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CHAPTER 18 INITIAL PUBLIC OFFERINGS, INVESTMENT BANKING, AND FINANCIAL RESTRUCTURING (Difficulty: E = Easy, M = Medium, and T = Tough) True/False Easy: (18.5) Private placements Answer: b Diff: E 1 . If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement. a. True b. False Medium: (18.2) Going public Answer: b Diff: M 2 . Going public establishes a market value for the firm’s stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts. a. True b. False (18.2) Disadvantages of going public Answer: a Diff: M 3 . The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public. a. True b. False (18.3) IPOs Answer: b Diff: M 4 . The term “leaving money on the table” refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm’s new stock offering. The banker is, in effect, “buying the job” with the low bid and thus not getting all the money his firm would normally earn on the job. a. True b. False Chapter 18: IPOs, Investment Banking, and Financial Restructuring Page 1
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(18.3) Investment banking Answer: a Diff: M 5 . Whereas commercial banks take deposits from some customers and make loans to other customers, the principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters. However, financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks. This was not true some years ago, when the two types of banks were required by law to be completely independent of one another. a. True b. False (18.4) Equity carve-outs Answer: b Diff: M 6 . The term “equity carve-out” refers to the situation where a firm’s managers give themselves the right to purchase new stock at a price far below the going market price. Since this dilutes the value of the public stockholders, it “carves out” some of their value. a. True b. False (18.8) Bond refunding Answer: b Diff: M 7 . Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted. Since then long-term rates (10 years or longer) have remained constant, but the yield curve has resumed its normal upward slope. Under such conditions, a bond refunding would almost certainly be profitable. a. True
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