Chapter 10—Stock Offerings and Investor Monitoring
1. Which of the following statements is incorrect?
a.
A stock is a certificate representing partial ownership in a corporation.
b.
Like debt securities, common stock is issued by firms to obtain funds.
c.
Stocks are issued by corporations to raise short-term funds.
d.
The secondary stock market enables investors to sell stocks that they had previously
purchased.
2. Preferred shareholders
a.
typically have the same voting rights as common shareholders.
b.
do not share the ownership of the firm with common shareholders.
c.
typically participate in the profits of the firm beyond the stated fixed annual dividend.
d.
may not receive a dividend every year.
3. From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
a. True
b. False
4. A ____ requires that dividends cannot be paid on common stock until all current and previously
omitted dividends are paid on preferred stock.
a.
residual claim
b.
preferred margin
c.
cumulative provision
d.
liquidation claim
5. Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of
dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy.
a.
more; can
b.
less; can
c.
more; cannot
d.
less; cannot
6. When a corporation first decides to issue stock to the public, it engages in a(n)
a.
secondary offering.
b.
initial public offering.
c.
seasoned equity offering.
d.
none of the above
7. A firm can best avoid the time lag between registering new securities with the SEC and actually selling
them by
a.
use of proxy.
b.
shelf-registration.
c.
use of a margin call.
d.
use of preemptive rights.
8. The process by which the lead underwriter solicits indications of interest by institutional investors in
an IPO at various possible ____ prices is referred to as ____.
a.
IPO; margin selling
b.
offer; secondary market building
c.
offer; bookbuilding
d.
IPO; bookbuilding
9. To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds
that the issuing firm receives from the IPO are less than it deserves.
a. True
b. False
10. The transaction costs to the issuing firm in an IPO is usually ____ percent of the funds raised.
a.
1
b.
3
c.
7
d.
25
11. If many investors quickly sell an IPO stock in the secondary market, there will be ____ on the stock’s
price.
a.
upward pressure
b.
downward pressure
c.
no additional pressure
d.
none of the above
12. The purpose of a lockup provision is to
a.
keep individual investors from buying and selling stock.
b.
prevent downward pressure on the stock‘s price.
c.
increase the number of outstanding shares.
d.
allocate a larger proportion of stock to institutional investors.
13. When the lockup period expires, the share price commonly
a.
remains unchanged.
b.
increases significantly.
c.
decreases significantly.
d.
none of the above
14. IPOs tend to occur more primarily during recessions.
a. True
b. False
15. The initial (one-day) return of IPOs in the United States has averaged about ____ percent over the last
30 years.
a.
10
b.
20
c.
30
d.
50
16. The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
a.
flipping.
b.
skiing.
c.
flopping.
d.
none of the above
17. ____ occurs when a securities firm allocates share from an IPO to corporate executives who may be
considering an IPO or other business that will require the help of an investment bank.
a.
Flipping
b.
Spinning
c.
Laddering
d.
None of the above
18. When brokers encourage investors to place bids for IPO shares on the first day that are above the offer
price this is referred to as
a.
flipping.
b.
spinning.
c.
laddering.
d.
none of the above
19. On average, IPOs of firms tend to perform ____ over a period of a year or longer.
a.
well
b.
poorly
c.
about the same as the S&P 500 index
d.
none of the above
20. A firm that wants to engage in a secondary stock offering does not need to file the offering with the
SEC.
a. True
b. False
21. A firm will typically attempt to sell shares from a secondary offering
a.
far below the prevailing market price.
b.
far above the prevailing market price.
c.
at the prevailing market price.
d.
at the offer price of the IPO.
22. Buy and sell orders on the OTC market are completed by
a.
auction on the trading floor.
b.
sealed competitive bids.
c.
noncompetitive bids.
d.
a telecommunications network.
23. A(n) ____ is a certificate which represents ownership of a foreign stock.
a.
ADR
b.
SEAQ
c.
Nasdaq
d.
AMEX
24. The first-time issuance of shares by a specific firm to the public is referred to as a(n)
a.
stock repurchase.
b.
secondary stock offering.
c.
initial rights issue.
d.
initial public offering (IPO).
25. A new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
a.
stock repurchase.
b.
secondary stock offering.
c.
initial rights issue.
d.
initial public offering (IPO).
26. Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their
stock is ____ by the market, or a secondary stock offering when they believe their stock is ____ by the
market.
a.
undervalued; undervalued
b.
overvalued; overvalued
c.
undervalued; overvalued
d.
overvalued; undervalued
e.
none of the above
27. The largest organized exchange, listing the largest firms, is the
a.
