Chapter 10 – The Practice of Fundamental Investing
1. A company goes public for many reasons, including that the original investors and the management team would like
liquidity.
a.
True
b.
False
2. Being a public company also has some advantages, among which management must answer to outside shareholders.
a.
True
b.
False
3. The least significant part of the registration statement is known as the prospectus.
a.
True
b.
False
4. When a firm decides to go public, it hires an investment bank to lead the company through the process.
a.
True
Chapter 10 – The Practice of Fundamental Investing
b.
False
5. A successful offering is undersubscribed.
a.
True
b.
False
6. The sell-side refers to firms that facilitate securities transactions.
a.
True
b.
False
7. Buy-side analysts typically cover the stocks within a particular industry and produce reports that are intended to help
the sell-side reach investment decisions.
a.
True
b.
False
8. Sell-side analysts provide information and recommendations to their firm’s portfolio manager(s).
a.
True
b.
False
9. Capital allocation is the description of how management uses resources to create value on behalf of shareholders.
a.
True
b.
False
10. When a company acquires another public company, it typically pays a significant premium above the previous market
price.
a.
True
b.
False
11. Some investors believe that dividends increase the agency conflict.
a.
True
b.
False
12. The declaration date is the date that a dividend is announced by the board of directors.
a.
True
b.
False
13. The ex-dividend date is the date on which the transfer agent “closes the book” and looks at who is the shareholder.
a.
True
b.
False
14. Share repurchases do not always create value.
a.
True
b.
False
15. Corporate governance refers to the rules, policies, and procedures that are used to direct and control a company.
a.
True
b.
False
16. A growing percentage of institutional investors are integrating environmental, social, and governance (ESG) factors
into their investment decisions.
a.
True
b.
False
17. Corporations can use many tools in order to prevent takeovers, including poison pills, which require a supermajority
of shareholder votes to approve selling the firm, selling the most profitable part of the company, and staggered boards.
a.
True
b.
False
18. Investors want directors who will voice their opinion, who are not beholden to the CEO or board chair, and who have
enough experience that their opinion carries weight on the board.
a.
True
b.
False
19. CEO compensation is often used to try to remedy the principal–agent conflict.
a.
True
b.
False
20. The three goals of executive compensation are to align management’s interest with the shareholders, to keep
management from leaving in bad times, and to refrain from giving too much of shareholder profits to management.
a.
True
b.
False
21. Kaplan (2013) argues that the market for top executives is competitive, and compensation of other professionals is
growing even faster.
a.
True
b.
False
22. Compensation for the top executives at public companies is set by a compensation committee, which is a subset of the
board of directors.
a.
True
b.
False
23. The level of compensation of the top five earners within each public company can be found in the company’s proxy
statement.
a.
True
b.
False
24. The goal of the stock pitch is to convince an investor to buy a stock or to sell a stock short.
a.
True
b.
False
25. A stock pitch is like a book report or a news report.
a.
True
b.
False
26. Advantages of a company going public include all of the following, EXCEPT that
a.
publicly traded stock provides valuable signaling information concerning the health of the company.
b.
the original investors and the management team would like liquidity.
c.
it is easier to use public stock as currency to acquire other companies.
Chapter 10 – The Practice of Fundamental Investing
d.
it might need more capital in order to finance growth.
e.
management must answer to outside shareholders.
27. Disadvantages of a company going public include all of the following, EXCEPT that
a.
there are direct costs associated with compliance.
b.
management may have to disclose more of its strategy.
c.
publicly traded stock provides valuable signaling information.
d.
management will spend significant time meeting with analysts.
e.
management must answer to outside shareholders.
28. An investment bank can do an IPO offering as a
a.
firm commitment.
b.
best efforts commitment.
c.
firm offering.
d.
bought offering.
e.
red herring.
29. An investment bank can do an IPO offering as a
a.
discounted commitment.
b.
best efforts commitment.
c.
premium commitment.
d.
best efforts offering.
e.
red herring.
30. Which of the following is a document that helps potential investors understand the company?
a.
Indications of interest
b.
The pricing meeting
c.
The registration statement
d.
The road show
e.
The prospectus
31. Which of the following describes the process of when the underwriter takes the issuing company’s management to
meet with potential investors?
a.
Indications of interest
b.
The pricing meeting
c.
The registration statement
d.
The road show
e.
The prospectus
32. Once the offering has been deemed effective, the investment bank and the issuing firm have a/an _____.
a.
indication of interest
b.
pricing meeting
c.
registration statement
d.
road show
e.
prospectus
33. The preliminary prospectus is often referred to as a/an _____
a.
SEC form S-1.
b.
red herring.
c.
registration statement.
d.
winner’s curse.
e.
green shoe.
34. A company is going public with an offering price of $15 per share. The gross spread is 7 percent. How much will the