FM11_Ch_19 - CHAPTER 19 INITIAL PUBLIC OFFERINGS,...

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CHAPTER 19 INITIAL PUBLIC OFFERINGS, INVESTMENT BANKING, AND FINANCIAL RESTRUCTURING (Difficulty: E = Easy, M = Medium, and T = Tough) True-False Medium: Going public Answer: b Diff: M 1 . Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares. a. True b. False Disadvantages of going public Answer: a Diff: M 2 . The cost of meeting SEC and possible additional state reporting requirements regarding disclosure of certain financial information about the firm, the danger of losing control, and the possibility of an inactive market or low stock price are all potential disadvantages of going public. a. True b. False Investment banking Answer: b Diff: M 3 . Investment bankers are not really like commercial "bankers" in the sense of taking deposits and issuing loans; rather, they help firms issue securities in the secondary market and their activities are limited to raising new equity capital. a. True b. False Chapter 19 - Page 1
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Bond refunding Answer: b Diff: M 4 . A company issued 5-year bonds when the yield curve was inverted. Since that time long-term (10 years or longer) rates haven't changed but the yield curve has resumed its normal shape. Under such conditions a bond refunding would be profitable. a. True b. False Refunding discount rate Answer: a Diff: M 5 . The appropriate discount rate to use in the discounting process when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk to the interest savings. a. True b. False Refunding decision Answer: b Diff: M 6 . If the firm applies the after-tax cost of marginal debt as the discount rate in analyzing a refunding decision, and the NPV of refunding is positive, the firm should immediately refund the outstanding debt issue and replace it with a cheaper issue. a. True b. False Refunding and callable bonds Answer: a Diff: M 7 . When a firm refunds a debt issue, the firm gains and bondholders lose. This points out the risk of a call provision to bondholders and why bonds without a call feature command higher prices than callable bonds. a. True b. False Chapter 19 - Page 2
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Multiple Choice: Conceptual Medium: Going public Answer: a Diff: M 8 . Which of the following advantages of going public simultaneously implies a potential disadvantage of going public? a. Facilitates in stockholder diversification. b. Changes liquidity of the firm's stock. c. Alters the difficulty associated with obtaining capital. d. Establishes a market value for the firm. e. Changes name recognition of the company. Listing Answer: c Diff: M 9 . Which of the following statements about listing on a stock exchange is most correct? a. Listing is a decision of more significance to a firm than going
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FM11_Ch_19 - CHAPTER 19 INITIAL PUBLIC OFFERINGS,...

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