Chap015.pdf

Chapter 15 - How Corporations Issue Securities

Chapter 15 How Corporations Issue Securities Multiple Choice Questions

1. A business plan generally contains: I) a description of the proposed products II) a description of the potential market III) a description of the underlying technology IV) resources needed A. I only B. I and II only C. II and III only D. I, II, III, and IV

2. Equity investment in start-up private companies is called: A. venture capital B. mezzanine financing C. initial public offering (IPO) D. none of the above

3. The market for venture capital refers to the: I) Private financial marketplace for providing equity investment for small, startup firms II) Bond market III) Market for providing equity to well-established firms A. I only B. II only C. II and III only D. III only

4. Which of the following statements is generally true of venture capital (VC) firms? A. VCs are always silent partners in the startup company that they finance B. VCs always have a majority of directors in the startup company C. VCs generally provide management advice and contacts in addition to capital D. All of the above statements are true of VCs

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Chapter 15 - How Corporations Issue Securities

5. Arrange the following in the chronological order for a startup firm: I) VC financing; II) Mezzanine financing; III) Stage 1, 2, 3, 4 etc. financing; and IV) IPO A. I, II, III, and IV B. I, III, II, and IV C. IV, I, II, and III D. III, I, II, and IV

6. Venture capitalists provide start-up companies: A. all the money they will need up-front B. enough money at each stage so that they can reach the next stage or major checkpoint C. help the companies issue initial public offering (IPO) D. none of the above

7. Wealthy individuals who provide equity investment for new firms are called: I) White knights II) Red herrings III) Angel investors A. I only B. I and II only C. III only D. II only

8. Generally, venture capital funds are organized as: I) proprietorships II) corporations III) limited private partnerships A. I only B. II only C. III only D. I and II only

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Chapter 15 - How Corporations Issue Securities

9. Venture capital investment was highest in the year: A. 1999 B. 2000 C. 2003 D. 2005

10. Large technology firms like Intel, Johnson and Johnson, and Sun Microsystems which provide equity capital to new innovative companies are called: A. Angel investors B. Corporate venturers C. White Knights D. none of the above

11. The stock exchange that specializes in trading the shares of young and rapidly growing companies is: A. Nasdaq B. NYSE C. London Stock Exchange D. none of the above

12. According "Venture Economics" venture capital funds earn an average annual rate of return of: A. about 32% B. about 24% C. about 17% D. about 12%

13. Registration statements are filed with the: A. Federal Reserve Board (FED) B. Office of the Comptroller of the Currency (OCC) C. Securities and Exchange Commission (SEC) D. Environmental Protection Agency (EPA)

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Chapter 15 - How Corporations Issue Securities

14. According to evidence from survey of CFOs, the top-most motive for firms to go public is: A. to broaden the base of ownership B. to enhance the reputation of the firm C. to establish a market price/value for our firm D. to create public shares for use in future acquisitions

15. The main reason for recent migration of a large number of firms from public-to-private ownership is: A. Blue-sky laws B. Sarbanes-Oxley Act C. International Accounting Standards (IAS) D. None of the above

16. Generally, underwriters provide the following services to the issuing firm: I) Provide advice II) Buy new issue III) Reselling the issue to the public A. I only B. I and II only C. I, II, and III

17. State laws that regulate sales of securities within the state are called: A. Red herring B. Registration laws C. Rule 415 D. Blue-sky laws

18. The managing underwriter is also called the: A. syndicate B. bookrunner C. specialist D. none of the above

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Chapter 15 - How Corporations Issue Securities

19. Generally, underwriters may handle an issue on: I) Best efforts basis. II) Firm commitment basis. III) All or none basis. A. I only B. II only C. III only D. I or II or III

20. Underwriters get compensated for their services in issuing new securities in the form of: A. commissions B. set fees C. spread D. none of the above

21. Generally initial public offerings (IPOs) are: A. Overpriced B. Correctly priced C. Under priced

22. The average initial returns from investing in IPOs is the highest in: A. India B. China C. Korea D. U.S.A.

23. The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the value) is called: A. Winner's curse B. Dutch auction C. English auction D. None of the above

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Chapter 15 - How Corporations Issue Securities

24. In a uniform-price auction: A. Winning bidders pay a price that they have bid B. All winning bidders pay a price that is the highest bid C. All winning bidders pay a price that is the lowest winning bid D. None of the above

