Foundations of Financial Management, 17e (Block)
Chapter 15 Investment Banking: Public and Private Placement
1) The investment banker is someone who buys large new issues of stocks and then sells them to
the public after the stock price has risen.
2) The entire area of investment banking is becoming more competitive.
3) An investment banker acts as a middleman between a corporation needing funds and investors
with funds.
4) Among several other roles, as a middleman, the investment banker is responsible for
designing and packaging a security offering and selling it to the public.
5) The year 2008 will likely go down in history as one of the worst environments for companies
wishing to go public.
6) Over 51 percent of the total revenue made through investment banking was generated by just
10 global banking firms.
7) When a new issue of bonds is sold, all the proceeds go to the owners of the company.
8) When the stock market is rising and high, companies hold off on the issue of new common
stock.
9) The Glass-Steagall Act of the 1930s required U.S. banks to separate their commercial banking
operations and their investment banking operations into two different entities.
10) The Glass-Steagall Act of the 1930s was created to separate U.S. bank’s commercial and
investment sections, which later because an advantage to the U.S. banks because foreign banks
were affected by having them combined.
11) The Gramm-Leach-Bliley Act repealed the Bretton Woods Agreement.
12) Smaller investment banking houses may handle distributions for relatively unknown
corporations on a “best-efforts” basis.
13) The term “underwriter” is synonymous with risk-taker or risk-bearer.
14) Large well-established investment bankers often distribute new issues on a best-efforts basis.
15) Only a small amount of security issues are sold on a “best-efforts” basis.
16) In today’s market environment, most investment banking houses specialize in underwriting
and do not engage in the dealer-broker function.
17) The period of market stabilization usually lasts two or three days after the initial offering, but
may extend up to 30 days for difficult-to-distribute securities.
18) The investment banking industry has shifted its emphasis from mergers and acquisitions to
underwriting new securities.
19) The movement of non-brokerage firms into the brokerage area has forced traditional
securities firms to expand their staffs.
20) Investment banking has changed from a very competitive, price-sensitive environment to one
where relationships determine who gets the business.
21) Continued consolidation is not expected in the investment banking industry, as market share
and global competition have stabilized.
22) “Best efforts” and “direct” methods account for a relatively small portion of investment
banking roles.
23) Because there is more uncertainty involved in the initial market reaction to common stock, a
larger “underwriting spread” often exists for stocks, compared to other types of offerings.
24) The investment banking industry has shifted its activities to underwriting new securities,
rather than advising on mergers and acquisitions.
25) The underwriting spread is the guaranteed minimum profit to an investment bank for each
share distributed.
26) An underwriting syndicate is a group of investment bankers who help to distribute a new
issue for a company.
27) One purpose of an underwriting syndicate is to distribute securities to the public.
28) The out-of-pocket cost to issue new common stock is always paid by the investment banker.
29) The issuing company desires to have as little underpricing of new securities as possible.
30) An underpriced offering represents a permanent lost opportunity to the issuing firm.
31) Underpricing is when an investment banker sets the stock price above the market price to
ensure that a profit is made.
32) The goal of underpricing is to ensure that a large amount of shares of stock is sold.
33) When stock is exchanged in the NYSE that is considered secondary offerings, while when
stock is exchanged during an initial public offering that is considered primary offerings.
34) When a firm issues new stock, it always results in a dilution of earnings in the long run.
35) When a firm issues new stock, it can result in a dilution of earnings in the short run.
36) IPOs generally underperform compared to the general market in the immediate aftermarket.
37) In 2011, IPOs rose tremendously since the market started to pick up.
38) The term “underpricing” describes the process of setting the spread between the participants
of the investment banking syndicate.
39) When a company goes public, an initial public offering must occur to sell the ownership of
the company to the public.
40) Investment bankers can help a firm undertake a secondary offering when the company is too
small for a primary offering IPO.
41) While manipulation of security prices is normally illegal, the SEC allows underwriters to
temporarily support the price of stocks that they have brought to market.
42) After an IPO has been issued and the price of the stock drops tremendously, the investment
banker is to blame since they probably miscalculated the original stock price.
43) Shelf registration has nearly eliminated competition in the investment banking industry.
44) Only the stronger investment bankers are in a position to benefit from the shelf registration
process.
45) The SEC Rule 415 allows an issuing corporation to quickly take advantage of market
conditions.
46) Shelf registration requires the firm to file one comprehensive registration statement, which
outlines the company’s indefinite financial plan.
47) Shelf registration has helped larger investment banking firms become larger, while smaller
investment banking firms are left behind.
48) Shelf registration is most frequently used with new issues of common stock.
49) Shelf registration primarily gives large, strong companies flexibility in the timing of debt or
equity issues.
50) When a company first goes public, a registration statement must be filed with the New York
Stock Exchange.
51) Generally, the larger the dollar value of an issue, the smaller is the spread as a percentage of
the offering price.
52) Google’s IPO was controversial because Google used a Dutch investment banking firm to
underwrite the IPO.
53) Private placement eliminates the expensive and lengthy registration process with the
Securities and Exchange Commission.
54) Even though the firm may pay a lower interest rate on a private placement, it will pay higher
out-of-pocket costs than a public offering.
55) Privately placed bonds are the most popular method of raising long-term corporate debt.
56) Investment banks are hesitant to issue bonds when they perceive the interest rate to be low.
57) Leveraged buy-outs usually entail the use of a large proportion of debt to take control of the
firm.
58) A major trend of privatization in foreign markets began after 1984.
59) Privatization may have different meanings when used in the U.S. compared to foreign
markets.
60) Privatization in many foreign markets means selling companies to the public that were
previously owned by the state or government.
61) A branch of investment banking that has been very opportunistic in recent years has been the
increase in sales of foreign securities of companies formerly owned by the government.
62) The primary rationale for repealing the Glass-Steagall Act was that the U.S. Congress
recognized the international competitive disadvantage for US commercial and investment banks.
63) The “best efforts” method of underwriting is the most common method used in issuances.
64) If the retail price of a stock issuance is $17.50 and the issuers’ price is $15.50, the total
spread is 11.4%.
65) If the retail price of a stock issuance is $17.50 and the syndicate members’ price is $15.50,
the total spread is 11.4%.