FM14e-TB-CHAPTER 18 PUBLIC AND PRIVATE FINANCING: INITIAL OFFERINGS
1. If its managers make a tender offer and buy all shares that were not held by
... [Show More] the
management team, this is called a private placement.
ANS: F
False. In a private placement, securities are sold to one or a few investors, generally institutional
investors. Private placements are most common with bonds, but they also occur with stocks.
PTS: 1 DIF: Difficulty: Easy OBJ: LO: 18-5
NAT: BUSPROG: Reflective Thinking STA: DISC: Investments and hybrid financing
LOC: TBA TOP: Private placements KEY: Bloom’s: Knowledge
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.
ANS: F
False. Going public does establish the firm's market value, but it does not ensure that a liquid market
will continue to exist, and this is especially true for small firms that are not widely followed.
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 18-2
NAT: BUSPROG: Reflective Thinking STA: DISC: Investments and hybrid financing
LOC: TBA TOP: Going public KEY: Bloom’s: Comprehension
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.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 18-2 NAT: BUSPROG: Reflective Thinking
STA: DISC: Investments and hybrid financing LOC: TBA
TOP: Disadvantages of going public KEY: Bloom’s: Comprehension
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.
ANS: F
False. Leaving money on the table occurs when a security issue is underpriced.
PTS: 1 DIF: Difficulty: Moderate OBJ: LO: 18-3
NAT: BUSPROG: Reflective Thinking STA: DISC: Investments and hybrid financing
LOC: TBA TOP: IPOs KEY: Bloom’s: Comprehension
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 [Show Less]
