they still use the same reporting forms (10-K, 10-Q) as larger companies. Textbook Reference See textbook section 8.1

Which statement is false with regard to the M&A process? A) A separate financing team at the sell-side bank will set up the stapled financing package. B) Stapled Financing is primarily offered to financial sponsors rather than strategic buyers. C) An initial bid procedures letter is sent out by the sell-side advisor during the first round of the M&A process. D) A potential buyer that signs a confidentially agreement would be precluded from releasing its own analyst projections or discussing information contained in research reports.

D Answer Explanation All the statements are true except for the one referring to the confidentiality agreement. A buyer would have no restrictions on releasing or discussing information related to their research reports. This is already public information. Textbook Reference See textbook section 6.4.3

Which of the following valuation multiples is most helpful when valuing divisions of public companies? A) EV/EBITDA B) P/E C) EV/Sales D) EV/EBIT

D Answer Explanation EV/EBIT is helpful in situations where D&A is unavailable (e.g., when valuing divisions of public companies) or for companies with high capex. EV/EBITDA serves as a valuation standard for most sectors, but is difficult to calculate for a specific division of a company. It is independent of capital structure and taxes, as well as any distortions that may arise from differences in D&A among different companies. In certain sectors, as well as for companies with little or no earnings, EV/sales may be relied upon as a meaningful reference point for valuation. The P/E ratio, calculated as current share price divided by diluted EPS (or equity value divided by net income), is the most widely recognized trading multiple, but difficult to calculate for a specific division. Textbook Reference See textbook section 3.7

In a declining economic environment, one would expect a company to trade at a I. Higher multiple of FY1 (Forward Year 1) earnings than LTM earnings II. Higher multiple of LTM earnings than FY1 (Forward Year 1) earnings III.Lower multiple of LTM earnings than FY1 (Forward Year 1) earnings IV. Lower multiple of FY1 earnings than LTM earnings

I & III In a declining environment, earnings are expected to decrease. Therefore, multiples of future earnings are expected to be higher than trailing earnings. Here is an example: Current Stock Price = $20 LTM EPS = $5.00 FY1 EPS = $4.00 (lower than last year due to declining economic environment. Therefore, LTM P/E multiple of 4x ($20/$5.00) is lower than the FY1 multiple of 5x ($20/$4.00) Textbook Reference See textbook section 3.4

Rank the following events in the order in which they occur in an M&A auction process: I. Seller signs an engagement letter II. Buyers return a Letter of Intent III. Buyers receive a Teaser IV. Buyers receive an Information Memorandum

I,III,IV,II In an M&A transaction, key process documents typically follow this order: 1. Seller signs an engagement letter with an adviser. 2. Seller delivers a Teaser to each potential acquirer along with a Confidentiality Agreement (CA) 3. Acquirers sign and return the CA 4. Seller delivers a Confidential Information Memorandum (CIM), also called a Detailed Memorandum or Information Memorandum, to each potential acquirer along with the Initial Bid Procedures Letter. 5. Seller receives first round bids from potential acquirers. First round bids may be called Indications of Interest (IOIs), Statements of Interest (SOIs) or Letters of Intent (LOIs) 6. In the second round, the seller and buyer do site visits, management presentations, and the seller makes the data room available. 7. The seller distributes the Final Bid Procedures Letter to each potential acquirer. 8. The seller receives Final (i.e. Second Round) Bids from each potential acquirer. 9. The seller and acquirer sign a Definitive Agreement and announce the transaction.

At which milestones does a buyer make a public announcement regarding an acquisition? I. When the Board of Directors is apprised of the details of the bid II. Upon signing a definitive agreement III. Upon hiring a financial adviser IV. Upon deal closing

II & IV The buyer makes a public announcement upon signing a definitive agreement with the target and upon deal closing. The buyer is NOT required to make a public announcement when it hires an adviser or when the Board is apprised of the transaction details. section 6.6

Which statement(s) are true with regard to stapled financing? I. It must be offered to all buyers. II. It reduces execution risk. III. Stapled financing is subject to credit approval. IV. It allows bidders to view pre-arranged financing terms.

II, III, & IV Although stapled financing is offered by the sell-side advisor there is no requirement that it be offered to all bidders. Textbook Reference See textbook section 6.4.3

OrangeCo, Inc. announces that it has entered into a Definitive Agreement to be acquired by AppleCo, Inc. Under the terms of the agreement, OrangeCo, Inc. will be acquired for $50,000,000, with 80% of the consideration in newly issued AppleCo, Inc. common stock and the rest in cash. The cash will be financed with debt, at a pre-tax cost of 13%. Furthermore, AppleCo, Inc. expects to recognize $350,000 in after-tax transaction synergies upon closing the deal. Using the information provided here, along with the data in Exhibit 102, which of the following is true regarding this transaction? A) The transaction is accretive by $0.03 per share on a diluted basis B) The transaction is accretive by $0.07 per share on a diluted basis

