Fin 701 5-1 and 5-2

Blue Stone Builders recently offered to sell 45,000 newly issued shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid Blue Stone Builders the uniform auction price for each of those shares. Which one of the following term best describes this underwriting? A. Dutch auction B. Best efforts C. Public rights D. Private placement E. Market commitment

A. Dutch auction

Mobile units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the following? A. Green Shoe provision B. Red Herring Provision C. Quiet provision D. Lockup agreenment E. Post-issue agreement

A. Green Shoe provision

Existing shareholders: A. May or may not have a pre-emptive right to newly issued shares B. Must purchase new shares whenever rights are issued C. Are prohibited from selling their rights D. Are generally well advised to let the rights they receive expire. E. Can maintain their proportional ownership positions without exercising their rights.

A. May or may not have a pre-emptive right to newly issued shares

8. A company's weighted average cost of capital: A. Is equivalent to the after tax cost of the outstanding liabilities B. Should be used as the required return when analyzing any new project C. Is the return investors require on the total assets of the firm. D. Remains constant when the debt-equity ratio changes E. Is unaffected by changes in corporate tax rates.

C. Is the return investors require on the total assets of the firm.

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: A. 3 months B. 6 months C. 180 days D. 2 years E. 5 years

D. 2 years

2. All else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. A. A reduction in the dividend amount B. An increase in the dividend amount C. A reduction in the market rate of return D. A reduction in the firm's beta E. A reduction in the risk-free rate

E. A reduction in the risk-free rate

11.) Jones & Co. recently went public an received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. What type of underwriting was this? A. Best efforts B. Shelf C. Oversubscribed D. Private placement E. Firm commitment

E. Firm commitment

A syndicate can best be defined as a: A. Venture capitalist B. Group of attorneys providing services for an IPO C. Block of investors who control a firm D. Bank that loans funds to finance the start-up of a new company. E. Group of underwriters sharing the risk of selling a new issue of securities

E. Group of underwriters sharing the risk of selling a new issue of securities

6. Which one of these will increase a company's aftertax cost of debt? A. A decrease in the company's debt-equity ratio B. A decrease in the company's tax rate C. An increase in the credit rating of the company's bonds D. An increase in the company's beta E. A decrease in the market rate of interest.

B. A decrease in the company's tax rate

With Dutch auction underwriting: A. Each winning bidder pays the minimum price offered by any bidder. B. All successful bidders pay the same price per share C. All bidders receive at least a portion of the quantity for which they bid. D. The selling firm receives the maximum possible price for each security sold E. The bidder for the largest quantity receives the first allocation of securities

B. All successful bidders pay the same price per share

4. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith Inc. What is the return that these individuals require on this investment called? A. Dividend yield B. Cost of equity C. Capital gains yield D. Cost of capital E. Income return

B. Cost of equity

10. If a company usues its WACC as the discount rate for all of the projects it undertakes then the company will tend to: A. Accept all positive net present value projects B. Increase the average risk level of the company over time C. Reject all high-risk projects D. Reject all negative net present value projects E. Favor low-risk project over high-risk projects

B. Increase the average risk level of the company over time

Before a second stock offering, you owned 500 shares of a firm that had 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number of shares outstanding rose to 25,000. Which one of the following terms best describes this situation? A. Overallotment B. Percentage ownership dilution C. Green Shoe allocation D. Red herring allotment E. Abnormal event

B. Percentage ownership dilution

12. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the _______ approach. A. Subjective risk B. Pure play C. Divisional cost of capital D. Capital adjustment E. Security market line

B. Pure play

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. A. Auction B. Quiet C. Lockup D. Green Shoe E. Red

B. Quiet

Pearson Electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this? A. Standby registration B. Shelf registration C. Regulation A registration D. Regulation Q registration E. Private placement registration.

B. Shelf registration

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called. A. Red herrings B. Tombstones C. green Shoes D. Registration statements E. Cash offers

B. Tombstones

Underwriters generally: A. Pay a spread to the issuing firm B. Provide only best efforts underwriting in the U.S. C. Accept the risk of selling the new securities in exchange for the gross spread. D. Market and distribute an entire issue of new securities within their own firm. E. Pass the risk of unsold shares back to the issuing firm via a firm commitment agreement.