New York Stock Exchange.
b.
American Stock Exchange.
c.
Midwest Stock Exchange.
d.
Pacific Stock Exchange.
28. ____ are employed by brokerage firms and execute orders for clients on the floor of the NYSE.
a.
Specialists
b.
Commission brokers
c.
Independent brokers
d.
Dealers
29. The OTC market does not have a trading floor.
a. True
b. False
30. Firms listed as “pink sheets” on the OTC market
a.
are typically very large.
b.
satisfy Nasdaq’s listing requirements.
c.
are typically owned by various institutional and individual investors.
d.
none of the above
31. The prevailing price per share divided by the firm’s earnings per share is known as the
a.
dividend yield.
b.
price-earnings ratio.
c.
fully diluted earnings per share.
d.
annual dividend.
32. The ____ is a value-weighted average of stock prices of 30 large U.S. firms.
a.
Dow Jones Industrial Average
b.
Standard and Poor’s 500
c.
New York Stock Exchange Index
d.
Nasdaq
33. The ____ is a value-weighted index of stock prices of 500 large U.S. firms.
a.
Dow Jones Industrial Average
b.
Standard and Poor’s 500
c.
New York Stock Exchange Index
d.
Nasdaq
34. Sudden favorable news about the performance of a firm will make investors believe that the firm’s
stock is ____ at its prevailing price.
a.
overvalued
b.
fixed
c.
appropriate
d.
undervalued
35. Analysts periodically communicate with high-level managers of the firms whose stock they rate.
a. True
b. False
36. Shareholders can most easily measure a firm’s performance by monitoring changes in its ____ over
time.
a.
share price
b.
employee job descriptions
c.
board of directors
d.
asset size
37. Which of the following is not true regarding the Sarbanes-Oxley Act?
a.
It attempts to force accountants to conform to regular accounting standards in preparing a
firm’s financial statements.
b.
It requires that only outside board members of a firm be on the firm’s audit committee.
c.
It allows public accounting firms to offer nonaudit consulting services to an audit client
whether the client’s audit committee pre-approves the nonaudit services or not.
d.
It prevents members of a firm’s audit committee from receiving consulting of advising fees
or other compensation from the firm beyond that earned from serving on the board.
38. An example of shareholder activism is
a.
communication with the firm.
b.
engaging in a proxy contest.
c.
filing a lawsuit against the board.
d.
all of the above
39. ____ are acquisitions that require substantial amounts of borrowed funds.
a.
Stock repurchases
b.
Corporate controls
c.
Leveraged buyouts
d.
Stock splits
40. ____ are not barriers to corporate control to eliminate agency problems.
a.
Leveraged buyouts
b.
Antitakeover amendments
c.
Poison pills
d.
Golden parachutes
41. Listing stock on a foreign stock exchange
a.
enhances the stock’s liquidity.
b.
may increase the firm’s perceived financial standing.
c.
may protect a firm against hostile takeovers.
d.
all of the above
42. American Depository Receipts (ADRs) are similar to
a.
stock options.
b.
bank deposits.
c.
stocks.
d.
bonds.
43. ____ are portfolios of international stocks created and managed by various financial institutions.
a.
International mutual funds
b.
American Depository Receipts
c.
Exchange rate options
d.
Initial Public Offerings
44. ____ sell shares to investors and use the proceeds to invest in portfolios of international stocks created
and managed by portfolio managers.
a.
International mutual funds
b.
American Depository Receipts
c.
World Equity Depository Receipts
d.
Initial Public Depository Receipts
45. When a firm buys some of its shares that it had previously issued, this is referred to as a:
a.
reverse IPO.
b.
leveraged buyout.
c.
ladder spin.
d.
stock repurchase.
46. Whenever _____, the stock price will be driven up.
a.
supply exceeds demand
b.
demand exceeds supply
c.
demand is reduced
d.
none of the above
47. Which of the following is not a form of shareholder activism?
a.
investors communicating their concerns to other investors in an effort to place more
pressure on the firm’s managers or its board members
b.
poison pills
c.
shareholder lawsuits
d.
all of the above
48. Initial public offerings (IPOs) tend to occur more frequently during bearish (weak) stock markets.
a. True
b. False
49. Initial public offerings (IPOs) perform ____ on the day following the IPO and ____ for periods of a
year or longer after the IPO.
a.
well; poorly
b.
poorly; well
c.
well; well
d.
poorly; poorly
50. Which of the following is not a part of the over-the-counter market?
a.
the Nasdaq National Market
b.
the Nasdaq Small Cap Market
c.
the OTC Bulletin Board
d.
the New York Stock Exchange
51. A firm has a current stock price of $15.32. The firm’s annual dividend is $1.14 per share. The firm’s
dividend yield is
a.