In order to complete the accretion/(dilution) analysis, it is first necessary the calculate AppleCo, Inc.'s standalone diluted shares outstanding and standalone net income. Because the outstanding options are in-the-money, there will be new shares issued, and the proceeds used to repurchase shares in the open market. The net new number of shares issued, using the Treasury Stock Method = (current stock price avg exercise price)/(current stock price) x number of options shares = ($47.32 - $31.25)/$47.32 x 5,500,000 = 1,867,815. Standalone diluted shares outstanding = reported shares outstanding + net new shares issued for options = 83,000,000 + 1,867,815 = 84,867,815. Standalone net income = reported EPS x reported outstanding shares = $1.78 x 83,000,000 = $147,740,000. Also, standalone diluted EPS = net income/diluted shares outstanding = $147,740,000/84,867,815 = $1.74. AppleCo, Inc. will issue new shares to finance the transaction. The number of new shares issued = (Purchase price for target x % stock consideration)/current stock price = ($50,000,000 x 80%)/$47.32 = 845,309. Therefore, the pro forma diluted shares outstanding, after the transaction = AcquirerCo standalone shares outstanding + new shares issued for transaction = 84,867,815 + 845,309 = 85,713,123. Finally, it is necessary to calculate the combined entity's pro forma net income, taking into account the synergies and the after-tax cost of debt. The cash consideration of 20% (100% - 80% stock consideration), will require AppleCo, Inc. to issue new debt of $10,000,000 (20% x $50,000,000 total purchase price). The interest expense on the debt = cost of debt x $10,000,000 = 13% x $10,000,000 = $1,300,000. Since interest expense is tax deductible, the after-tax cost of debt = pre-tax interest x (1 tax rate) = $1,300,000 x (1 - 42%) = $(754,000). This is a negative number because it will be a deduction from combined net income. The combined entity's net income = AcquirerCo net income + TargetCo net income + synergies + after-tax cost of debt = $147,740,000 + $7,500,000 + $350,000 + $(754,000) = $154,836,000. Therefore, pro forma EPS = Pro forma net income/pro forma outstanding shares = $154,836,000/85,713,123 = 1.81. Since the combined EPS is greater than AppleCo, Inc.'s standalone diluted EPS of $1.74, the transaction is said to be accretive, by $0.07 (1.81 - $1.74). section 6.4.4.1

The sell-side adviser performs all of the following functions with regard to the virtual data room EXCEPT A) providing recommendations on vendors B) programming enhanced functionality

The sell-side advisor monitors dataroom access throughout the process, including the viewing of specific items. This enables them to track buyer interest and activity, draw conclusions, and take action accordingly. The sell-side adviser also ensures new data is uploaded to the dataroom in a timely fashion. Upfront, the adviser makes a recommendation on potential dataroom vendors. The programming of enhanced functionality of the dataroom is the domain of the vendors, not the bankers. section 6.4.2

A registered rep verbally recommends that a customer participate in a structured portfolio of stocks. The rep's firm previously has participated in underwriting several stocks in this portfolio. Must the rep disclose this control relationship at the time of the recommendation? If so, how? A) Yes, a verbal disclosure is required. B) No, because disclosure is only required when customers purchase individual stocks, not structured portfolios. C) Yes, a written disclosure is required. D) No, because disclosure is only required at the time of transaction, not the time of recommendation.

a Answer Explanation The SEC requires broker-dealers to disclose to customers any control relationship they have with the issuer of securities offered or sold. This disclosure is triggered by a verbal recommendation to buy or sell securities. A verbal disclosure may be made at the point of offer or recommendation. A written disclosure is required at or before completion of the transaction. For this purpose, a structured portfolio of stocks is treated as a collection of individual securities. Textbook Reference Please see textbook section 10.11

Under Regulation A+, the maximum amount of capital that can be raised is referred to as the A) Aggregate Offering Price B) Integration with Other Offerings C) Continuous Offering D) Offering Conditions

a Answer Explanation As defined under Regulation A+, the aggregate offering price shall not exceed $50 million, of which no more than $15 million can be offered by selling security holders. In addition, in a case where a combination of cash and non-cash consideration is received, the aggregate offering price is based on the cash price for the securities. Textbook Reference See textbook section 12.2

Which of the following is TRUE regarding a registrant's financial information disclosures in its 10-K? A) The registrant must disclose the top 50 list of customers by revenues for the last three fiscal years. B) The registrant must disclose all foreign countries, in total, from which it derives revenues for the last three fiscal years. C) The registrant must disclose all compensation paid to foreign dignitaries for the last three fiscal years. D) The registrant must disclose amounts paid for executive travel for the last five fiscal years.

b Answer Explanation Pursuant to Regulation S-K, a registrant must disclose all foreign countries, in total, from which it derives revenues for the last three fiscal years. The 10-K will display this information as a data table showing country or geographic region and the dollar amount of sales (and potentially operating income) derived from that location. This disclosure assists shareholders in evaluating risk associated with the source of sales and profit. Textbook Reference See textbook section 8.1

