Exam Questions

Which of the following entities are subject to reporting requirements on Form 8-K? I. A registrant II. An underwriter for the registrant III. The parent company of the registrant IV. Outside counsel of the registrant

! and III

Under Rule 144A, a QIB is defined as any institution managing _______ in _______assets or any broker-dealer with $10mm in assets.

$100mm; discretionary

At the end of 2013, Company A has retained earnings of $25,000,000. During 2014 the company earns pre-tax income of $5,000,000. Also, in December, 2014, the company declares a dividend of $0.20 per share on 2,000,000 outstanding shares, to be paid in January, 2015. The company has a marginal tax rate of 40% and a corporate tax rate of 35%. What are Company A's retained earnings at the end of 2014?

$27,600,000

Acme Industries buys Delta Company for $250 million in an all cash deal. At the time of the acquisition Delta had equity of $175 million, carried $35 million of bank notes, $15 million in 7% debentures due in 2025, and $25 million of secured bonds with a 4.5% coupon. The market value of Delta's net assets is $220 million. In connection with the acquisition, what will Acme record, if any, as goodwill on its balance sheet?

$30 million

Company E issues $500,000,000 in bonds at 99.25. Underwriting fees are 100 basis points. What are the proceeds received by Company E, net of underwriting fees?

$491,250,000

A partnership wishes to participate in a private placement as an accredited investor. To qualify, the partnership must have total assets of at least

$5 million at the time of purchase

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?

$5 per share plus interest 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.

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?

$8 per share 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.

Net new # of shares issued

((current stock price - avg. strike price)/current stock price) x options shares

Growth rate =

(new earnings / old earnings) - 1

Annual depreciation (straightline)

(purchase price - salvage value)/useful life

Deferred tax liability

(tax depreciation - accounting depreciation) x marginal tax rate

Subchapter S Corporations are permitted to have no more than ____ _______ and all shareholders must be individual investors. The benefit for Subchapter S Corporations is pass-through of gains and losses to investors.

100 shareholders

Under Sections 11 and 12 of the Securities Act of 1933, which of the following entities may be held liable for untrue or omitted information in a registration statement? I. Everyone who helps print the registration statement II. Professionals preparing and certifying reports III. All senior employees of the issuer IV. All directors and partners of the issuer

II and IV

Typically, required public disclosure of selective information is made by the filing of

Form 8K

Company X agrees to purchase Company Y in a privately negotiated sale. Which provision of the Definitive Agreement would allow Company Y to achieve a higher purchase price?

Go-Shop provision go-shop provision in a definitive agreement allows the target company to pursue a higher price from another buyer after a Definitive Agreement has been signed. Go-shop provisions are more common in targeted auctions or one-on-one negotiations because the target company may not have canvased the entire universe of potential buyers.

The safe harbor exemptions under Regulation S are subject to which of the following general conditions? I. The seller reasonably believes the buyer is offshore at the time of the offer or sale II. The seller must have verification that the funds to purchase the offering are in U.S. dollars III. No directed selling efforts are be made in the U.S. by the issuer, investment bank, advisor, or affiliate IV. The offshore buyer is a QIB

I and III

Company Q reports changes to its income statement as follows from one year ago: sales are flat, gross profit margin has fallen, SG&A expenses are flat, the effective tax rate is down due to some one-time expenses, the number of outstanding shares is flat, and earnings per share is up 8%. Which of the following could be concluded by a registered rep based on this information?

Operating profit margin is down; net income is up If Gross profit margin has fallen and the company's fixed expenses are flat, then the company's EBIT margin (i.e. operating margin) would also have fallen. Also, EPS = Net Income / outstanding shares. If EPS is up and outstanding shares are flat, then net income must have increased.

The rule addressing the required disclosures to investors in a corporate transaction is known as

Regulation M-A Regulation M-A requires investors to receive a summary terms sheet with a series of Plain English disclosures regarding the proposed transaction.

Cost of Equity =

Risk-rate + (beta x market risk premium)

Cram-down

a cram-down is a plan that is forced on creditors by the court, against their will. A plan that is crammed down on creditors must be approved by at least one creditor class that votes in favor of the plan. Importantly, the impaired creditor class vote does not include the votes of any of the debtor's insiders that may hold claims in the impaired class.

a fairness opinion is

a letter opining on the "fairness" (from a financial point of view) of the consideration offered in a transaction. In general, investment banks limit the scope and authority of a fairness opinion so as to mitigate potential liabilities that may stem from shareholder suits centered on the transaction. Therefore, a typical fairness opinion contains a long list of disclaimers such as noting reliance upon financial forecasts and synergies provided by company, as well as recent investment banking services provided by the bank rendering the opinion to the target and acquirer. It also may comment on the compensation for target Co-executives, but not for Acquirer Co-executives.

