adopted new
standards that
focused on more thorough financial disclosure, greater accountability, and more stringent requirements
for the board of directors.
C) The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When
investors diversify their holdings, the equity holders of the corporation become more concentrated.
D) Several high profile corporate scandals during the early part of the twenty–first century prompted
tougher regulations designed to address corporate abuses.
54) Which of the following statements is FALSE?
A) After deciding to go public, managers of the company work with an underwriter, an investment
banking firm that manages the offering and designs its structure.
B) The shares that are sold in the IPO may either be new shares that raise new capital, known as a
secondary offering, or existing shares that are sold by current shareholders (as part of their exit
strategy), known as a primary offering.
C) Many IPOs, especially the larger offerings, are managed by a group of underwriters.
D) At an IPO, a firm offers a large block of shares for sale to the public for the first time.
55) Which of the following statements regarding best efforts IPOs is FALSE?
A) For smaller IPOs, the underwriter commonly accepts the deal on this basis.
B) The underwriter does not guarantee that the stock will be sold, but instead tries to sell the stock for the
best possible price.
C) Often these arrangements have an all–or–none clause: either all of the shares are sold in the IPO, or the
deal is called off.
D) If the entire issue does not sell out, the underwriter is on the hook.
56) Which of the following statements regarding firm commitment IPOs is FALSE?
A) If the entire issue does not sell out, the remaining shares must be sold at a lower price and the
underwriter must take the loss.
B) The underwriter purchases the entire issue (at a the offer price) and then resells it at a slightly higher
price to interested investors.
C) It is the most common underwriting arrangement.
D) The underwriter guarantees that it will sell all of the stock at the offer price.
57) Which of the following statements is FALSE?
A) In recent years, the investment banking firm of W.R. Hambrecht and Company has attempted to
change the IPO process by selling new issues directly to the public using an online auction IPO
mechanism called Open IPO.
B) The lead underwriter is the primary banking firm responsible for managing the deal. The lead
underwriter provides most of the advice and arranges for a group of other underwriters, called the
syndicate, to help market and sell the issue.
C) Because of the potential conflict of interest, the underwriter will not make a market in the stock after
the issue.
D) The SEC requires that companies prepare a registration statement, a legal document that provides
financial and other information about the company to investors, prior to an IPO. Company managers
work closely with the underwriters to prepare this registration statement and submit it to the SEC.
58) As part of the registration statement , the preliminary prospectus circulates to investors before the stock is
offered. This preliminary prospectus is also called a(n)
A) IPO filing.
B) 10–K filing.
C) blue whale.
D) red herring.
59) Which of the following statements is FALSE?
A) Once the issue price (or offer price) is set, underwriters may invoke another mechanism to protect
themselves against a loss the over–allotment allocation.
B) Before the offer price is set, the underwriters work closely with the company to come up with a price
range that they believe provides a reasonable valuation for the firm.
C) Before an IPO, the company prepares the final registration statement and final prospectus containing
all the details of the IPO, including the number of shares offered and the offer price.
D) A “road trip” is where senior management and the lead underwriters travel around the country (and
sometimes around the world) promoting the company and explaining their rationale for the offer price
to the underwriters’ largest customers mainly institutional investors such as mutual funds and pension
funds.
60) Which of the following statements is FALSE?
A) Underwriters appear to use the information they acquire during the book–building stage to
intentionally underprice the IPO, thereby reducing their exposure to losses.
B) The bluetooth option allows the underwriter to issue more stock, amounting to 15% of the original offer
size, at the IPO offer price.
C) The lead underwriter usually makes a market in the stock and assigns an analyst to cover it.
D) In most cases, the preexisting shareholders are subject to a 180–day lockup; they cannot sell their shares
for 180 days after the IPO. Once the lockup period expires, they are free to sell their shares.
61) Which of the following is NOT one of the four characteristics of IPOs that puzzle financial economists?
A) On average, IPOs appear to be underpriced.
B) The long–run performance of a newly public company (three to five years from the date of issue) is
superior to the overall market return.
C) The number of issues is highly cyclical.
D) The costs of the IPO are very high, and it is unclear why firms willingly incur such high costs.
62) Which of the following statements regarding exit strategies is FALSE?
A) An alternative way to provide liquidity to its investors is for the company to become a publicly traded
company.
B) An important consideration for investors in private companies is their exit strategy or how they will
eventually realize the return from their investment
C) Often large corporations purchase successful start–up companies. In such a case, the acquiring company
purchases the outstanding stock of the private company, allowing all investors to cash out.
D) Roughly 25% of venture capital exits from 2001–2005 occurred through mergers or acquisitions.
Use the information for the question(s) below.
Luther Industries is in the process of selling shares of stock in an auction IPO. At the end of the bidding period, Luther’s
investment bank has received the following bids:
Price ($)
Number of
Shares Bid
$19.50
50,000
$19.25
25,000
$19.10
25,000
$19.00
100,000
$18.75
125,000
$18.50
75,000
$18.25
150,000
$18.00
240,000
$17.75
80,000
$17.50
125,000
$17.25
150,000
$17.00
100,000
$16.90
60,000
$16.75
80,000
$16.50
75,000
$16.25
200,000
63) What will the offer price of these shares be if Luther is selling 1 million shares?
A) $17.00
B) $17.50
C) $17.25
D) $16.75
Price ($)
$19.50
50,000
$19.25
25,000
$19.10
25,000
100,000
$19.00
100,000
200,000
$18.75
125,000
325,000
$18.50
75,000
400,000
$18.25
150,000
550,000
$18.00
240,000
790,000
$17.75
80,000
870,000
$17.50
125,000
995,000
$17.25
150,000
$16.90
60,000
$16.75
80,000
$16.50
75,000
64) The proceeds from the IPO be if Luther is selling 1.25 million shares is closest to:
A) $20.6 million
B) $21.6 million
C) $21.1 million
D) $20.9 million
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
65) What are some of the advantages of going public?