According to Regulation M, FINRA notice is required in all of the following circumstances EXCEPT A) intention of the underwriters to conduct penalty bids or syndicate covering transactions B) intention of an OTC market maker that is participating in the distribution to withdraw its quotes C) determination of the price of a security for which a restricted period applies D) determination of the applicable restricted period for a new offering of securities

b Answer Explanation Reg M requires FINRA notice of restricted periods for distribution participants and also the price of the security for which a restricted period applies. Furthermore, if a syndicate intends to stabilize the offering by conducting penalty bids or covering transactions, additional FINRA notice is required. The withdrawal of quotes by market makers in subject OTC equity securities does not require FINRA notification. Textbook Reference See textbook section 10.14

The Hart-Scott-Rodino Act of 1976 applies to A) Ownership limitations by foreign companies in selected US strategic sectors B) Strategic combinations within the military sector C) Strategic combinations within the telecommunications sector D) M&A activity compliance with antitrust guidelines

d Depending on the size of the transaction, the HSR Act requires both parties to an M&A transaction to file respective notifications and report forms with the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ). section 6.7

The red-herring for Steelpoint Inc.'s IPO states that the company was founded by two brothers in 2010. After the registration but before the effective date, the company wishes to clarify this information by stating that one brother did not join the company until 2013. Can this correction be made in a free writing prospectus? A) no, because it conflicts with information in the red-herring B) yes, in all cases C) yes, provided that it clearly states that the red-herring information is in error D) yes, provided that the company's board of directors approves the free writing prospectus

A A free writing prospectus is designed to supplement information in the registration and red-herring. It cannot be used to make corrections to material facts in those filings - i.e., when it is in conflict with them. The registration and red-herring will need to be amended with the correct facts, and then the free writing prospectus can be used to clarify. Textbook Reference Please see textbook section 7.6

Which statement is true about the proper use of proxies? A) In situations where a preliminary proxy is required (PRE14A) it must be filed with the SEC, at least 10 days prior to mailing the definitive proxy (DEF14A) to the shareholders. The shareholders must receive the definitive proxy at least 20 days before the shareholder vote. The information found in a preliminary proxy and a definitive proxy will be identical. B) In the case of a merger vote a preliminary proxy does not need to be filed with the SEC. The shareholders must be sent a definitive merger proxy (DEFM14A) at least twenty days prior to the vote. C) Each time shareholders get to vote, a preliminary proxy (PRE14A) must first be sent to the SEC. After a 20-day waiting period the SEC clears the proxy application. At that point, a definitive proxy (DEF14A) is sent to the shareholders in order for them to cast their vote. D) The proxy statement should include various pieces of information. It should disclose the names of the officers, directors, and greater than 5% shareholders. In situations where a director is up for election, the company must disclose the voting record of that director so shareholders can make an informed judgement. The minutes of the board of director's meeting will be included in the proxy disclosure to add additional context on how the director voted.

A Answer Explanation A preliminary proxy (PRE14A) is only filed with the SEC 10 days prior to mailing the definitive proxy (DEF14A) if the matter being voted on is not considered routine. A merger vote would always require a preliminary proxy. shareholders must receive the definitive proxy at least 20 days prior to the vote. Information in the preliminary and definitive proxies are identical. Although it contains detailed director, information, director voting records are not disclosed, nor are board of director minutes. If directors attended less than 75% of last year's meetings that would be a required disclosure. Textbook Reference See textbook section 8.1.5

The private placement rule states that the person to whom the offer of securities is made must be an informed person A) who either has access to the same type of information contained in a registration statement or is furnished such information B) who has a net worth of $2 million C) or a person who signs a statement testifying that he will not hold the broker-dealer responsible for any losses D) but the person need not have access to the same type of information contained in a registration statement

A For private placement transactions, any potential investor must have access to, or must be furnished with, the information about the issuer that would normally be available in a registration statement. section 11.1

All of the following statements regarding a purchaser representative in a Regulation D transaction are true EXCEPT A) Purchaser representatives are required to assist accredited investors in evaluation of the merits and risk of the investment B) Disclosure of any material relationship with the issuer that has existed within the past 2 years must be made by the purchaser representative C) A purchaser representative cannot be an affiliate, director, office or other employee of the issuer D) There must be a written acknowledgement of the relationship signed by the purchaser

A Purchaser representatives are required to assist non-accredited investors in evaluating the merits and risks of a Reg D investment, if the non-accredited investor does not have experience with these types of transactions. Textbook Reference See textbook section 12.4

To qualify as a well-known seasoned issuer (WKSI), a company must have issued at least $1 billion in non-convertible debt in primary offerings for cash over what period? A) The past three years B) The past two years C) The past year D) Since the company's IPO

A The issuance test is based on the prior three years. Also note that it is based on primary offerings. The issuance test applies if the company does not meet the stock market capital test of $700 million. Textbook Reference See textbook section 7.2