25. For example: a government wishes to auction 5 million bonds (quantity) and three potential buyers submit bids.

In a discriminatory auction: A. Buyer A pays $1,110 and Buyer B pays $1,000 B. Buyer A pays $1,000 and Buyer B pays $1,000 C. Buyer A pays $990 and Buyer B pays $990 D. Buyer A pays $1,000 and Buyer C Pays $990

26. Suppose a government wishes to auction 5 million bonds and three would-be buyers submit bids.

In an uniform-price auction: A. Buyer A pays $1,110 and Buyer B pays $1,000 B. Buyer A pays $1,000 and Buyer B pays $1,000 C. Buyer A pays $990 and Buyer B pays $990 D. Buyer A pays $1,000 and Buyer C Pays $990

27. Winner's curse is reduced in a (an): A. discriminatory auction B. uniform-price auction C. English auction D. none of the above

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Chapter 15 - How Corporations Issue Securities

28. An equity issue sold to the firm's existing stockholders is called: A. A rights offer B. A general cash offer C. A private placement D. A discriminatory-price auction

29. A general cash offer involves the following processes: I) register the issue with the SEC II) sell the securities to an underwriter or a syndicate of underwriters III) underwriter builds up a book of likely demand for the securities IV) price of the issue is fixed V) sell the securities to the public A. I, II and III only B. I, II, and IV only C. I, II, III, IV and V D. II, III, IV and V only

30. Which of the following statements describes shelf registration best? A. The issuance of securities to qualified institutional investors. B. Blue-sky laws. C. The provision that allows large companies to file a single registration statement covering financing plans up to two years into the future. D. None of the above.

31. Shelf registration is more often used for: A. the issue of common stock B. the issue of convertible securities C. issue of corporate bonds D. None of the above

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Chapter 15 - How Corporations Issue Securities

32. The following are advantages of shelf registration except: A. Securities can be issued in dribs and drabs without incurring excessive transaction costs B. Securities can be issued in short notice C. Security issues can be timed to take advantage of market conditions D. All of the above are advantages

33. The underwriter's spread is the highest for: A. IPOs B. Seasoned equity offerings C. Convertible bonds D. Straight bonds

34. The very first public equity issue that is made by a company is referred to as: A. A rights issue B. American depositing receipts (ADRs) C. An initial public offering (IPO) D. A seasoned equity offering (SEO)

35. A new public equity issue from a company with public equity previously outstanding is called: A. An initial public offering (IPO) B. American depositing receipts (ADRs) C. A seasoned equity offering (SEO) D. A private placement

36. Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds? A. Initial public offerings (IPOs) B. Seasoned equity offerings (SEOs) C. Convertible bonds D. Straight bonds

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Chapter 15 - How Corporations Issue Securities

37. Generally, there is a drop in the price of equity subsequent to the announcement of a new issue. This is attributed to: A. An increase in the supply of shares B. Information effect C. Both a and b D. None of the above

38. A rights issue is also called: A. A private placement B. Shelf registration C. Initial public offering (IPO) D. A privileged subscription

39. Image Storage Corporation has #1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. If the current stock price is $50 and the subscription price is $47/share, calculate the value of a right? A. $0.40/right B. $5.00/right C. $2.50/right D. $1.00/right

40. New Image Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. How many rights are needed to buy one new share? A. 1 right/share B. 2 rights/share C. 3 rights/share D. 4 rights/share

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Chapter 15 - How Corporations Issue Securities

41. If a shareholder or an investor wants to acquire a new share of stock under a rights issue, he/she must: A. Buy call options on the stock B. Acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent C. Acquire the correct number of rights per share and submit them to the subscription agent D. Any of the above

42. If the old stock price is $50/share and ex-rights price is $49/share then the value of a right is: A. $50/right B. $49/right C. $1/right D. Cannot be determined

43. The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price of $27/share, calculate the value of a right. A. $1/right B. $2/right C. $3/right D. None of the above

44. When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds etc., it is called A. A rights offering B. A general art offering C. A private placement D. An unseasoned issue

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Chapter 15 - How Corporations Issue Securities

45. SEC registration is not required when a company makes: A. A private placement of securities B. A public offering of securities issue of value less than $5 million and maturity less than 9 months C. A public offering of securities issue of value greater than $5 million D. A and B above

