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Unformatted text preview: Chapter 15 Discussion Questions 15-1. In what way is an investment banker a risk taker? The investment banker is a risk taker (underwriter) in that the investment banking house agrees to buy the securities from the corporation and resell them to other security dealers and the public at an agreed upon price. If they cant sell the securities at the initial offering price, they suffer a loss. 15-2. What is the purpose of market stabilization activities during the distribution process? Market stabilization activities are managed in an attempt to insure that the market price will not fall below a desired level during the distribution process. Syndicate members committed to purchasing the stock at a given price could be in trouble if there is a rapid decline in the price of the stock. 15-3. Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process. By forming a syndicate of many underwriters rather than just one, the overall risk is diffused and the capabilities for widespread distribution are enhanced. A syndicate may comprise as few as two or as many as 50 investment banking houses. 15-4. Discuss the reason for the differences between underwriting spreads for stocks and bonds. Common stocks often carry a larger underwriting spread than bonds because the market reaction to stocks is more uncertain. 15-5. What is shelf registration? How does it differ from the traditional requirements for security offerings? Shelf registration permits large companies to file one comprehensive registration statement (under SEC Rule 415). This statement outlines the firm's plans for future long-term financing. Then, when market conditions appear to be appropriate, the firm can issue the securities without further SEC approval. Shelf registration is different from the traditional requirement that security issuers file a detailed registration statement for SEC review and approval each and every time S15-1 they plan a sale. 15-6. Comment on the market performance of U.S. companies going public, specifically on the first day and after three years. On the first day, companies going public have an 18 percent average return. After three years, they under-perform similar size companies by more than five percent. 15-7. Discuss the benefits accruing to a company that is traded in the public securities markets. The benefits of having a publicly traded security are: a. Greater ability to raise capital. b. Additional prestige and visibility that can be helpful in bank negotiations, executive recruitment, and the marketing of products. c. Increased liquidity for existing stockholders. d. Ease in estate planning for existing stockholders....
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- Spring '10