What document defines the terms of any over-allotment options granted to the underwriters of a public offering under a greenshoe provision? A) underwriting agreement B) sales contract C) agreement among underwriters D) underwriting addendum

A The underwriting agreement (also known as the purchase agreement) is a written contract between the issuer and investment banking firms in the syndicate. It defines the arrangement between them, including any greenshoe. Textbook Reference Please see textbook section 10.2

ABC Industries owns a majority of the shares of a public company and controls its board of directors. However, this company's minority shareholders feel ABC has mismanaged its businesses and left it undervalued. They are demanding seats on the board. In response, ABC launches a tender offer at a price just above the company's public share price, to take the company private and eliminate minority shareholders and their dissent. What is this strategy called? A) fair value lock-out B) freeze-out C) tender squeeze D) buy-up

B A minority freeze-out is a tender offer made by a majority shareholder of a public company to buy the shares of minority shareholders and take the company private. The tender usually is made at a price just above the public stock price, which technically protects minority shareholders by offering them fair value. The minority shareholders are forced to choose between accepting the tender or fighting the company legally. Textbook Reference Please see textbook section 13.2

For a non-automatic shelf registration, what is the maximum period of time that may elapse after the effective date of the prior registration in order to offer securities? A) Three years B) 180 days after the third anniversary

B A non-automatic shelf registration may be offered for up to 180 days after the third anniversary of the prior registration's effective data. The filing of a new registration statement will "refresh" this period. section 7.4.1.2

An investor in an IPO paid $20 per share. The investor then claims there was untrue or omitted information contained in the prospectus, and she sues the underwriter who sold the shares. She ultimately sold the shares at $15 a share, a loss of $5 per share. What damages is she entitled to claim under Section 12 of the Securities Act of 1933? A) $15 per share (three times the amount of her losses) B) $5 per share plus interest

B Damages claimed under Section 12 for untrue or omitted information in prospectuses and oral communications is generally limited to consideration paid (with interest) less income or consideration received. The investor can be made whole, though there is no provision for punitive damages. section 7.11.1.2

Tim is a registered representative who has a control relationship with the issuer of securities. He makes an offer of the issuer's securities to his clients, the Howells. At the time of the offer, he makes a verbal disclosure of his control relationship. Assuming the Howells want to buy the securities, what else must he do to avoid deception and manipulation? A) Nothing, he has satisfied his obligations with the verbal disclosure. B) He must disclose the control relationship in writing prior to the sale's completion C) He must inform the SEC in writing prior to the sale's completion D) He must withdraw the offer

B For purposes of the "interest in distribution" rule, a verbal disclosure of a control relationship is not sufficient to avoid a manipulative and deceptive transaction. The broker must disclose the relationship in writing prior to completing the transaction. Textbook Reference See textbook section 10.11

If a syndicate manager expects the closing of an offering to be delayed, the firm is required to notify FINRA of this fact A) At least one day prior to the scheduled closing date. B) No later than the scheduled closing date. C) At least five days prior to the scheduled closing date. D) No later than the actual closing date.

B If a syndicate manager expects the closing of an offering to be delayed; it is required to notify FINRA's Corporate Finance Department immediately, but no later than the scheduled closing date. section 10.5.1

A corporation places a tender offer to repurchase 30,000,000 of its outstanding shares. At the conclusion, a total of 50,000,000 shares have been tendered by investors. What is the issuer's required response to this tender? A) It is required to accept shares pro-rata from all shareholders. B) It is required to accept shares pro-rata from all shareholders who have tendered shares.

B If a tender offer is oversubscribed; the shares are accepted pro-rata from all shareholders who have chosen to tender shares. This means that the purchaser will accept the same percentage of shares from all selling shareholders. section 13.2

ABC Co, Inc., an SEC filer in good standing, has a non-affiliate market capitalization of $600 million. ABC subsequently issues $200 million of non-convertible notes, its first debt issuance in the last three years. If ABC subsequently decides to do a follow-on equity offering, which of the following is TRUE? A) ABC could issue a free-writing prospectus discussing the new equity offering prior to filing the registration statement. B) ABC would be required to file a Form S-3 before distributing a free-writing prospectus. C) ABC is prohibited from using a free-writing prospectus. D) ABC would be required to file a Form S-1 before distributing a free-writing prospectus.