46. The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called A. Rule 144A B. Rule 415 C. Sarbanes-Oxley Act D. None of the above

47. What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue? A. SOX compliance B. Spinning C. Conflict of interest D. None of the above

48. What cost in an IPO generally exceeds all other costs? A. Commission B. Issues fees C. Spread D. Underpricing

True / False Questions

49. Recently, most venture capital funds come from pension funds. True False

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Chapter 15 - How Corporations Issue Securities

50. Mezzanine financing must come in the third stage. True False

51. Under pricing is not a serious problem for most initial public offerings (IPOs). True False

52. Most public issues must be registered with the SEC, and the company may not sell securities until the SEC has approved its registration statement. True False

53. The most important motive for IPO issue is to create public shares for use in future acquisitions. True False

54. Generally, IPOs are overpriced and are subject to winner's curse. True False

55. Shelf registration allows the firm to file a registration statement with the SEC to cover a series of subsequent issues. True False

56. The first public issue by a firm is known as a seasoned issue. True False

57. The underwriting spread for debt is generally less than that for equity. True False

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Chapter 15 - How Corporations Issue Securities

58. Rule 144A allows large financial institutions to trade unregistered securities among themselves. True False

59. Underpricing is a technique used by underwriters to ensure the success of an issue. True False

60. An underwriter may work with a CEO to spin a hot new issue so that the CEO can personally benefit and the underwriter may get future business from the CEO's firm. True False

Short Answer Questions

61. Briefly explain the term venture capital.

62. Briefly explain the term "Initial public offering (IPO)."

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Chapter 15 - How Corporations Issue Securities

63. Briefly explain the role of the underwriters.

64. What are some of the costs associated with issuing new securities?

65. Briefly explain the basic procedure for a new issue.

66. Explain the term "winner's curse."

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Chapter 15 - How Corporations Issue Securities

67. Discuss the advantages of shelf registration.

68. Briefly explain the term "private placement."

69. Briefly discuss SEC rule 144A.

70. Explain the need for a firewall between underwriters and analysts.

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Chapter 15 - How Corporations Issue Securities

Chapter 15 How Corporations Issue Securities Answer Key

Multiple Choice Questions

1. A business plan generally contains: I) a description of the proposed products II) a description of the potential market III) a description of the underlying technology IV) resources needed A. I only B. I and II only C. II and III only D. I, II, III, and IV

Type: Easy

2. Equity investment in start-up private companies is called: A. venture capital B. mezzanine financing C. initial public offering (IPO) D. none of the above

Type: Easy

3. The market for venture capital refers to the: I) Private financial marketplace for providing equity investment for small, startup firms II) Bond market III) Market for providing equity to well-established firms A. I only B. II only C. II and III only D. III only

Type: Easy

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Chapter 15 - How Corporations Issue Securities

4. Which of the following statements is generally true of venture capital (VC) firms? A. VCs are always silent partners in the startup company that they finance B. VCs always have a majority of directors in the startup company C. VCs generally provide management advice and contacts in addition to capital D. All of the above statements are true of VCs

Type: Medium

5. Arrange the following in the chronological order for a startup firm: I) VC financing; II) Mezzanine financing; III) Stage 1, 2, 3, 4 etc. financing; and IV) IPO A. I, II, III, and IV B. I, III, II, and IV C. IV, I, II, and III D. III, I, II, and IV

Type: Difficult

6. Venture capitalists provide start-up companies: A. all the money they will need up-front B. enough money at each stage so that they can reach the next stage or major checkpoint C. help the companies issue initial public offering (IPO) D. none of the above

Type: Medium

7. Wealthy individuals who provide equity investment for new firms are called: I) White knights II) Red herrings III) Angel investors A. I only B. I and II only C. III only D. II only

Type: Easy

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Chapter 15 - How Corporations Issue Securities

8. Generally, venture capital funds are organized as: I) proprietorships II) corporations III) limited private partnerships A. I only B. II only C. III only D. I and II only

Type: Medium

9. Venture capital investment was highest in the year: A. 1999 B. 2000 C. 2003 D. 2005

Type: Easy

10. Large technology firms like Intel, Johnson and Johnson, and Sun Microsystems which provide equity capital to new innovative companies are called: A. Angel investors B. Corporate venturers C. White Knights D. none of the above

