Chapter 10 – The Practice of Fundamental Investing
bank receive? How much will the issuing firm receive?
a.
$1.05; $13.95
b.
$1.50; $15.00
c.
$1.50; $13.50
d.
$1.05; $15.00
e.
$7.00; $15.00
35. A company is going public with an offering price of $10 per share. The gross spread is 7 percent. How much will the
bank receive? How much will the issuing firm receive?
a.
$1.07; $17.00
b.
$1.70; $7.00
c.
$0.70; $9.30
d.
$7.00; $10.00
e.
$7.00; $3.00
36. A company is going public with an offering price of $27 per share. The gross spread is 7 percent. How much will the
bank receive? How much will the issuing firm receive?
a.
$2.70; $24.30
b.
$1.89; $25.11
c.
$0.70; $27.00
d.
$7.00; $20.00
e.
$7.00; $27.00
37. The fee paid to the underwriter is called the
a.
tactical spread.
b.
net spread.
c.
gross spread.
d.
listing fee.
e.
banking fee.
38. If there is a demand for more shares than are available at the offering price, the offering is said to be _____.
a.
b.
c.
d.
e.
39. A stock went public at $15 and closed at $17.70. What was the underpricing percentage?
a.
15 percent
b.
17 percent
Chapter 10 – The Practice of Fundamental Investing
c.
18 percent
d.
17.70 percent
e.
15.25 percent
40. A stock went public at $27 and closed at $45. What was the underpricing percentage?
a.
18 percent
b.
40 percent
c.
27 percent
d.
66.67 percent
e.
45 percent
41. The underpricing during the 1999–2000 technology bubble was above _____.
a.
18 percent
b.
30 percent
c.
25 percent
d.
66 percent
e.
55 percent
42. From 1980 to 2016, the average IPO in the United States closed _____higher than the IPO price.
a.
18 percent
b.
30 percent
c.
25 percent
d.
66 percent
e.
55 percent
43. The _____ gives the investment bank the right to buy 15 percent more shares within the next 30 days.
a.
underwriters fee
b.
red herring
c.
overallotment option
d.
winner’s curse
e.
red shoe option
44. The overallotment option gives the investment bank the right to buy _____ more shares within the next _____.
a.
5 percent; 10 days
b.
30 percent; 10 days
c.
10 percent; 30 days
d.
30 percent; 15 days
e.
15 percent; 30 days
Chapter 10 – The Practice of Fundamental Investing
45. A company is going public by selling 50 million shares. As a result of the overallotment option, the investment bank
has the right to buy an additional _____ shares.
a.
2.5 million
b.
5.25 million
c.
7.5 million
d.
9.5 million
e.
11.25 million
46. A company is going public by selling 75 million shares. As a result of the overallotment option, the investment bank
has the right to buy an additional _____ shares.
a.
2.5 million
b.
5.25 million
c.
7.5 million
d.
9.5 million
e.
11.25 million
47. The investment bank helps stabilize the price of new issues in the secondary market by
a.
purchasing shares in the open market.
b.
selling shares in the open market.
c.
risking its capital.
d.
market manipulation.
e.
underallotment of shares.
48. The _____ is the idea that anyone who wins an auction must have bid too much.
a.
blue herring
b.
red herring
c.
loser’s curse
d.
winner’s curse
e.
red shoe
49. In a _____, the issuing company could agree to sell the shares at a price below the clearing price.
a.
bookbuilt offering
b.
discount offering
c.
dirty auction
d.
clean auction
e.
green shoe
50. The _____ refers to firms that facilitate securities transactions.
a.
buy-side
b.
sell-side
c.
SEC
d.
issuing firm
e.
pension fund
51. The _____ refers to firms that actually invest in securities.
a.
buy-side
b.
sell-side
c.
SEC
d.
issuing firm
e.
investment bank
52. _____ is the description of how management uses resources to create value on behalf of shareholders.
a.
Corporate governance
b.
Capital allocation
c.
Executive compensation
Chapter 10 – The Practice of Fundamental Investing
d.
Going public
e.
A stock pitch
53. All of the following are primary ways to allocate capital, EXCEPT
a.
engaging in mergers and acquisitions.
b.
paying dividends.
c.
repurchasing shares.
d.
decreasing the working capital of the business.
e.
returning cash to debtholders.
54. _____ refers to the rules, policies, and procedures that are used to direct and control a company.
a.
Corporate governance
b.
Capital allocation
c.
Executive compensation
d.
Going public
e.
A stock pitch
55. The key issues that investors seem to care about with respect to a board include all of the following, EXCEPT
a.
the size of the board.
b.
stratthe independence of the board.
c.
how the board responds to shareholder proposals.
d.
separation of the CEO and board chair positions.
e.
how management is compensated.
56. Corporations can use many tools in order to prevent takeovers, including
a.
poison pills.
b.
non-staggered boards.
c.
retaining the most profitable part of the company.
d.
requiring a minority of shareholder votes to approve selling the firm.
e.
staging a walk out.
57. According to a study (Callahan and Mauboussin), when does compensation conflict tend to occur?
a.
When it provides strong incentives to create shareholder value
b.
When it helps retain key talent
c.
When it limits compensation cost to levels that maximize the wealth of shareholders
d.
When management has most of their wealth in this one company, so they may take too little risk
e.
When it makes management focus on long-term value maximization rather than earnings per share
Chapter 10 – The Practice of Fundamental Investing
58. Which of the following facts about executive compensation is TRUE?
a.
The level of compensation of the top five earners within each public company is not disclosed.
b.
Officers are permitted to hedge their stock and option awards.
c.
CEO compensation has increased much faster than the wages of the other corporate employees.
d.
Aligning compensation to share price will align management to shareholders.
e.
The majority of the compensation committee must be dependent directors.
59. A stock pitch includes all of the following EXCEPT
a.
that stock returns are mean reverting.
b.
merits of a stock.
c.
models and multiples.
d.
risks.
e.
background information about the company.
60. The goal of _____ is to convince an investor to buy a stock or to sell a stock short.
a.
corporate governance
b.
capital allocation
c.
executive compensation
d.
going public
e.
the stock pitch