Answers to Concepts Review and Critical Thinking Questions
1. A company’s internally generated cash flow provides a source of equity financing. For a profitable
company, outside equity may never be needed. Debt issues are larger because large companies have the
2. From the previous question, economies of scale are part of the answer. Beyond this, debt issues are
simply easier and less risky to sell from an investment bank’s perspective. The two main reasons are
3. They are riskier and harder to market from an investment bank’s perspective.
4. Yields on comparable bonds can usually be readily observed, so pricing a bond issue accurately is much
5. It is clear that the stock was sold too cheaply, so Eyetech had reason to be unhappy.
6. No, but, in fairness, pricing the stock in such a situation is extremely difficult.
7. It’s an important factor. Only 6.5 million of the shares were underpriced. The other 32 million were, in
effect, priced completely correctly.
8. The evidence suggests that a non-underwritten rights offering might be substantially cheaper than a cash
9. He could have done worse since his access to the oversubscribed and, presumably, underpriced issues
10. a. The price will probably go up because IPOs are generally underpriced. This is especially true for
b. It is probably safe to assume that they are having trouble moving the issue, and it is likely that the