66) A lower equity spread usually means that there is a lower amount of uncertainty in equity
compared to other types of capital.
67) Generally, the larger amount of shares issued means that the spread percentage would be
lower.
68) Because of their lower levels of risk to the underwriter, smaller issuances have lower spread
percentages than large issuances.
69) Investment banking is highly concentrated with the top 10 underwriters controlling 90% of
the global market for stocks and bonds.
70) Stock prices for Amazon and eBay managed to avoid the turbulent price movements that
followed the collapse of the Internet bubble.
71) Which of the following is not a key role of an investment banker?
A) Market-maker
B) Underwriter
C) Acting as a transfer agent
D) Agent in private placement
72) The investment banker’s function involves all of the following EXCEPT
A) Taking a portion of the risk in the distribution of an issue.
B) Always ensuring a company that a given amount of equity can be sold so that long-range
financial planning can be made accurately.
C) Making a market by buying and selling a security to ensure a liquid market.
D) Contracting to buy securities from the corporation and resell them to other security dealers
and the public.
73) The investment banker may advise clients on a continuing basis about
A) the types of securities being sold.
B) the number of shares for distribution.
C) the timing of the sale.
D) all of these options are correct.
74) Which investment bank underwrote the most bonds in 2013 and 2014?
A) Merrill Lynch
B) J.P. Morgan
C) Deutsche Bank
D) Citigroup
75) The Glass-Steagall Act prohibited
A) retail brokerage firms from having investment banking operations.
B) commercial banks from combining investment banking and commercial banking functions.
C) investment banks from selling both debt and equity securities.
D) insurance companies from selling investment products.
76) Investment banking is changing dramatically into an industry where
A) investment bankers are using larger syndicates to distribute initial public offerings.
B) investment bankers are becoming increasingly larger so that they can take on more risk and
have less need for large syndicates.
C) investment bankers don’t need a distribution network because most new issues are sold
directly to institutional investors.
D) new investment banking firms are being established to deal with the increasing number of
companies looking for capital.
77) When investment bankers act in the function of “underwriters,” they
A) give a “firm commitment” to purchase the securities from the corporation at a set price.
B) guarantee that the company will not suffer a decline in earnings after taxes.
C) are allowed to sell as many securities as possible and return the rest unsold.
D) are allowed to give advice to the company’s management.
78) The risk function of investment banking is categorized mainly under
A) underwriting function.
B) market-maker function.
C) advisor function.
D) agent function.
79) In issuing stock, the term “spread” refers to
A) the profit the managing investment banker gets for an issue of stock.
B) the disparity between the initial asking price and the average price for the stock issued some
months later.
C) the difference between what the corporation gets for new issues of stock and what the public
pays for the stock.
D) the total cost to the corporation for issuing new stock.
80) The managing investment banker is typically responsible for
A) putting a syndicate together to aid in the distribution and share the underwriting risk.
B) determining the value (price) of the company.
C) stabilizing the offering during the distribution period.
D) all of these options are the responsibility of the investment banker.
81) An investment banker most commonly makes money from
A) commissions from buyers.
B) fees from other investment bankers in the syndicate.
C) the spread between the issue price and proceeds to the issuer.
D) artificially supporting the stock price during and after the offering.
82) Which of the following activities is not a service provided by investment bankers?
A) Underwriting initial public offerings
B) Raising capital via mutual fund offerings
C) Advising in mergers
D) Advising on restructurings
83) Raybac is about to go public. Its present stockholders own 500,000 shares. The new public
issue will represent 700,000 shares. The shares will be priced at $25 to the public with a 5%
spread. The out-of-pocket costs in addition to the spread will be $450,000. What are the net
proceeds to Raybac?
A) $17,500,000
B) $17,050,000
C) $17,075,000
D) $16,175,000
84) Raybac is about to go public. Its present stockholders own 500,000 shares. The new public
issue will represent 700,000 shares. The shares will be priced at $25 to the public with a 5%
spread. The out-of-pocket costs in addition to the spread will be $450,000. What are the total
per-share underwriting fees to the investment banker?
A) $1.50
B) $23.50
C) $1.25
D) $1.89
85) In a public distribution, the dealer group will generally pay a
A) higher price for the stock than the public.
B) lower price for the stock than the managing investment banker.
C) higher price for the stock than the managing investment banker.
D) lower price for the stock than members of the investment banking syndicate group.
86) When a firm sells a new issue through an investment banker, the costs incurred
A) are the “give up” expense of the spread, plus the legal and accounting fees, printing expense,
and other small fees.
B) are the spread to the underwriter, which includes all the costs of legal and accounting fees,
printing expense, and other small fees.
C) are dependent upon the number of underwriters in the syndicate.
D) are the “give up” expense of the spread, plus the legal and accounting fees, printing expense,
and other small fees, and are dependent upon the number of underwriters in the syndicate.
87) Generally, the total cost to issue securities (as a percent of total proceeds)
A) is greater for common stock than for debt and increases as the size of the issue increases.
B) is greater for debt than for common stock and decreases as the size of the issue increases.
C) is greater for debt than for common stock and increases as the size of the issue increases.
D) is greater for common stock than for debt and decreases as the size of the issue increases.
88) Dilution of earnings occurs because
A) a new issue of common stock creates more shares outstanding, which often reduces earnings
per share temporarily.
B) the company suffers a decline in earnings after taxes.
C) the investment banker collects an underwriting fee.
D) all of these options are correct.
89) Market stabilization
A) is the action by the managing investment banker to keep the price of newly issued securities
from falling below the issue price to the public.
B) usually lasts 2 to 3 days, but can last up to 30 days if a security is difficult to distribute.
C) cannot always maintain high initial prices—a case in point being the Facebook issue, sold in
May of 2012.
D) all of these options are true.
90) Underpricing occurs
A) when additional shares are to be issued for companies with securities already publicly traded.
B) to aid in the market’s reception of the securities.
C) in large secondary offerings.
D) all of these options are true.
91) Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at $22
to the public. Maxwell will receive $19 per share. The firm has one million shares outstanding
and earnings of $6 million before recording the new issue. What is the amount of dilution in
earnings per share?
A) $1.86
B) $1.38
C) $1.77
D) $6.00
92) Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at $22
to the public. Maxwell will receive $19 per share. The firm has one million shares outstanding
and earnings of $6 million before recording the new issue. What is the amount of earnings per
share after the stock issuance?
A) $2.79
B) $1.38
C) $4.14
D) $6.00
93) Maxwell Corp. is coming to the market with a new offering of 450,000 shares of stock at $22
to the public. Maxwell will receive $19 per share. The firm has one million shares outstanding
and earnings of $6 million before recording the new issue. What is the spread in dollars?
A) $19
B) $22
C) $3
D) $41
94) Firm X needs to net $12,800,000 from the sale of common stock. Its investment banker has
informed the firm that the retail price will be $22 per share, and that Firm X will receive $18.50
per share. Out-of-pocket costs are $250,000. How many shares must be sold to achieve the
desired net to the issuing firm? (Round up answer to nearest whole number)
A) 581,526
B) 654,545
C) 659,091
D) 705,406
95) Newdex has net income of $3,000,000 (INCLUDING the effect of expected out-of-pocket
costs) and 1,000,000 shares outstanding. It needs to raise $5,000,000 in funds for a new asset. Its
investment banker plans to sell an issue of common stock to the public for $40, less a spread of
10%. How much must Newdex’s after-tax income increase by to prevent dilution of earnings per
share?
A) $40,000
B) $416,667
C) $350,000
D) $375,000