17 – 15 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
I. Initial filing
II. Preliminary prospectus
III. Pricing and distribution
IV. Investment bank discussion
a) I, II, III, IV
b) IV, II, I, III
c) I, IV, II, III
d) IV, I, II, III
41. A low quality issuer wishing to reduce issuing expenses should NOT choose to have their
new issue made on a(n) ____ basis.
a) escrow
b) best efforts
c) letter
d) bought deal
42. Which of the following is not one of the four main types of public offerings?
a) Bought deal
b) Standby offering
c) Best efforts offering
d) Green-shoe offering
43. Which of the following offering types can only be used with seasoned offerings?
I. Bought deal
II. Best efforts
III. Firm commitment
IV. Standby offering
a) I and IV
b) II and IV
c) II and III
d) I and II
44. In a ______ offering, common shares are offered at a discount to investors who already own
shares.
a) bought deal
b) firm commitment
c) standby or rights
d) best efforts
45. What is the spread for an investment dealer who purchases shares for a fixed price of $13
each and resells them to the public at a price of $15 each?
a) $2
b) $15
c) $28
d) The spread can only be determined when the number of shares both purchased and sold is
known.
46. How is the compensation to a Canadian investment dealer determined?
a) A standard 2% underwriting fee (based on gross proceeds) plus the total value of the spread.
b) A standard 4% underwriting fee (based on gross proceeds) plus the total value of the spread
c) A standard 2% underwriting fee (based on net proceeds) plus the total value of the spread
d) A standard 2% underwriting fee (based on gross proceeds)
47. Montreal Dealers Inc. (MD), a Canadian underwriting firm, has just underwritten an issue by
PublicDomaine.com, and the total proceeds of the issue are $15 million. MD charges an
underwriting fee of 4 percent. MD bought the 1,000,000 shares from PublicDomaine for $12 and
sold them to the public for $15 each. What is the total compensation MD obtained?
a) $2.6 million
b) $0.6 million
c) $3.6 million
d) $3.52 million
48. Concordia Partners (CP) has recently underwritten a firm commitment public offering from
Laurentide Resort Inc. (LR). However, after three customers died and many others were
seriously injured while using LR products, large lawsuits have been raised against the firm, and
the demand for LR shares has dwindled to nothing. Which of the following provisions might save
CP from having to market an unprofitable issue?
a) Green-shoe provision
b) Market out clause
c) Unforeseen events provision
d) As it was a firm commitment offering, CP must absorb any losses from underwriting the
issue.
Investment Banking and Securities Law 17 – 18
49. The overallotment or green-shoe option allows:
a) the issuing firm to take back any unsold shares from the underwriter so that an underwriting
fee need not be paid for these shares.
b) the underwriting firm to charge a higher price for the shares in cases of very high demand.
c) the underwriting firm to buy more shares from the issuing firm if investor demand is strong.
d) the founder of the firm to sell his or her shares at a higher issue price in the case of strong
investor demand.
50. Generally, initial public offerings (IPOs) are:
a) fairly priced.
b) overpriced.
c) underpriced.
51. Which of the following is not one of the differences between limit and market orders?
a) Limit orders define the price at which the shares will be purchased while market orders are
independent of the final price.
b) Limit orders are usually made by major institutions while retail investors make market orders.
c) The amount of shares that can be purchased with a limit order is pre-specified by the
underwriter, while market orders can be for any number of shares.
d) Limit orders are expressions of interest while market orders are for fixed amounts.
17 – 19 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
52. Which of the following is not a function of the lead underwriter in supporting the stock during
the distribution period?
a) Trading against other members of the underwriting syndicate.
b) Using the overallotment option.
c) Putting as many shares as possible in friendly hands to be able to materialize the sell.
d) Avoiding the use of the “out clause” as much as possible.
53. Which of the following activities is allowed during the quiet period?
a) Hyping the stock to help sell it.
b) Issuing an analyst report recommending the shares.
c) Reducing the price.
d) Trading in the shares by the lead underwriter.
54. Which of the following statements is not true about underpricing?
a) It “leaves money on the table.”
b) It is done to get more IPO proceeds for the issuing firm.
c) It is calculated as the difference between the initial offering price and the price on the first day
of trading.
d) It involves pricing an IPO at less than its market value.
Investment Banking and Securities Law 17 – 20
55. Use the following statements to answer this question:
I. “Leaving money on the table” refers to the underperformance of stocks in the long term.
II. Underpricing in Canada is higher than in the U.S.
a) I and II are correct.
b) I and II are incorrect.
c) I is correct and II is incorrect.
d) I is incorrect and II is correct.
56. Which of the following is not one of the reasons that have been advanced for the high level
of underpricing in the U.S.?
a) Too much competition
b) The threat of litigation
c) Lowering the risk for the underwriter
d) IPO spinning
57. Use the following statements to answer this question:
I. Spinning encourages underpricing in the market.
II. Spinning is unethical.
a) I and II are correct.
b) I and II are incorrect.
c) I is correct and II is incorrect.
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d) I is incorrect and II is correct.
58. A short-form prospectus incorporates which of the following?
a) The nature and pricing of the securities.
b) All corporate information.
c) Both of the above.
59. The filing of quarterly and annual financial statements, annual information forms, and proxy
and information circulars is a main component of which of the following:
a) Continuous disclosure
b) Due diligence
c) Fair disclosure
d) Standard reporting for all public and private companies
60. Evaluate the following statement:
A short-form prospectus is required for a seasoned offering.
a) True
b) False
Investment Banking and Securities Law 17 – 22
17 – 23 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
PRACTICE PROBLEMS
61. Briefly explain the term “underpricing.”
62. Identify and describe the two ways a new issue of securities can be distributed by the
underwriter.
63. Identify two types of firms that may have their newly issued securities distributed on a best
efforts basis, and discuss why this basis would be used.
Answer:
64. Explain the importance of the lock-up period in the asymmetry of information minimization
process.
65. Discuss the differences between a letter of intent from the underwriter to the issuer and an
underwriting agreement.
66. Distinguish between the following: public offering, private placement, and rights offering.
67. Discuss some challenges with initial public offerings (IPOs).
68. Describe a potential conflict of interest that may arise when an investment dealer
underwrites a new equity issue on a bought deal basis.
69. The little company you and your friend started in your parents’ garage has grown so much
that you are now ready to take the firm public. In your discussions with one of the top
investment dealers, you have been given a choice between two alternatives:
Plan I: The investment dealer will underwrite the issue of 1 million shares at $14 per share.
There will be an underwriting fee of 7 percent of the gross proceeds.
Plan II: The investment dealer will accept the 1 million shares on a “best efforts” basis. The price
will be $15 per share, and it is believed that 95 percent of the shares will be sold. The
investment dealer’s fee will be $950,000.
Investment Banking and Securities Law 17 – 26
What will the net proceeds be under each plan? What will the investment dealer charge under
each plan? Which plan should you accept?
Answer:
17 – 27 Test Bank for Introduction to Corporate Finance, Fourth Canadian Edition
LEGAL NOTICE