Capital Market

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Chapter 10
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Stock Offerings and Investor Monitoring

1. Which of the following statements is incorrect?
A) A stock is a certificate representing partial ownership in a corporation. B) Like debt securities, common stock is issued by firms to obtain funds. C) Stocks are issued by corporations to raise short-term funds. D) The secondary stock market enables investors to sell stocks that they had previously purchased.

ANSWER: C

2. Preferred shareholders
A) typically have the same voting rights as common shareholders. B) do not share the ownership of the firm with common shareholders. C) typically participate in the profits of the firm beyond the stated fixed annual dividend. D) may not receive a dividend every year.

ANSWER: D

3. From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds. A) True
B) False

ANSWER: A

4. A ______ requires that dividends cannot be paid on common stock until all current and previously omitted dividends are paid on preferred stock. A) residual claim
B) preferred margin
C) cumulative provision
D) liquidation claim

ANSWER: C

5. Firms assume ______ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ______ be omitted without the firm being forced into bankruptcy. A) more; can

B) less; can
C) more; cannot
D) less; cannot

ANSWER: B

6. When a corporation first decides to issue stock to the public, it engages in a(n) A) secondary offering.
B) initial public offering.
C) seasoned equity offering.
D) none of the above

ANSWER: B

7. A firm can best avoid the time lag between registering new securities with the SEC and actually selling them by A) use of proxy.
B) shelf registration.
C) use of a margin call.
D) use of preemptive rights.

ANSWER: B

8. The process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible _______ prices is referred to as ___________. A) IPO; margin selling

B) offer; secondary market building
C) offer; bookbuilding
D) IPO; bookbuilding

ANSWER: C

9. To the extent that shares sold during an IPO are discounted from their appropriate price, the proceeds that the issuing firm receives from the IPO are lower than it deserves. A) True
B) False

ANSWER: A

10. The transaction costs to the issuing firm in an IPO is usually _____ percent of the funds raised. A) 5
B) 6
C) 7
D) 10

ANSWER: C

11. If investors quickly sell an IPO stock in the secondary market, there will be ___________ on the stock’s price. A) upward pressure
B) downward pressure
C) no additional pressure
D) none of the above

ANSWER: B

12. The purpose of a lockup provision is to
A) keep individual investors from buying and selling stock.
B) prevent downward pressure on the stock’s price.
C) increase the number of outstanding shares.
D) allocate a larger proportion of stock to institutional investors.

ANSWER: B

13. When the lockup period expires, the share price commonly A) remains unchanged.
B) increases significantly.
C) decreases significantly.
D) none of the above

ANSWER: C

14. IPOs tend to occur more primarily during recessions.
A) True
B) False

ANSWER: B

15. The initial (one-day) return of IPOs in the United States has averaged about _____ percent over the last 30 years. A) 10
B) 20
C) 30
D) 50

ANSWER: B

16. The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called A) flipping.
B) skiing.
C) flopping.
D) none of the above

ANSWER: A

17. ________ occurs when an investment bank allocates share from an IPO to corporate executives who may be considering an IPO or other business that will require the help of an investment bank. A) Flipping

B) Spinning
C) Laddering
D) none of the above

ANSWER: B

18. When brokers encourage investors to place bids...
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