Type: Medium

11. The stock exchange that specializes in trading the shares of young and rapidly growing companies is: A. Nasdaq B. NYSE C. London Stock Exchange D. none of the above

Type: Medium

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Chapter 15 - How Corporations Issue Securities

12. According "Venture Economics" venture capital funds earn an average annual rate of return of: A. about 32% B. about 24% C. about 17% D. about 12%

Type: Medium

13. Registration statements are filed with the: A. Federal Reserve Board (FED) B. Office of the Comptroller of the Currency (OCC) C. Securities and Exchange Commission (SEC) D. Environmental Protection Agency (EPA)

Type: Easy

14. According to evidence from survey of CFOs, the top-most motive for firms to go public is: A. to broaden the base of ownership B. to enhance the reputation of the firm C. to establish a market price/value for our firm D. to create public shares for use in future acquisitions

Type: Medium

15. The main reason for recent migration of a large number of firms from public-to-private ownership is: A. Blue-sky laws B. Sarbanes-Oxley Act C. International Accounting Standards (IAS) D. None of the above

Type: Difficult

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Chapter 15 - How Corporations Issue Securities

16. Generally, underwriters provide the following services to the issuing firm: I) Provide advice II) Buy new issue III) Reselling the issue to the public A. I only B. I and II only C. I, II, and III

Type: Easy

17. State laws that regulate sales of securities within the state are called: A. Red herring B. Registration laws C. Rule 415 D. Blue-sky laws

Type: Medium

18. The managing underwriter is also called the: A. syndicate B. bookrunner C. specialist D. none of the above

Type: Difficult

19. Generally, underwriters may handle an issue on: I) Best efforts basis. II) Firm commitment basis. III) All or none basis. A. I only B. II only C. III only D. I or II or III

Type: Easy

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Chapter 15 - How Corporations Issue Securities

20. Underwriters get compensated for their services in issuing new securities in the form of: A. commissions B. set fees C. spread D. none of the above

Type: Easy

21. Generally initial public offerings (IPOs) are: A. Overpriced B. Correctly priced C. Under priced

Type: Easy

22. The average initial returns from investing in IPOs is the highest in: A. India B. China C. Korea D. U.S.A.

Type: Easy

23. The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the value) is called: A. Winner's curse B. Dutch auction C. English auction D. None of the above

Type: Medium

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Chapter 15 - How Corporations Issue Securities

24. In a uniform-price auction: A. Winning bidders pay a price that they have bid B. All winning bidders pay a price that is the highest bid C. All winning bidders pay a price that is the lowest winning bid D. None of the above

Type: Medium

25. For example: a government wishes to auction 5 million bonds (quantity) and three potential buyers submit bids.

In a discriminatory auction: A. Buyer A pays $1,110 and Buyer B pays $1,000 B. Buyer A pays $1,000 and Buyer B pays $1,000 C. Buyer A pays $990 and Buyer B pays $990 D. Buyer A pays $1,000 and Buyer C Pays $990

Type: Difficult

26. Suppose a government wishes to auction 5 million bonds and three would-be buyers submit bids.

In an uniform-price auction: A. Buyer A pays $1,110 and Buyer B pays $1,000 B. Buyer A pays $1,000 and Buyer B pays $1,000 C. Buyer A pays $990 and Buyer B pays $990 D. Buyer A pays $1,000 and Buyer C Pays $990

Type: Difficult

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Chapter 15 - How Corporations Issue Securities

27. Winner's curse is reduced in a (an): A. discriminatory auction B. uniform-price auction C. English auction D. none of the above

Type: Medium

28. An equity issue sold to the firm's existing stockholders is called: A. A rights offer B. A general cash offer C. A private placement D. A discriminatory-price auction

Type: Medium

29. A general cash offer involves the following processes: I) register the issue with the SEC II) sell the securities to an underwriter or a syndicate of underwriters III) underwriter builds up a book of likely demand for the securities IV) price of the issue is fixed V) sell the securities to the public A. I, II and III only B. I, II, and IV only C. I, II, III, IV and V D. II, III, IV and V only

Type: Medium

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Chapter 15 - How Corporations Issue Securities

30. Which of the following statements describes shelf registration best? A. The issuance of securities to qualified institutional investors. B. Blue-sky laws. C. The provision that allows large companies to file a single registration statement covering financing plans up to two years into the future. D. None of the above.