B In this scenario, ABC would qualify as a seasoned issuer because it has a non-affiliate market cap of at least $75 million and has been an SEC filer for at least one year. As a result, it is eligible to file an S-3 to register, and could use an FWP after the S-3 has been filed. ABC does not qualify as a WKSI because it has neither a $700 million non-affiliate market cap nor total debt issuance of $1 billion in the last three years. Textbook Reference See textbook section 7.2

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) manage at least $100 million in total assets C) access to the type of information of a statutory prospectus D) agree not to resell the securities

B 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). Textbook Reference See textbook section 12.4

Restricted and control securities under Rule 144 are A) Acquired only through exchange offers B) acquired in the open market or in a private placement C) acquired only via open market transactions D) acquired only in private placements

B Investors traditionally are granted or receive restricted securities through private placement offerings, Regulation D offerings, Employee Stock Ownership Plans (ESOPs), as compensation for professional services, or in exchange for providing venture capital funding. Control securities are owned by a corporate insider and can be acquired either via a private sale or in the open market. Textbook Reference See textbook section 12.7

What type of companies are generally issuers of PIPEs? A) Public agencies B) Small-cap and micro-cap companies C) Start-ups that have not yet gone public D) Well-known seasoned issuers

B PIPEs (private investments in public equity) are a market that is tapped mainly by small-cap and micro-cap companies to raise financing. Some of these companies have a difficult time accessing capital in public markets. PIPEs also can help them raise money faster than a public registration by avoiding the time and expense associated with preparing a prospectus. Textbook Reference See textbook section 1.2

In an IPO, an underwriter must file the required number of copies of the final prospectus with the SEC A) before the effective date B) prior to first use with the public C) at the time the issue is priced D) simultaneously with the red herring

B Ten copies of the final prospectus must be filed with the SEC prior to first use with the public. Textbook Reference See textbook section 7.8

Fast Movers, Inc. buys a new van for $40,000. The van has a useful life of 8 years and a salvage value of $3,000. For accounting purposes, Fast Movers, Inc. depreciates the van on a straight line basis. For tax purposes, it uses a form of accelerated depreciation and books $18,500 of depreciation expense at the end of the fiscal year. Fast Movers, Inc. has a marginal tax rate of 45% and an effective tax rate of 40%. Which of the following is true regarding the effect of these transactions as of the end of the fiscal year A) Fast Movers, Inc. has a deferred tax liability of $5,550 B) Fast Movers, Inc. has a deferred tax liability of $6,244

B Under straight-line depreciation, the annual depreciation = (purchase price salvage value)/useful life = ($40,000 - $3,000)/8 years = $4,625. Since the company declares a greater depreciation expense for tax purposes, this will lead to lower declared income and lower taxes paid than it actually reports. As a result, this creates a deferred tax liability the company will need the pay the difference at some point in the future. The amount of the deferred tax liability = (tax depreciation accounting depreciation) x marginal tax rate = = ($18,500 - $4,625) x 45% = $6,244. The effective tax rate is a blended rate that is not used when adjusting financial statements. section 2.4.2.2

Under discounted cash flow (DCF) analysis, which company will have the highest weighted average cost of capital (WACC)? A) High beta stock, investment grade debt B) High beta stock, speculative debt C) Low beta stock, investment-grade debt D) Low beta stock, speculative debt

B WACC combines the cost of equity and the cost of debt. The cost of equity is driven primarily by the beta of the company stock, and the higher the beta (risk) the higher the cost of equity capital. The cost of debt is captured in the current yield on the company's bonds or loans. Speculative-grade debt will have higher current yields. section 5.4

A company files an S-1 registration form for an IPO. Which statement is accurate as to the treatment of each of the following circumstances where additional information is brought to the public during the cooling off period? A) The company filing the S-1 registration is a SPAC. The CEO is interviewed on television about the types of companies to be acquired. This interview can be filed as a Free Writing Prospectus and would have to be filed with the SEC on the day of first use. B) Verbal efforts to collect indications of interest is considered to be a Free Writing Prospectus and would have to be filed with the SEC on the day of first use. C) While the SEC is examining the S-1 registration, the issuer decides it would be beneficial for all future investors to view glossy photographs of prototypes on their website. This website is considered to be a Free Writing Prospectus and would have to be filed with the SEC on the day of first use. D) Research published by a broker-dealer is considered to be a Free Writing Prospectus and would have to be filed with the SEC on the day of first use.

C A free writing prospectus (FWP) is a written or graphic communication other than the full prospectus that is an offering to sell a securities. FWPs are used to provide additional or supplemental information not found in the preliminary prospectus. Examples include term sheets, glossy product pamphlets, and websites describing the product. FWPs must be filed on the day of first use. Special Purpose Acquisition Companies and companies that have filed for bankruptcy in the last three years are ineligible to file a FWP. A phone call from the syndicate desk is not an FWP. Textbook Reference See textbook section 7.7

Which of the following types of mergers is typically the fastest from signing to closing? A) Tender in which squeeze-out threshold is not reached B) One-step merger C) Two-step tender with squeeze-out D) Hostile transaction

