FINC 332 FINAL EXAM PREP

Tyson Enterprises has decided to take its company public by offering a total of 80,000 shares of common stock to the public in an initial public offering (IPO). Tyson has hired an underwriter who arranges a full commitment underwriting and suggests an initial selling price of $32 a share with a 9 percent spread. As it turns out, the underwriters only sell 68,500 shares. How much cash will Tyson receive from the IPO?

$2,329,600

Allied Corporation offers 40,000 shares of common stock to the public in an initial public offering (IPO). The underwriters agree to provide their services in a best efforts underwriting. The offering price is set at $28. The gross spread is $3. After completing their sales efforts the underwriters determine that they were able to sell a total of 36,750 shares. How much cash did Allied Corporation receive from their IPO?

$918,750

The ex-dividend date is _____ business days before the date of record.

2

The ex-dividend date is defined as _____ business days before the date of record.

2

Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

2 years.

The last date on which you can purchase shares of stock and still receive the dividend is the date which is _____ business days prior to the date of record.

3

Which one of the following statements concerning cash dividends is correct?

A dividend is not a liability of a firm until it has been declared.

Which one of the following statements is correct concerning the issuance of long-term debt?

Direct placement debt tends to have more restrictive covenants than publicly issued debt.

Arguments that have been presented to support IPO underpricing include: I. counteracting the "winner's curse". II. rewarding institutional investors for sharing their opinion of a stock's market value. III. diminishing the risk to the underwriters who have agreed to a firm commitment underwriting. IV. reducing the probability that investors will sue the investment banks involved in the IPO offering.

I, II, III, and IV

Which of the following should be considered when selecting a venture capitalist? I. style II. contacts III. exit strategy IV. financial strength

I, II, III, and IV

The value of a right depends upon: I. the number of rights required to purchase one new share. II. the market price of the security. III. the subscription price. IV. the price-earnings ratio of the stock.

I, II, and III only

Which one of the following statements is correct?

IPO allocations are generally less restrictive when an IPO is overpriced.

The SEC regulation that exempts public issues of less than $5 million from most registration requirements is called:

Regulation A.

All new interstate security issues are regulated by the:

Securities Act of 1933.

Which one of the following statements is correct concerning the costs of issuing securities?

There tends to be substantial economies of scale when issuing securities.

A reverse stock split is defined as:

a decrease in the number of shares outstanding that does not affect owner's equity.

The target payout ratio is:

a firm's long-term desired dividend-to-earnings ratio.

What is the definition of a syndicate?

a group of underwriters formed to share the risk of marketing and distributing new securities to the investing public

What is a red herring?

a preliminary prospectus

Registration permitted under SEC Rule 415 which allows a company to register all issues it expects to sell within the next two years at one time is called:

a shelf registration.

Which one of the following statements concerning venture capitalists is correct?

a. All venture capitalists become actively involved in the day-to-day management of the financed firm. (B.) Financial strength is a key consideration when selecting a venture capitalist. c. Venture capitalists seldom offer any benefit other than the funds they provide. d. Most venture capitalists are long-term investors in a firm. e. A venture capitalists exit plan is relatively unimportant.

Which one of the following statements concerning dilution is correct?

a. Dilution of percentage ownership occurs whenever an investor participates in a rights offering. b. Market value dilution increases as the net present value of a project increases. (C.) An individual investor has less control over a firm if he or she experiences percentage ownership dilution. d. Book value dilution reduces the resale value of an investor's holdings. e. Investors are entitled to immediate tax refunds whenever they are injured by any type of dilution.

Which one of the following statements concerning venture capital financing is correct?

a. Venture capitalists desire shares of common stock but avoid preferred stock. b. Venture capital is relatively easy to acquire in today's market. c. Venture capitalists rarely assume active roles in the management of the financed firm. (D.) Venture capitalists often require at least a forty percent equity position as a condition of financing. e. Venture capital is relatively inexpensive in today's competitive markets.

A form filed with the SEC that discloses all material information related to a public offering is called a(n):

a. offering prospectus. b. red herring filing. c. indenture contract. d. public release statement. (E.) registration statement.

With Dutch auction underwriting:

all successful bidders pay the same price.

An individual investor with a small portfolio who wishes to purchase 100 shares of each IPO is more likely to receive an allocation of shares when:

an IPO is undersubscribed.

The type of underwriting where a syndicate sells as much of an issue as possible, but can return any unsold securities to the issuing firm without any further financial responsibility, is called a _____ offering.

best efforts

The declaration date is the date on which the:

board of directors passes a resolution to pay a dividend.