.74 percent.
b.
1.34 percent.
c.
7.44 percent.
d.
1.14 percent.
52. If the secondary market is inactive, then the shares would be illiquid.
a. True
b. False
53. Private firms that need a large equity investment but are not yet in a position to go public may attempt
to obtain funding from a venture capital (VC) fund.
a. True
b. False
54. Venture capital (VC) funds receive money from wealth investors and from pension funds that need to
receive their money back in one year or less.
a. True
b. False
55. Venture capital (VC) funds commonly serve as advisors to the businesses in which they invest.
a. True
b. False
56. Venture capital (VC) funds usually invest in publicly-traded businesses.
a. True
b. False
57. Venture capital (VC) funds typically plan to exit from their original investment within a period of
about one year.
a. True
b. False
58. The phrase “leaving money on the table” refers to investors who pay more for a stock in the secondary
market than was paid by those investors who were able to buy shares at the initial (offer) price on the
IPO date.
a. True
b. False
59. Underwriters sell most or all of the shares of an IPO to institutional investors.
a. True
b. False
60. The total cost of engaging in an IPO is usually about 1 percent of the total proceeds.
a. True
b. False
61. Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been
smaller.
a. True
b. False
62. In general, secondary offerings cause an immediate increase in the market price of the stock.
a. True
b. False
63. Electronic stock exchanges that execute stock transactions electronically are referred to as electronic
communications networks (ECNs).
a. True
b. False
64. As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting
financial information.
a. True
b. False
65. As a result of the Sarbanes-Oxley Act, there was a reduced likelihood of fraudulent financial reporting
by firms.
a. True
b. False
66. The legal protection of shareholders varies substantially among countries.
a. True
b. False
67. Common law countries such as the U.S., Canada, and the United Kingdom allow for more legal
protection than civil law countries such as France or Italy.
a. True
b. False
68. The government enforcement of securities laws varies among countries.
a. True
b. False
69. The laws of the financial information that must be provided by public companies is similar among all
developed countries.
a. True
b. False
70. Electronic communications networks (ECNs) are passive funds that track a specific index.
a. True
b. False
71. A venture capital fund typically plans to exit from its original investment within about four to seven
years.
a. True
b. False
72. Venture capital funds typically take over businesses and manage them.
a. True
b. False
73. Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning
the firm, such as the election of the board of directors.
a. True
b. False
74. If investors become dissatisfied with a firm’s performance, they can compete with management in
soliciting proxy votes in what is known as a proxy fight.
a. True
b. False
75. Initial public offerings (IPOs) tend to occur more frequently during bullish stock markets.
a. True
b. False
76. According to financial research, there is evidence that the stock price associated with an IPO typically
rises on the first day but then declines over time.
a. True
b. False
77. Shelf-registration allows firms quick access to funds without repeatedly being slowed by the
registration process.
a. True
b. False
78. In addition to the Nasdaq market, the OTC market has another segment known as “pink sheets,” where
smaller stocks are traded.
a. True
b. False
79. The Dow Jones Industrial Average (DJIA) is a value-weighted average of stock prices of 30 large U.S.
firms.
a. True
b. False
80. Research studies have found that the share prices of target firms and of acquiring firms react very
positively to announcements of an acquisition.
a. True
b. False
81. If managers believe that their firm’s stock price is weak because it is undervalued by the market, they
may consider repurchasing a portion of the shares that are outstanding.
a. True
b. False
82. International exchange-traded funds (ETFs) represent international indexes that reflect composites of
stocks for particular countries; shares of the index can be purchased or sold, thereby allowing investors
to invest directly in a stock index representing any one of several countries.
a. True
b. False
83. Which of the following is not true with respect to venture capital (VC) funds?
a.
When a VC fund decides to invest in a business, it will negotiate the terms of its
investment, including the amount of funds it is willing to invest.
b.
One common exit strategy for VC funds is to sell its equity stake to the public before the
business engages in a public stock offering.
c.
VC funds receive money from wealthy investors and from pension funds that are willing
to maintain the investment for a long-term period.
d.
All of the above are true with respect to VC funds.