A Regulation A+ exemption applies to

a new issue of $75,000,000 or less Regulation A+ is intended for small businesses. They are not required to go through the entire, costly, registration process. It allows a business to raise up to $75,000,000 in an offering over a 12 month period.

Penalty bid

a penalty bid is a type of stabilization bid launched by the syndicate manager or another underwriter. If a stabilization bid is identified as a penalty bid, a syndicate member loses their compensation for shares that are flipped (i.e. sold immediately after the deal is effective) back to the stabilization agent. This encourages underwriters to offer shares to investors who are likely to hold them rather than immediately trade them.

Under the SEC's Regulation D, a private placement may be offered to

accredited investors with a limited number of non-accredited investors

Tender offer rules mandate ___ __________ _____ _____," which require all investors to receive the same compensation in the tender. In order to sweeten the terms, the purchaser could extend the offer by 10 business days and offer those better terms to all investors.

all holders best price

Schedule 13F requires institutional investors with investment discretion of over what amount of funds to report their equity holdings?

Institutional investment managers who exercise discretion over $100 million over more must report their long equity holdings on Form 13F. Institutional investment managers include entities that invest in securities for proprietary accounts, or entities that invest on the behalf of other entities.

Form 10-Q

It is filed by a company at the end of each of the first three quarters of its fiscal year

The Securities Act of 1933 is...

called the Truth in Securities Act; requires full and fair disclosure

In discounted cash flow (DCF) analysis, the Capital Asset Pricing Model (CAPM) is used to determine the

cost of equity

Without debt in its capital structure, a company's WACC equals its_____ _____ _____

cost of equity

A change in inventory accounting methods from FIFO to LIFO will impact the ______ _______ _____, not operating expenses. In an inflationary environment, it will cause the cost of goods sold to increase. Sales will not be affected, so income before taxes will decline and so will income taxes.

cost of goods sold

P/E Ratio =

current share price / diluted EPS

If a company redeems an outstanding debenture, working capital ...

decreases Working Capital = current assets - current liabilities

If the company declares greater income for tax filings than in its SEC filings, it pays greater cash taxes than it appears on its 10-K. This creates a _________________________

deferred tax asset as at some point in the future the company will pay less taxes to offset the higher amount it paid in the current year.

Goodwill =

difference between purchase price and the market value of purchased net assets

Which of the following investment funds would most likely invest in a company that has recently been hit with lawsuits, manufacturing difficulties and a cash crunch but whose revenue and popularity continues to exhibit strong growth?

distressed funds A distressed fund will invest primarily in distressed companies - that is, companies who are experiencing financial or other difficulties and companies who are going through litigation.

P/E ratio is also equal to

equity value / net income

Company A, a public company, is planning to make a tender offer to acquire all of the shares of Company B, another public company, for cash. Company A is planning to offer a 30% premium to the market price of B's shares, based on the expected synergies of the deal. Why would Company A's board want to obtain a fairness opinion?

expected synergies in corporate combinations are hard-to-measure

An investment banking representative has just helped a client facilitate an asset purchase from a private company and has now been tasked with doing due diligence on the purchase price allocation of the asset to the acquirer's financial statements. The banker's initial model assumes a book value of $600,000. After completing due diligence, the banker realizes the asset is actually worth $1.3 million. How will this information impact the banker's model for the transaction?

goodwill will decrease, depreciation will increase Goodwill is created when an asset is purchased for a price in excess of its book value (for a private company). Upon learning that the value of the asset is higher than the initial assumption, goodwill will fall, since the "over-payment" for the asset is not as much as the initial estimate. Also, the purchaser will be able to depreciate the asset from the higher cost basis of $1.3mm, thus increasing expenses.

When an IPO trades above the Public Offering Price which of the following is the most likely way the underwriter will cover an oversold transaction?

greenshoe clause

Sales =

gross profit + COGS

EBIT =

gross profit - operating expenses

Under discounted cash flow (DCF) analysis, which company will have the highest weighted average cost of capital (WACC)?

high beta stock, speculative debt

A standby offering is used

in a rights offering

When diluting a company's total shares, any __________________________________ are exercised. Employees purchase shares at strike.

in-the-money options

A company has been experiencing increased earnings but has kept its dividend payments constant. Due solely to this, the company's balance sheet would reflect...

increased shareholders' equity When a company experiences increased earnings while keeping dividend payments constant, it is retaining more of its income, which will increase retained earnings, a component of shareholders' equity, which would also increase.

