Chapter 10 Stock Offerings and Investor Monitoring 343 Chapter 10 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 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 4 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 5 When a corporation first decides to issue stock to the public it engages in a n offering A secondary B initial public C seasoned equity D none of these ANSWER B 344 Chapter 10 Stock Offerings and Investor Monitoring 6 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 7 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 8 The transaction costs to the issuing firm in an IPO is usually percent of the funds raised A 5 B 6 C 7 D 25 ANSWER C 9 If investors quickly sell an IPO stock in the secondary market there will be pressure on the stock s price A upward B downward C no additional D none of these ANSWER B 10 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 11 When the lockup period expires the share price commonly A remains unchanged B increases significantly C decreases significantly D does none of these ANSWER C Chapter 10 Stock Offerings and Investor Monitoring 345 12 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 13 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 these ANSWER A 14 occurs when an investment bank allocates shares 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 these ANSWER B 15 When brokers encourage investors to place bids for IPO shares on the first day that are above the offer price this is referred to as A flipping B spinning C laddering D none of these ANSWER C 16 On average IPOs of firms tend to perform over a period of a year or longer A well B poorly C better than the S P 500 index D none of these ANSWER B 346 Chapter 10 Stock Offerings and Investor Monitoring 17 A firm will typically attempt to sell shares from a secondary offering A below the prevailing market price B above the prevailing market price C at the prevailing market price D at the offer price of the IPO ANSWER C 18 Buy and sell orders on the OTC market are completed by A auction on the trading floor B sealed competitive bids C noncompetitive bids D a telecommunications network ANSWER D 19 A n is a certificate which represents ownership of a foreign stock A ADR B SEAQ C NASDAQ D AMEX ANSWER A 20 The first time issuance of shares by a specific firm to the public is referred to as a n A stock repurchase B secondary stock offering C initial rights issue D initial public offering IPO ANSWER D 21 A new stock issuance by a specific firm that already has stock outstanding is referred to as a n A stock repurchase B secondary stock offering C initial rights issue D initial public offering IPO ANSWER B 22 Managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is by the market or a secondary stock offering when they believe their stock is by the market A undervalued undervalued B overvalued overvalued C undervalued overvalued D overvalued undervalued E none of these ANSWER C Chapter 10 Stock Offerings and Investor Monitoring 347 23 The largest organized exchange listing the largest firms is the Stock Exchange A New York B American C Midwest D Pacific Stock ANSWER A 24 are employed by brokerage houses and execute orders for clients on the floor of the NYSE A Specialists B Commission brokers C Independent brokers D Dealers ANSWER C 25 Firms listed as pink sheets on the OTC market A are typically very large B satisfy NASDAQ s listing requirements C are typically owned by various institutional and individual investors D none of these ANSWER D 26 The prevailing price per share divided by the firm s earnings per share is known as the A dividend yield B price earnings ratio C fully diluted earnings per share D annual dividend ANSWER B 27 The is a price weighted average of stock prices of 30 large U S firms A Dow Jones Industrial Average B Standard and Poor s 500 C New York Stock Exchange Index D NASDAQ ANSWER A 28 The is a value weighted index of stock prices of 500 large U S firms A Dow Jones Industrial Average B Standard and Poor s 500 C New York Stock Exchange Index D NASDAQ ANSWER B 348 Chapter 10 Stock Offerings and Investor Monitoring 29 Sudden favorable news about the performance of a firm will make investors believe that the firm s stock is at its prevailing price A overvalued B fixed C appropriate D undervalued ANSWER D 30 The easiest way for shareholders to monitor the firm is to A call management on a weekly basis B monitor changes in firm value over time C attend the annual shareholders meeting D read the annual report ANSWER B 31 Shareholders can most