66) What are some of the disadvantages of going public?
67) What are some of the highlights of Google’s IPO process?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
68) Stock issued in an IPO usually trades significantly higher at the end of the first day of trading than the
original IPO price.
69) Newly listed firms tend to perform relatively poorly in the three to five years after their IPOs.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
70) How does the total cost of issuing stock for the first time compare to the costs of other securities?
A) substantially larger than the costs for most other securities
B) about the same as the cost for most other securities
C) substantially less than the cost for a few other securities
D) substantially less than the costs for most other securities
71) Which of the following is a notable puzzle in IPOs?
A) The number of IPOs is highly underestimated.
B) The number of IPOs is highly cyclical.
C) The number of IPOs is highly seasonal.
D) The number of IPOs is almost the same every year.
72) The offer price of shares in an IPO is generally less than the price those shares sell for at the end of the first
trading day. Which of the following parties suffer most from this situation?
A) the buyers of shares after the initial offering
B) the underwriters of the IPO
C) the pre–IPO shareholders of the issuing firm
D) the lead underwriter of the IPO
73) How does the size of an issue affect the fees charged by underwriters?
A) Although large issues generally have a smaller spread, the large number of shares released means that
the total fees are somewhat larger than for smaller issues.
B) Large issues generally have a similar spread to small issues and thus attract much greater fees.
C) Large issues have a reduced spread, which means that the total fees are generally the same as for
smaller issues.
D) Large issues have substantially larger direct costs and, thus, must charge a larger spread in order to be
profitable for the underwriter.
74) The cost of issuing an IPO in the U.S. is higher than most other security issuance fees. A typical spread is:
A) 5%
B) 6%
C) 7%
D) 8%
75) Dusty Corporation is issuing an IPO with an issue price of $15 per share that is expected to raise about $100
million. Which of the following is likely to be true?
A) The price of the stock will be less than $15 at the close of the first trading day.
B) The cost of the IPO to Dusty will be about $7 million.
C) The stock will perform very well in the three to five years after the issue.
D) None of the above is likely to happen.
76) Which of the following statements concerning the volume and number of IPOs issued over time is most
correct?
A) They are cyclical.
B) They tend to rise over time.
C) They tend to fall over time.
D) They remain approximately the same over time.
77) Underpricing of an IPO would most likely be greatest in which of the following markets?
A) Australia
B) China
C) Japan
D) United States
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
78) How does IPO pricing puzzle financial economists?
79) How does the costs of IPO puzzle financial economists?
80) What is the general long run performance of an IPO?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
81) A cash offer differs from a rights offer in that in the latter shares are offered to both existing shareholders and
investors at large.
82) The announcement of an SEO usually raises a stock’s price.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
83) Moon Company plans to issue 10 million shares in a seasoned equity offering. The owner, Ken Moon, plans
to sell 4 million shares as part of the offering. Which of the following is true regarding the seasoned equity
issue?
A) It is a primary offering.
B) It is a secondary offering.
C) Some shares are primary shares and some shares are secondary shares.
D) None of the above is true regarding this seasoned equity offering.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
84) Managers will try to protect their existing shareholders by selling new shares at a price that correctly values
or overvalues their firm, leading investors to reason that the announcement of an SEO indicates that a
company is over–valued.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
85) What is a seasoned equity offering?
A) the sale of shares by the owners of a company
B) the raising of capital through retained earnings
C) the issuing of shares to the public in a proven private company
D) the issuing of shares by a company at a time after its IPO
86) A equity issue that raises new funds for a publicly traded company is called:
A) an initial public offering.
B) a seasoned equity offering.
C) an underpriced offering.
D) a secondary offering.
87) What are the advantages of a rights offer over a cash offer when issuing new shares?
A) It enables a firm to attract new investors from outside its current owners.
B) It enables a firm to issue equity without imposing a loss on current shareholders.
C) It enables a firm to access new sources of capital to fund its growth.
D) It enables a firm to attract new investors by offering them a windfall from the difference between the
price of the issued stock and the price of stock after the offering.
88) Big Box retailing has a market capitalization of $500 million and 2 million shares outstanding. In order to
finance its growth, the management of Big Box plans to raise further capital through a rights issue. All
shareholders will be issued ten rights to purchase ten shares at a price of $1.50 per share. How much money
will this raise, if all shareholders exercise their rights?
A) $15 million
B) $30 million
C) $45 million
D) $60 million
89) Valiant Industries has 20 million shares of stock outstanding at a price of $28 per share. The company wishes
to raise more money and plans to do so through a rights issue. Every existing stockholder will receive one
right for each share of stock held. For every four rights held by the stockholder, they can buy one share at a
price of $28. If all rights are exercised, how much money will be raised in this offer?
A) $70 million
B) $120 million
C) $140 million
D) $165 million
90) Big Box retailing has a market capitalization of $500 million and 20 million shares outstanding. In order to
finance its growth, the management of Big Box plans to raise further capital through a rights issue. All
shareholders will be issued ten rights to purchase a new share at a price of $1.50. What will the price of a
share be after the SEO, if all shareholders exercise their rights?
A) $2.32
B) $2.41
C) $2.50
D) $3.64
91) Chambers Industries has a market capitalization of $800 million and 250 million shares outstanding. The
management of this firm plans to raise further capital through a rights issue. Which of the following rights
schemes will raise the most money, if all shareholders exercise their rights?
A) two rights to purchase one share at $1.60 per share
B) three rights to purchase two shares at $1.80 per share
C) four rights to purchase three shares at $2.00 per share
D) five rights to purchase two shares at $1.50 per share