Sarbanes-Oxley and Regulation S-K require all members of a company's audit committee be _______ members of the board (i.e. not employees of the firm or related to employees of the firm). Also, Nasdaq and NYSE companies are required to have a financial expert on the audit committee.

independent

Regarding a restricted period in connection with a merger..

it is based only on the target shareholder's vote

Under the dividend discount model, Stock Price =

last year's dividend x (1 + growth rate) / (discount rate - growth rate)

A "mini-tender" offer is subject to minimum filing and disclosure requirements, provided that it seeks to acquire...

less than 5% of the outstanding shares

Corporations are excluded from the disclosure requirements of Regulation FD when sharing information with persons on a need-to-know basis, like __________ , ___________ and _____________ . An exclusion also exists for sharing information with entities that issue credit ratings.

like attorneys, accountants and investment bankers

In a best-efforts offering, an underwriter

makes no guarantee that an offering will be sold

For a CAPM question, the S&P 500 is considered the _________ _________

market portfolio

P/E ratio is a ...

measure of how much investors are willing to pay for a dollar of company's current or future earnings

All else being equal, the use of a ____________ 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.

mid-year convention

FINRA rules require firms to have qualification requirements for individuals to participate on the fairness committee, but those qualifications are not necessarily required to include_____ _____ _____ _____.

minimum years of experience

The sell-side advisor functions include

monitoring data room access throughout the process, including the viewing of specific items. Track buyer interest and activity, draw conclusions, and take action accordingly. Ensures new data is uploaded to the data room in a timely fashion. Make recommendation on potential data room vendor.

___________ and _____________ of equity are both used to calculate a company's ROE

net income; book value of equity

If a syndicate manager expects the closing of an offering to be delayed, the firm is required to notify FINRA of this fact...

no later than the scheduled date

In a Chapter 11 filing, which of the following actions may a Debtor-in-possession (DIP) take?

pay debts incurred after the filing The DIP pays all debts incurred after the petition is filed, but may not pay previously incurred debts without court approval. DIPs may not sell or transfer assets without court approval.

_________________ are always required to be filed with the SEC but _____________ are not.

preliminary merger proxy statements; preliminary proxy statements

Reg M Rule 104 requires underwriters to notify the SEC .......

prior to entering a stabilization bid. The notification requirement does not apply to syndicate covering transactions, however. Investors are prohibited from investing in a follow-on offering if the stock was sold short within five days prior to pricing. Finally, unsolicited orders from customers are permitted in almost all circumstances, including during the Reg M restricted period.

If a tender offer is oversubscribed; the shares are accepted________ 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.

pro-rata

An underwriter claims that on the effective date it had reasonable grounds for believing that statements made in a registration statement were true, even though they in fact were false. The standard for proving the "reasonable grounds" in this case is

prudent man

Securities Act of 1934 requires..

registration of exchanges

Diluted Shares = ____ + _____

reported shares + net new shares issued

Regulation FD was enacted to require public disclosure at the same time analyst and ____________ are made aware of material inside information of an issuer.

research personnel

SEC Rule 144 provides an exemption from registration for

restricted stock

When a company files for bankruptcy, the unsecured creditors committee will consist of the

seven largest unsecured creditors as appointed by the U.S. trustee The chapter 11 trustee will negotiate with the UCC and help the shape the reorganization plan but does not actually appoint the UCC.

The concept that smaller sized companies are riskier and, therefore, should have a higher cost of equity is known as which of the following?

size premium Therefore, the banker may choose to add a size premium to the CAPM formula for smaller companies to account for the perceived higher risk and, therefore, expected higher return.