The observable fact that stocks attract particular investors based dividend yield and the resulting tax effects is called the:

clientele effect.

The date the dividend payments are mailed is called the:

date of payment.

The date by which a shareholder must be recorded as the share owner in order to receive

date of record.

When a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to:

decrease.

A loss in shareholder value as measured in terms of percentage ownership in the firm, market value of the firm, book value of equity, or earnings per share is known as:

dilution.

A payment made by a firm to its owners from sources other than current or accumulated retained earnings is called a:

distribution.

A payment made out of a firm's earnings to its owners in the form of either cash or stock is called a:

dividend.

The first day a stock trades in the market without a recently declared right attached to the stock is called the:

ex-rights date.

What is venture capital?

financing for new firms which generally entails high levels of risk

The type of underwriting in which a syndicate buys the entire issue from the issuing firm and assumes full financial responsibility for any unsold shares, is called a _____ offering.

firm commitment

An issue of securities offered for sale to the general public on a direct cash basis is called a _____ offering.

general cash

The total direct costs of underwriting an equity IPO:

generally range between 5 and 15 percent of the offer price.

What is management's first step in issuing new securities to the general public?

getting board approval

The difference between the underwriters' buying price and the offering price of the securities to the public is called the:

gross spread.

The date on which existing shareholders are designated as the recipients of stock rights is called the _____ date.

holder-of-record

The ability of shareholders to undo a firm's dividend policy and create an alternative dividend policy by reinvesting dividends or selling shares of stock is called (a):

homemade dividend policy.

The market's reaction to a change in a firm's dividend payout is referred to as the:

information content effect.

A corporation's first sale of equity securities to the public is called a(n):

initial public offering.

The Securities and Exchange Commission:

is concerned only that an issue complies with all rules and regulations.

If an IPO is underpriced then the:

issuing firm receives less money than they probably should have.

With firm commitment underwriting, the issuing firm:

knows up-front the amount of money they will receive from the stock offering.

Existing shareholders:

may have a preemptive right to maintain their proportional ownership positions.

The privilege that allows existing shareholders to purchase unsubscribed shares in a rights offering at the subscription price is called the _____ privilege.

oversubscription

Before a seasoned stock offering, you owned 3,500 shares of a firm that had 225,000 shares outstanding. After the seasoned offering, you still owned 3,500 shares but the number of shares outstanding rose to 275,000. This is an example of _____ dilution.

percentage ownership

Venture capital is primarily found through:

personal contacts.

Loans provided directly from a limited number of investors to a corporation with maturities typically in excess of five years are called:

private placements.

A lockup agreement is an agreement included in an underwriting contract which:

prohibits company insiders from selling their securities to the public during the 180 day period following an IPO.

The 40 day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the _____ period.

quiet

Underwriters generally:

receive less compensation under a competitive agreement than under a negotiated agreement.

A cash payment generally paid quarterly by a firm to its owners in the normal course of business is called a:

regular cash dividend.

A method used to distribute earnings to shareholders that offers preferential treatment over dividends is a:

repurchase.

A policy under which a firm pays dividends only after its capital investment needs are met while maintaining a constant debt/equity ratio is called a:

residual dividend approach.

A public issue of securities where existing shareholders are given the first opportunity to purchase the new securities is called a _____ offering.

rights

What is a seasoned equity offering?

sale of newly issued equity shares by a firm that is currently publicly owned

The venture capital provided in the very early stages of financing is commonly referred to as:

seed money.

A rights offering in which the underwriting syndicate agrees to purchase the unsubscribed portion of the issue is called a _____ underwriting.

standby

The amount paid to an underwriter who participates in a standby underwriting agreement is called a(n):

standby fee.

A payment made by a firm to its owners in the form of new shares is called a _____ dividend.

stock

An increase in the number of shares outstanding which does not affect owners' equity is called a:

stock split.

To purchase shares in a rights offering, you generally just need to:

submit the required number of rights along with the subscription price.

Direct business loans typically ranging from one to five years are called:

term loans.

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called:

tombstones.

The difference between the highest and lowest prices at which a stock has sold is called the stock's:

trading range.

The investment banks that act as intermediaries between a securities issuer and the investing public are called:

underwriters.

The first day returns on IPOs:

vary significantly over time.

A prospectus is a legal document:

which describes the details of a proposed security offering along with relevant information about the issuer.