C. Accept the risk of selling the new securities in exchange for the gross spread.

5. Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the : A. Compound rate B. Current yield C. Cost of debt D. Capital gains yield E. Cost of capital

C. Cost of debt

What is an issue of securities that is offered for sale to the general public on a direct cash basis called A. Best efforts underwriting B. Frim commitment underwriting C. General Cash offer D. Rights offer E. Herring offer

C. General Cash offer

3. Assume Russo's has a debt equity ratio of .4 and uses the capital asset pricing model (CAPM) to determine its cost of equity. As a result, the company's cost of equity: A. Is affected by the firm's rate of growth projections B. Implies that the firm pays out all of its earnings to its shareholders C. Is dependent upon a reliable estimate of the market risk premium D. Would be unaffected if the dividend discount model were applied instead E. Will be unaffected by changes in overall market risks

C. Is dependent upon a reliable estimate of the market risk premium

Which one of the following is a key goal of the aftermarket period? A. Collecting the largest number of Dutch auction bids as possible B. Determining a fair offer price C. Supporting the market price for a new securities issue D. Establishing a broad-based underwriting syndicate E. Distributing red herrings to as many potential investors as possible

C. Supporting the market price for a new securities issue

Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n): A. Aftermarket specialist B. Venture capitalist C. Underwriter D. Seasoned writer E. Primary investor

C. Underwriter

11. The subjective approach to project analysis: A. is used only when a firm has an all-equity capital structure. B. Uses the WACC of Firm X as the basis for the discount rate for a project under consideration by firm Y C. assigns discount rates to projects based on the discretion of the senior managers of a firm. D. allows managers to randomly adjust the discount rate assigned to a project once the project's standard deviation has been determined. E. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt

C. assigns discount rates to projects based on the discretion of the senior managers of a firm.

What is the prospectus? A. A letter used by the SEC authorizing a new issue of securities B. A report stating that the SEC recommends a new security to investors C. A letter issued by the SEC that outlines the changes required for a registration statement to be approved D. A document that describes the details of a proposed security offering along with relevant information about the issuer E. An advertisement in a financial newspaper that describes a security offering

D. A document that describes the details of a proposed security offering along with relevant information about the issuer

1. A company's current cost of capital is based on: A. Only the return required by the company's current shareholders. B. The current market rate of return on equity shares C. The weighted costs of all future funding sources D. Both the returns currently required by its debt holders and stockholders E. The company's original debt-equity ratio

D. Both the returns currently required by its debt holders and stockholders

Which one of these describes an exception to the registration filing requirement of the SEC? A. Loans that mature in one year or less B. Issues that have an approved prospectus C. Loans of $10 Million or less D. Issues of les than $5 million E. Issues that have received an approved letter of comment

D. Issues of les than $5 million

7. The cost of preferred stock is computed the same as the: A. Pretax cost of debt B. Rate of return on an annuity C. Aftertax cost of debt D. Rate of return on a perpetuity E. Cost of an irregular growth common stock

D. Rate of return on a perpetuity

The securities and exchange commission: A. Verifies the accuracy of the information contained in the prospectus B. Publishes re herrings on prospective new security offerings C. Examines the prospectus during the Green Shoe period D. Reviews registrations statements to ensure they comply with current laws and regulations E. Determines the final offer price once they have approved the registration statement

D. Reviews registrations statements to ensure they comply with current laws and regulations

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prior to the shares being offered to the general public. What is this type of an offer called? A. Best efforts offer B. Firm commitment offer C. General cash offer D. Rights offer E. Priority offer

D. Rights offer

All of the following are supporting arguments in favor of IPO underpricing except which one? A. Helps prevent the "winner's circle" B. Rewards institutional investors who share their market value opinions C. Reduces potential lawsuits against underwriters D. Diminishes underwriting risk E. Provides better returns to issuing firms

E. Provides better returns to issuing firms

Which one of the following is a preliminary prospectus? A. Tombstone B. Green shoe C. Registration statement D. Rights offer E. Red herring

E. Red herring

9. The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the company's capital structure is called the: A. Reward-to-risk ratio B. Weighted capital gains rate C. Structured cost of capital D. Subjective cost of capital E. Weighted average cost of capital

E. Weighted average cost of capital