84. Assume a firm that is valued at $800 million with 6 million shares of stock outstanding. This firm’s
stock should have a price of $____ per share.
a.
6.00
b.
80.00
c.
133.33
d.
none of the above
85. The owners of common stock are permitted to vote on the
a.
election of the board of directors.
b.
authorization to issue new shares of common stock.
c.
approval of amendments to the corporate charter.
d.
adoption of bylaws.
e.
all of the above
86. Which of the following is not true with respect to preferred stock?
a.
Preferred stock usually does not allow for significant voting rights.
b.
If the firm does not have sufficient earnings from which to pay the preferred stock
dividends, the preferred shareholders may force the firm into bankruptcy.
c.
Normally, the owners of preferred stock do not participate in the profits of the firm beyond
the stated fixed annual dividend.
d.
Payment of preferred dividends is not a tax-deductible expense.
e.
All of the above are true.
87. Which of the following is false with respect to initial public offerings (IPOs)?
a.
IPOs are first-time offerings of shares by a specific firm to the public.
b.
Normally, a firm planning an IPO will hire a securities firm to recommend the amount of
stock to issue and the asking price for the stock.
c.
Owners of firms that engage in IPOs are normally required to retain their shares for at
least 3 years before selling them in the secondary market.
d.
IPOs are typically intended to raise funds so the corporation can expand.
88. To discourage flipping, some securities firms make ____ shares of future IPOs available to
institutional investors that retain shares for a ____ period of time.
a.
fewer; long
b.
more; short
c.
more; long
d.
Answers A and B are correct.
89. There is strong evidence that IPOs of firms perform ____ on average over a period of a year or longer.
a.
well
b.
poorly
c.
very well relative to other firms in their industry
d.
none of the above
90. Firms are more willing to issue new stock in a secondary stock offering when the market price of their
outstanding shares is relatively
a.
high.
b.
low.
c.
either high or low, depending on the overall market.
d.
none of the above
91. “Pink sheets” are traded on the
a.
New York Stock Exchange.
b.
American Stock Exchange.
c.
over-the-counter market.
d.
Nasdaq market.
92. The annual dividend on Grozky, Inc. stock is $5 per share and the stock’s prevailing price is $93.13 per
share. Thus, the stock’s dividend yield is ____ percent.
a.
18.63
b.
5.37
c.
8.81
d.
none of the above
93. Which of the following is not a provision specified in the Sarbanes-Oxley Act?
a.
It requires that only inside board members of a firm be on the firm’s audit committee.
b.
It prevents the members of a firm’s audit committee from receiving consulting or advising
fees or other compensation from the firm beyond that earned from serving on the board.
c.
It requires that the CEO and CFO of firms that are of at least a specified size certify the
audited financial statements are accurate.
d.
It allows public accounting firms to offer nonaudit consulting services to an audit client
only if the client’s audit committee pre-approves the nonaudit services to be rendered
before the audit begins.
94. Which of the following is not a form of shareholder activism?
a.
proxy contests
b.
antitakeover amendments
c.
shareholder lawsuits
d.
all of the above are forms of shareholder activism
95. Which of the following is not a barrier to corporate control?
a.
antitakeover amendments
b.
proxy contests
c.
poison pills
d.
golden parachutes
e.
all of the above are barriers to corporate control
96. Possible disadvantages of private stock exchanges to investors include:
a.
only large institutional investors may purchase shares in privately listed stocks
b.
required disclosures may be less than those required when a firm goes public.
c.
trading volume is limited.
d.
B and C
97. After an IPO, firms commonly list their shares on a private stock exchange.
a. True
b. False
98. Managers protected by golden parachutes may be more willing to make decisions that increase the
company’s earnings in the long run, even though the decisions adversely affect the stock price in the
short run.
a. True
b. False
99. A firm whose stock price has risen:
a.
will not have to pay a premium if it acquires another firm.
b.
has an incentive to use its stock as currency to acquire the shares of a target firm.
c.
is likely to be a candidate for a leveraged buyout.
d.
is likely to repurchase some of its shares.
100. Most individual investors attend road shows of firms that are about to go public before they purchase
shares at the time of an IPO.
a. True
b. False
101. When a corporation makes a secondary offering, it may direct sales of the stock to its existing
shareholders by giving them:
a.
preemptive rights.
b.
limit orders.
c.
subscription rights.
d.
presumptive rights.
102. When a firm goes public and issues stock in the primary market:
a.
the equity investment in the firm declines.
b.
the firm’s debt level increases.
c.
the number of the firm’s owners increases.
d.
A and C