Although it is unusual for a private placement where non-accredited investors are contributing a substantial percentage of the overall capital, it is not prohibited as long as each non-accredited investor is either _________ or utilizes a ______ ______. Mutual funds are permitted to invest in private placements.

sophisticated; purchaser representative

In lieu of a sale of the company, _________ and ______ might be viable strategic options for increasing shareholder value.

spin-off of non-core division: traditional path of increasing shareholder value bolt-on acquisition for existing growth segment: strategic move that should be recognized and highly valued by the market

A commitment whereby the underwriter agrees to purchase any portion of an issue offered to existing shareholders under a rights offerings that is left unsubscribed is known as a

stand-by commitment

Trust Indenture Act of 1939 requires..

that debt securities be issued with a trust indenture

Operating leverage is best described as

the extent to which sales growth results in growth at the operating income level

What does the bring-down session prior to closing refer to?

the session where the accuracy of parties' reps and warranties is confirmed A bring-down session, also known as a "bring-down due diligence session" is a session where the accuracy of the reps and warranties (typically the seller's) are confirmed. It is often telephonic and routine, led by selected advisers and conducted just prior to the closing of the deal to ensure that key financial data and other material information for the deal cannot change in between the bring-down session and closing. On a related note, the "bring-down" condition in the Definitive Agreement is the closing condition related to ensuring the accuracy of the other party's reps and warranties as of the closing date.

What does "unaffected' stock price refer to in an M&A transaction involving a public target?

the target's stock price at a date prior to news of a deal reaching the market

In a Direct Participation Program, $200,000 is paid to wholesaling, retailing or marketing firms engaged in the distribution of securities. This expense should be categorized under

underwriting compensation Any compensation paid from any source to underwriters, broker-dealers or their affiliates should be included in underwriter compensation. The total of all underwriting compensation may not exceed 10% of gross offering proceeds.

Issuers who are permitted to file shelf registration statements which become automatically effective without prior SEC review are known as

well-known seasoned issuers

The private placement rule states that the person to whom the offer of securities is made must be an informed person

who either has access to the same type of information contained in a registration statement or is furnished such information

How often does Form 13F need to be filed?

within 45 days of the end of each calendar quarter

An investor has acquired greater than 5% ownership of a public company. Which of the following intentions would allow the investor to file a Schedule 13G instead of a Schedule 13D?

Engaging with company management to amend corporate governance rules, such as removal of a staggered board

Most fairness opinion disclosures (e.g. success fee) are required only if the _________________________ . FINRA rules do not required the committee to consist exclusive of registered persons

FO will be distributed to shareholders

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?

180 days after the third anniversary

A company pays a quarterly dividend of $0.05 per share and its shares are currently trading at $10.00. What is the dividend yield?

2.00%

An investor must file a Schedule 13D with the SEC when they obtain ____ beneficial ownership of a company's voting shares.

5%

Within how many days after the end of a fiscal year must a large accelerated filer file Form 10-K?

60 calendar days

What is the typical tender squeeze-out threshold in the US?

90% 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 30 days.

Broker Dealer ABC is in the process of underwriting an IPO for an Emerging Growth Company. Which of the following is a permissible activity by the broker dealer?

Broker Dealer ABC can market the deal and collect indications of interest only after the registration statement has been filed. For Emerging Growth Companies (i.e. with less than $1 billion in revenue) research can be published immediately after the effective date - there is no required waiting period. Bankers and analysts cannot meet with the client to discuss pricing, and an analyst could never meet with a client at the direction of a banker. IOI's can be collected for any new issue (EGC or not) once the registration statement has been filed with the SEC.

Company A and Company B each have EV/EBITDA multiples of 7.0x. If Company A has a higher enterprise value than Company B, which of the following must be true?

Company A has a higher EBITDA

operating margin =

EBIT / sales

For a relatively young company that is not yet generating any profit or positive cash flow, what ratio would provide the best valuation measure?

EV/Sales EBIT (operating profit) or EBITDA (cash flow) will be negative and provide3 little useful information for valuation or comparison purposes

Karen is a broker who has a control relationship with the issuer of securities that she is offering. Under Rule 15c1-5, when must she disclose this relationship in writing to avoid manipulation and deceptive practices?

before completing the transaction

Which of these investment vehicles offers tax advantages and can do a public listing of securities?

Master Limited Partnership only MLPs offer pass through of gains and losses and can do a public listing of securities. S-corps pass through gains and losses but cannot do a public offering as they are limited to 100 shareholders. C-corps can be publicly listed but do not pass through gains and losses. LLCs pass through gains and losses but are rarely publicly traded. More often, they are subsidiaries of a corporation.

Next year's earnings =

New earnings x (1 + annual earnings growth)

An issuer's CEO could be liable for gun-jumping if he/she discussed a new issue during which period of time?

before the registration statement is filed

Ending retained earnings =

beginning retained earnings + Net Income Declared Dividends.

Implied Equity Value =

average FY1 P/E x FY1 earnings