C Answer Explanation In a "one-step" merger transaction for public companies, target shareholders vote on whether to approve or reject the proposed transaction at a formal shareholder meeting pursuant to relevant state law. Prior to this meeting, a proxy statement is distributed to shareholders describing the transaction, parties involved, and other important information. In a one-step merger, the timing from the signing of a definitive agreement to closing may take as little as six weeks, but often takes longer (perhaps three or four months) depending on the size and complexity of the transaction. Alternatively, A public acquisition can be structured as a "two-step" tender offer on either a negotiated or unsolicited basis, followed by a merger. In Step I of the two-step process, the tender offer is made directly to the target's public shareholders with the target's approval pursuant to a definitive agreement. The tender offer is conditioned, among other things, on sufficient acceptances to ensure that the buyer will acquire a majority (or supermajority, as appropriate) of the target's shares within 20 business days of launching the offer. If the buyer only succeeds in acquiring a majority (or supermajority, as appropriate) of the shares in the tender offer, it would then have to complete the shareholder meeting and approval mechanics in accordance with a "one-step" merger (with approval assured because of the buyer's majority ownership). However, if the requisite threshold of tendered shares is reached as designed (typically 90%), the acquirer can subsequently consummate a back-end "short form" merger (Step II) to squeeze out the remaining public shareholders without needing to obtain shareholder approval. In a squeeze out scenario, the entire process can be completed much quicker than in a one-step merger. If the requisite level of shares is tendered, the merger becomes effective shortly afterward (e.g., the same day or within a couple of days). In total, the transaction can be completed in as few as five weeks. Textbook Reference See textbook section 6.7

Corporate insiders - also known as affiliates, are required to file various forms at different times with the SEC. What would be an accurate depiction of when these forms must be filed? A) Form 4 is filed if the insider receives stock as compensation or exercises a stock option in order to receive stock. B) Form 3 is filed if an insider loses their status of being an insider, such as leaving the company as a corporate officer or director, or divesting their ownership interest. C) Form 5 is filed if the insider decides to transfer stock to a spouse or other person as a gift. D) Form 3 is filed every time an insider makes a trade in the public markets.

C Form 3 is filed when a person or entity becomes an insider. Form 4 is filed when an insider makes a trade in the open market or when the insider no longer meets the definition of an insider. Form 5 is filed for every other change in ownership that is not a buy/sell in the open market. This would include: receiving stock as compensation, exercising a stock option, investing in a private placement, or gifting stock. Textbook Reference See textbook section 8.4

A broker-dealer wishes to take ABC Company public with an IPO. ABC has only been in existence for only two years. The broker-dealer's research analysts and investment bankers can perform "joint due diligence" in the following circumstances? A) Joint due diligence is only permitted in an M&A engagement where the consideration being paid is all cash. B) These two departments within the broker-dealer can never work together in any situation. They must remain separate. C) They could have joint meetings with the management team of the company being taken public, if annual sales in the most recent fiscal year is $800 million. D) This would be allowed if the company being taken public had $2 Billion of annual sales in its most recent fiscal year.

C Joint due diligence is permitted when king the underwriting mandate of an Emerging Growth Company (EGC). This is defined as a company with less than $1 Billion in sales during its most recent fiscal year. Textbook Reference See textbook section 7.3

The individual investor limit on crowdfunding investment is based on A) Cumulative investment in all crowdfunding offerings over a rolling three-year period B) Total investment in all crowdfunding offerings over a calendar year C) Total investment in all crowdfunding offerings over any 12-month period D) Investment in any single crowdfunding offering

C SEC rules limit the amount an individual can invest on an annual basis in all crowdfunding issues. The limit is based on an individual's annual income and/or net worth. For this purpose, "annual" means over any trailing 12-month period. Textbook Reference See textbook section 12.8.3

Who is responsible for assuring that an investor does not exceed the annual limit (for individual investors) on crowdfunding investment in a calendar year? A) The issuer, the introducing broker and the intermediary B) The introducing broker C) The intermediary D) The issuer

C The intermediary is responsible for ensuring an investor does not exceed the annual limit. This applies to both broker-dealers and registered funding portals. The issuer does not have this responsibility, unless it has reason to know an individual has exceeded the limit. Textbook Reference See textbook section 12.8.3

ABC Corporation has one million shares of common stock, of which the public float is 900,000 shares. To qualify for an S-3 filing, what is the maximum amount of common shares that the company may have sold under an S-3 in the previous 12 calendar months? A) 333,333 shares B) 500,000 shares C) 300,000 shares D) 450,000 shares

C The limit for an issuer to be able to file a Form S-3 is one-third or 33.3% of the public float within the previous 12 calendar months. The public float is defined as shares held by the public - i.e. not officers, directors or shareholders with a 10% voting interest. Textbook Reference See textbook section 7.1

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. Jane Securities is an underwriter in the transaction and has a 15% allocation. Of its allocation, it sells 2/3 of the shares directly to clients and the remaining third are sold by its selling group. What is the total compensation received by Jane Securities? A) $50,000 B) $475,000 C) $425,000 D) $666,667

C 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. As an underwriter, Jane Securities has a total allocation of 15% of 5 million shares, or 750,000 shares. It receives the full takedown for the shares that it sells and the underwriting fee for the shares sold by the selling group: 2/3 of allocation x 750,000 shares x $.85 = $425,000 1/3 of allocation x 750,000 shares x $.20 = $50,000 Total = $475,000 Textbook Reference See textbook section 9.5