Type: Medium

31. Shelf registration is more often used for: A. the issue of common stock B. the issue of convertible securities C. issue of corporate bonds D. None of the above

Type: Easy

32. The following are advantages of shelf registration except: A. Securities can be issued in dribs and drabs without incurring excessive transaction costs B. Securities can be issued in short notice C. Security issues can be timed to take advantage of market conditions D. All of the above are advantages

Type: Medium

33. The underwriter's spread is the highest for: A. IPOs B. Seasoned equity offerings C. Convertible bonds D. Straight bonds

Type: Medium

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Chapter 15 - How Corporations Issue Securities

34. The very first public equity issue that is made by a company is referred to as: A. A rights issue B. American depositing receipts (ADRs) C. An initial public offering (IPO) D. A seasoned equity offering (SEO)

Type: Medium

35. A new public equity issue from a company with public equity previously outstanding is called: A. An initial public offering (IPO) B. American depositing receipts (ADRs) C. A seasoned equity offering (SEO) D. A private placement

Type: Medium

36. Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds? A. Initial public offerings (IPOs) B. Seasoned equity offerings (SEOs) C. Convertible bonds D. Straight bonds

Type: Easy

37. Generally, there is a drop in the price of equity subsequent to the announcement of a new issue. This is attributed to: A. An increase in the supply of shares B. Information effect C. Both a and b D. None of the above

Type: Medium

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Chapter 15 - How Corporations Issue Securities

38. A rights issue is also called: A. A private placement B. Shelf registration C. Initial public offering (IPO) D. A privileged subscription

Type: Easy

39. Image Storage Corporation has #1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. If the current stock price is $50 and the subscription price is $47/share, calculate the value of a right? A. $0.40/right B. $5.00/right C. $2.50/right D. $1.00/right Value of a right = (50 - 47)/(2 + 1) = $1.00/right

Type: Medium

40. New Image Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. How many rights are needed to buy one new share? A. 1 right/share B. 2 rights/share C. 3 rights/share D. 4 rights/share # rights required = 1,000,000/500,000 = 2

Type: Easy

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Chapter 15 - How Corporations Issue Securities

41. If a shareholder or an investor wants to acquire a new share of stock under a rights issue, he/she must: A. Buy call options on the stock B. Acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent C. Acquire the correct number of rights per share and submit them to the subscription agent D. Any of the above

Type: Medium

42. If the old stock price is $50/share and ex-rights price is $49/share then the value of a right is: A. $50/right B. $49/right C. $1/right D. Cannot be determined Value of a right = 50 - 49 = $1/right

Type: Medium

43. The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price of $27/share, calculate the value of a right. A. $1/right B. $2/right C. $3/right D. None of the above # of new shares = 13,500,000/27 = 500,000 shares; # rights required to buy a new share = 1,000,000/500,000 = 2 rights; value of a right = (30 - 27)/(2 + 1) = $1/right

Type: Difficult

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Chapter 15 - How Corporations Issue Securities

44. When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds etc., it is called A. A rights offering B. A general art offering C. A private placement D. An unseasoned issue

Type: Medium

45. SEC registration is not required when a company makes: A. A private placement of securities B. A public offering of securities issue of value less than $5 million and maturity less than 9 months C. A public offering of securities issue of value greater than $5 million D. A and B above

Type: Medium

46. The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called A. Rule 144A B. Rule 415 C. Sarbanes-Oxley Act D. None of the above

Type: Medium

47. What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue? A. SOX compliance B. Spinning C. Conflict of interest D. None of the above

Type: Medium

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Chapter 15 - How Corporations Issue Securities

48. What cost in an IPO generally exceeds all other costs? A. Commission B. Issues fees C. Spread D. Underpricing

Type: Medium

True / False Questions

49. Recently, most venture capital funds come from pension funds. TRUE

Type: Easy

50. Mezzanine financing must come in the third stage. FALSE

Type: Medium

51. Under pricing is not a serious problem for most initial public offerings (IPOs). FALSE

Type: Easy

52. Most public issues must be registered with the SEC, and the company may not sell securities until the SEC has approved its registration statement. TRUE