In a public offering of $1 par value stock for $9 per share, the underwriting spread is $1. What is the increase to the issuer's net worth? A) $9 per share B) $10 per share C) $8 per share D) $7 per share

C The underwriter is offering the shares to the public at $9 per share. For every share the underwriter sells it keeps the $1 spread. The remaining $8 proceeds from every share go to the issuer. section 9.5.1

For a buy-side banker advising its client, which of the following changes to contractual items might make its client's offer LESS appealing to the target? A) Lesser indemnification rights B) Looser target covenants C) A lower break-up fee D) Looser Material Adverse Effect (MAE) provision in the Definitive Agreement

D A break-up fee for a superior offer refers to a payment made by the company to the buyer in the event the target company terminates the deal to take a better offer. A lower break-up fee is usually deemed more favorable to the seller than the buyer. In a sale contract, indemnification rights typically refer to items for which the seller will indemnify the buyer for breaches of the representations and warranties. For example, the seller represents that it has no environmental liability. However, post-closing, a $100 million environmental problem is discovered. If the buyer had an indemnification against environmental liabilities, the seller would be required to pay the buyer $100 million (less any negotiated "deductible"). Indemnification rights are often limited in several respects, such as time during which a claim can be made, cap on maximum indemnity, losses that the buyer must absorb before making a claim (a deductible). Therefore, sellers prefer fewer and more lenient indemnification rights, while buyers prefer greater indemnification rights. In a sale contract, covenants refer to assurances that the target will operate in the ordinary course between signing and closing, and will not take value-reducing actions or change the business. Examples include restrictions on paying special dividends and restrictions on making capital expenditures in excess of an agreed budget. Therefore, sellers typically prefer looser covenants rather than tighter covenants. The material adverse effect (MAE), or material adverse clause (MAC), is typically a highly negotiated provision in the definitive agreement, which may permit a buyer to avoid closing the transaction in the event that a substantial adverse situation is discovered after signing or a detrimental post-signing event occurs that affects the target. As a general rule, buyers prefer loose MACs that afford wiggle room in the event that company performance or market conditions, for example, deteriorate; sellers, on the other hand, prefer very narrowly defined MACs that make it very hard for buyers to walk away. Textbook Reference See textbook section 6.6

Which of the following is TRUE regarding the restricted period in connection with a merger? A) It is based on both the acquirer's and target's shareholder vote. B) It is based only on the acquirer's shareholder vote. C) There is no restricted period in a merger. D) Is it based only on the target's shareholder vote.

D According to the definition of restricted period in Rule 100 of Regulation M, the restriction period begins on the date that the proxy statement or prospectus materials are sent to target shareholders and ends upon completion of the distribution. section 10.14.1

Garrison is a registered rep affiliated with ABC Securities, a broker-dealer. He tells his client that she can buy shares in a hot IPO "at the market." ABC Securities is participating in the IPO as an underwriter. In which case is this statement permitted by regulation? A) Shares are bought in the secondary market on a principal basis through ABC Securities. B) Shares are bought in the secondary market on a principal basis, but through another underwriter. C) Shares are allocated at the public offering price by the syndicate. D) Shares are bought in the secondary market on an agency basis.

D An SEC rule prohibits broker-dealers involved in securities offerings from stating that securities are offered at the market, unless such a market exists and has not been made solely by the broker-dealer or the syndicate. If shares are bought on a principal basis through ABC or any other underwriter, the transaction is not at the market. Shares allocated at the public offering price also are not at the market, because the market doesn't set this price. Textbook Reference Please see textbook section 10.6.1

To qualify for the Rule 168 exemption for factual or forward-looking information, the timing, manner and form of communications (made by or on behalf of issuers) must A) adhere to policies adopted by the company's Board of Directors. B) be written in plain English and avoid confusing jargon. C) conform to published SEC guidelines. D) be consistent with similar past releases.

D Factual or forward-looking information should be consistent with the timing, manner and form of similar past releases made by the same company. Textbook Reference See textbook section 7.9

Rule 504 of Regulation D allows companies to sell a maximum of A) $1 million per offering B) $1 million in a 6-month period C) $5 million per offering D) $5 million in a 6-month period

D The Rule 504 exemption is only available for private placements (not advertised to the public), and securities must be restricted from resale to the public without registration. The maximum offering size is $5 million in a 6-month period. Take note, that the threshold was recently increased from $1 million. Textbook Reference See textbook section 12.4

ABC Corporation recently issued an IPO. Shortly thereafter it decides it wants to buy back some of its shares. What time frame restrictions would ABC face in order to buy back their own stock? A) The issuer would have to wait a minimum of six months before beginning to buy back stock. B) After a company has an initial public offering it must wait a full year before it is permitted to buy back shares under the 10b-18 safe harbor rules. C) After a company has an initial public offering it has no time restriction preventing it from being eligible to repurchase its stock in the open market. It could do so as soon as it chooses. D) The issuer would have to wait a minimum of four weeks before beginning to buy back stock.

D Under Rule 10b-18, an issuer can do a share buyback four weeks after its IPO. Textbook Reference See textbook section 13.4.1.1

Use the data in Exhibit 202 to answer the following question. JimPrivateCo intends to raise capital by selling 85 million shares of common stock in an IPO. The investment bank rep advising JimPrivateCo on the transaction estimates that comparable companies in its sector tend to trade at a multiple of 14.2 - 16.3 times 2010 expected earnings. The equity capital markets rep advising JimPrivateCo advises the company to price the shares at a 15% discount to satisfy demand for the securities. Assuming JimPrivateCo intends to float 20% of its total equity in the IPO, and assuming it expects its current trend in earnings growth to continue, what is the mean offering price for the transaction? A) $126.19 B) $134.87 C) $25.24 D) $21.45

D - $21.45 The average equity value for this industry is 15.3x next year's earnings (average of high end P/E range + low end P/E range). The current growth rate for JimPrivateCo's earnings = 2009 earnings/2008 earnings 1 = $578.0mm/$475.0mm 1 = 21.7%. Assuming that trend continues, JimPrivateCo's next fiscal year earnings = 2009 earnings x (1 + annual earnings growth) = $578.0mm x (1 + 21.7%) = $703.3mm. This yields an implied equity value = Avg FY1 P/E x FY1 earnings = 15.3 x $703.3mm = $10,725.9mm. Since the company is only offering 20% of its equity to the public, the total equity sold would be 20% x $10,725.9mm = $2,145.2mm, or $25.24 per share ($2,145.2mm equity float/85mm shares offered). After the 15% IPO discount is applied, the mean offering price is $21.45. section 3.5.3.1

Harriet, a registered rep, encourages her clients to buy stock of Silverpoint, Inc., a micro-cap stock. Her firm owns a large position in the company through a hedge fund holding. When is she required to make a written disclosure of this control relationship? A) Written disclosure is not required, provided that a verbal disclosure is made at the time of the offer. B) at or before the completion of transactions C) at the point of the offer or recommendation D) annually, to all purchasers of the stock

b Answer Explanation The SEC requires broker-dealers to disclose to customers any control relationship they may have with the issuer of securities offered or sold. A verbal disclosure is required at the point of the offer or recommendation. A written disclosure is required at or before completion of the transaction. Textbook Reference Please see textbook section 10.11

The standard master agreement among underwriters document is known as the A) SEC Model Form B) SIFMA Model Form C) NYSE Model Form D) FINRA Model Form

b Answer Explanation The Securities Industry and Financial Markets Association model form is the standard document for use as an AAU for registered SEC offerings as well as exempt offerings. The SIFMA model form is typically adapted by each bank by their legal counsel. Textbook Reference See textbook section 9.4

In which types of Regulation A or A+ offerings are issuers required to make semiannual disclosures to the SEC indicating the amount of capital raised in the preceding six months? A) Regulation A+, Tiers 1 and 2 B) Regulation A and Regulation A+ Tiers 1 and 2 C) only Regulation A+, Tier 2 D) Regulation A and Regulation A+ Tier 1

b Answer Explanation In all three types of Reg A and A+ deals, issuers are required to file semiannual disclosures with the SEC indicating capital raised in the preceding six months. This is how the SEC makes sure issuers have not exceeded the capital-raising limits, which all three types of deals have. Textbook Reference Please see textbook section 12.2.2

Mary Beth manages the fixed income sleeve of a hedge fund. What publication should she read to stay abreast of both competitive and negotiated new bond issues coming to market in the near future? A) The Weekly Bond Calendar B) The Federal Reserve's Market Digest C) The Bond Buyer D) 30-day bond inventory reports

c Answer Explanation The Bond Buyer tracks new bond issues coming to market. Both competitive and negotiated issues are included on its New Issue Calendar. Textbook Reference Please see textbook section 9.2

In which case may securities of a broker dealer involved in a public offering be sold to discretionary accounts? A) Never B) Only if the account holder is considered sophisticated C) Only if the account holder consents in writing D) Only with regulatory approval

c Answer Explanation Under FINRA Rule 5121, public-offering of securities of broker dealers may not be offered to discretionary accounts without the account holder's consent. Textbook Reference See textbook section 10.9

BigKangarooCo (BKC) is an Australian company listed on the Australian Stock Exchange. BKC would like to raise capital in the United States, avoid SEC registration, and target accredited Australian investors currently residing in the U.S. BKC could best achieve these objectives by A) Submitting a Form S-1 with the SEC B) Issuing securities under Rule 144A C) Issuing Securities under a Regulation S offering D) Issuing securities under a Regulation D Private Placement

d Answer Explanation Any company seeking to target accredited investors in the U.S. would issue via a Regulation D private placement. Reg D allows the issuer to solicit an unlimited under of accredited investors. Rule 144A involves Qualified Institutional Buyers (QIBs), not accredited investors. Regulation S is for companies issuing securities only to non-U.S. residents. Textbook Reference See textbook section 12.4