Type: Medium

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Chapter 15 - How Corporations Issue Securities

53. The most important motive for IPO issue is to create public shares for use in future acquisitions. TRUE

Type: Medium

54. Generally, IPOs are overpriced and are subject to winner's curse. FALSE

Type: Medium

55. Shelf registration allows the firm to file a registration statement with the SEC to cover a series of subsequent issues. TRUE

Type: Medium

56. The first public issue by a firm is known as a seasoned issue. FALSE

Type: Easy

57. The underwriting spread for debt is generally less than that for equity. TRUE

Type: Medium

58. Rule 144A allows large financial institutions to trade unregistered securities among themselves. TRUE

Type: Easy

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Chapter 15 - How Corporations Issue Securities

59. Underpricing is a technique used by underwriters to ensure the success of an issue. TRUE

Type: Easy

60. An underwriter may work with a CEO to spin a hot new issue so that the CEO can personally benefit and the underwriter may get future business from the CEO's firm. TRUE

Type: Easy

Short Answer Questions

61. Briefly explain the term venture capital. Equity investment in start-up private companies is commonly known as venture capital. There are venture capital organizations that help provide venture capital to deserving start-up firms. Some large technology firms like Intel and Sun Microsystems also provide venture capital to new innovative firms.

Type: Medium

62. Briefly explain the term "Initial public offering (IPO)." When a firm issues securities to the public for the first time it is called an IPO. This is an important decision on the part of the firm as it involves disclosing a lot of information to the public. Generally, IPO's are under priced if the market for the shares of the firm is unknown.

Type: Medium

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Chapter 15 - How Corporations Issue Securities

63. Briefly explain the role of the underwriters. The underwriters are an integral part of the securities market. Underwriters have the expertise and contacts necessary to design and distribute the securities. Underwriters provide advice and guidance in the preparation of the security issue, and price it and sell it to the investors.

Type: Medium

64. What are some of the costs associated with issuing new securities? The most important cost is the underwriter's spread, which can be as high as 7% in the case of IPOs. In addition there are other administrative costs like preparing the registration statement and prospectus; consulting costs for management, legal and accounting matter. These can be substantial.

Type: Medium

65. Briefly explain the basic procedure for a new issue. The rules governing the sale of securities are derived from the securities act of 1933. The Securities and Exchange Commission (SEC) administers this act. The board of directors of the firm should approve to issue the security to the public. Next, the firm should file a registration statement with the SEC. The basic intent of this statement is the disclosure of information to the public. There is a 20-day waiting period. The registration is automatic if the firm does not hear from the SEC. If the SEC sends a letter of comment, which generally require disclosure of more information, then the 20-day waiting period starts again after the firm has presented the new information to the SEC. On the 21st day the firm can start selling the security to the public.

Type: Medium

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Chapter 15 - How Corporations Issue Securities

66. Explain the term "winner's curse." The highest bidder in an auction is most likely to have overestimated the value of an object. Therefore buyers will on average overpay. This problem is called winner's curse.

Type: Medium

67. Discuss the advantages of shelf registration. Shelf registration is allowed under SEC rule 415. It provides many advantages to firms issuing securities. • Securities can be issued in dribs and drabs without incurring excessive transaction costs. • Securities can be issued on short notice. • Securities issues can be timed to take advantage of "market conditions." • The issuing firms can make sure that underwriters compete for business.

Type: Medium

68. Briefly explain the term "private placement." When an entire issue of a security is sold to small group of investors, usually institutional investors, it is called a private placement. Private placements need not be registered with the SEC. Also, Rule 144A allows large financial institutions to trade unregistered securities among themselves.

Type: Easy

69. Briefly discuss SEC rule 144A. SEC rule 144A allows large financial institutions to trade unregistered securities among themselves. The intent of the rule was to increase liquidity and reduce issue costs of private placements. Private placements need not be registered with SEC.

Type: Medium

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Chapter 15 - How Corporations Issue Securities

70. Explain the need for a firewall between underwriters and analysts. Underwriters are in the business of selling securities for issuing firms. Analysts provide advice to investors who purchase securities. These relationships show that the underwriter and analyst represent opposing parties in the same transaction. Accordingly, there is a need for the analyst to be free from underwriter influence. If such independence does not exist, the investor will not get objective advice.

Type: Medium

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