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The possibility that the winner (highest bidder) in an auction process may have bid a price that is very high (far above the value) is called: A. winner's curse. B. seniority. C. English auction. D. uniform-price auction.

• CORRECT ANS-A. winner's curse In a uniform-price auction: A. all winning bidders pay the price that they bid.

B. all winning bidders pay a price that is the highest bid. C. all winning bidders pay a price that is the lowest winning bid. D. all winning bidders receive their full allocation.

• CORRECT ANS-C. all winning bidders pay a price that is the lowest winning bid Suppose that a government wishes to auction 5 million bonds (quantity), and three potential buyers submit the following bids: Buyer A: Price $1,015 Quantity 2M Buyer B: Price $1,000 Quantity 3M Buyer C: Pricy $990 Quantity 1M In a discriminatory auction: A. Buyer A pays $1,015 and Buyer B pays $1,000. B. Buyer A pays $1,000 and Buyer B pays $1,000. C. Buyer A pays $990 and Buyer B pays $990. D. Buyer A pays $1,000 and Buyer C Pays $990.
• CORRECT ANS-A. Buyer A pays $1,015 and Buyer B pays $1, Suppose a government wishes to auction 5 million bonds, and three would-be buyers submit the following bids: Buyer A: Price $1,015 Quantity 2M

Buyer B: Price $1,000 Quantity 3M Buyer C: Pricy $990 Quantity 1M In a uniform-price auction: A. Buyer A pays $1,015 and Buyer B pays $1,000. B. Buyer A pays $1,000 and Buyer B pays $1,000. C. Buyer A pays $990 and Buyer B pays $990. D. Buyer A pays $1,000 and Buyer C Pays $990.

• CORRECT ANS-B. Buyer A pays $1,000 and Buyer B pays $1,000. The winner's curse is reduced in a(an): A. discriminatory auction. B. uniform-price auction. C. English auction. D. winner-take-all auction.
• CORRECT ANS-B. uniform-price auction A general cash offer involves the following processes:

I) register the issue with the SEC; II) sell the securities through an underwriter or a syndicate of underwriters; III) have underwriter build up a book of likely demand for the securities; IV) price of the issue is fixed; V) sell the securities to the public A. I, II, and III only B. I, II, and IV only C. I, II, III, IV, and V D. II, III, IV, and V only

• CORRECT ANS-C. I, II, III, IV, and V Which of the following statements best describes shelf registration? A. The issuance of securities to qualified institutional investors. B. The enforcement of blue-sky laws. C. The provision that allows large companies to file a single registration statement covering financing plans up to three years into the future.

D. Registration of the sale of securities in the primary market.

• CORRECT ANS-C. the provision that allows large companies to file a single registration statement covering financing plans up to three years into the future Shelf registration is more often used for the: A. issue of common stock. B. issue of convertible securities. C. issue of corporate bonds. D. issue of warrants.
• CORRECT ANS-C. issue of corporate bonds The following are advantages of shelf registration except: I) securities can be issued in dribs and drabs without incurring excessive transaction costs; II) securities can be issued on short notice; III) security issues can be timed to take advantage of market conditions A. I only B. II only

C. III only D. I, II, and III

• CORRECT ANS-D. I, II, and III The underwriter's spread is the highest for: A. IPOs. B. seasoned equity offerings. C. convertible bonds. D. straight bonds.
  • CORRECT ANS-A. IPOs The very first public equity sold by a company is referred to as: A. a rights issue. B. American depositing receipts (ADRs). C. an initial public offering (IPO). D. a seasoned equity offering (SEO).

• CORRECT ANS-C. an initial public offering (IPO) Generally, which of the following issues have the lowest total direct costs of issuing as a percentage of gross proceeds? A. initial public offerings (IPOs) B. seasoned equity offerings (SEOs) C. convertible bonds D. straight bonds
• CORRECT ANS-D. straight bonds Most financial economists attribute the drop in the price of equity subsequent to the announcement of a new issue to: A. an increase in the supply of shares. B. information effect. C. both a and b. D. neither a nor b.
• CORRECT ANS-B. information effect A rights issue is also called a(an):

A. private placement. B. shelf registration. C. initial public offering (IPO). D. privileged subscription.

• CORRECT ANS-D. privileged subscription Image Storage Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using a (North American) rights issue. If the current stock price is $50 and the subscription price is $47/share, what is the value of a right? A. $0.40/right B. $5.00/right C. $2.50/right D. $1.00/right
• CORRECT ANS-D. $1.00/right Stock price after issue = ($50M + 0.5 × 47)/1.5M = $49. Shareholders were offered one right per share of stock. Value of two rights = (49 - 47) = $2. Value of 1 right = $1.

New Image Corporation has 1,000,000 shares outstanding. It wishes to issue 500,000 new shares using rights issue. How many (North American) rights are needed to buy one new share? A. 1 right/share B. 2 rights/share C. 3 rights/share D. 4 rights/share Number of rights required = 1,000,000/500,000 = 2.

• CORRECT ANS-B. 2 rights/share Number of rights required = 1,000,000/500,000 = 2. If a shareholder or an investor wants to acquire a new share of stock under a rights issue, he/she must: A. buy call options on the stock. B. acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent. C. acquire the correct number of rights per share and submit them to the subscription agent. D. register his order with the NYSE. - CORRECT ANS-B. acquire the appropriate number of rights per share and subscription price per share and submit them to the subscription agent

Which of the following is a possible exception to the efficient-market theory? A. Underwriters charge investors more for IPO shares than they pay the issuing firms. B. IPO spreads are lower on larger issues. C. The issuance of equity is interpreted as an unfavorable signal by investors. D. The long-run returns of IPOs tend to underperform the market. - CORRECT ANS-D. the long- run returns of IPOs tend to underperform the market The New Word Corporation has 1,000,000 shares outstanding at $30/share. If the firm wishes to raise $13.5 million at a subscription price (North American rights offering) of $27/share, calculate the value of a right. A. $1/right B. $2/right C. $3/right D. $4/right - CORRECT ANS-A. $1/right Number of new shares = 13,500,000/27 = 500,000 shares; Stock price after issue = ($30M + 13.5M)/1.5M = $29; Number of rights required to buy a new share = 1,000,000/500,000 = 2 rights; Value of a right = (29 - 27)/(2) = $1/right.

When a company sells an entire issue of securities to a small group of institutional investors like like insurance companies, pension funds, etc., it is called a(an): A. rights offering. B. general art offering. C. private placement. D. unseasoned issue. - CORRECT ANS-C. private placement SEC registration is not required when a company makes a: A. private placement of securities. B. public offering of securities issue having a value less than $5 million and a maturity less than nine months. C. public offering of securities having a value greater than $5 million. D. both A and B. - CORRECT ANS-D. both A and B

46. The SEC provision under which qualified institutional investors can trade privately placed securities among themselves is called: A. Rule 144A.

B. Rule 415. C. the Sarbanes-Oxley Act. D. none of the options. - CORRECT ANS-A. Rule 144A What term might be used to describe an underwriter who influences an analyst in the same firm to modify a report so as to create a favorable impression of a securities issue? A. SOX compliance B. spinning C. conflict of interest D. Chinese wall - CORRECT ANS-C. conflict of interest What costs in an IPO generally exceed all other costs? A. commissions B. issues fees C. spreads

D. underpricing - CORRECT ANS-D. underpricing Firms can pay out cash to their shareholders in the following ways: I) dividends; II) share repurchases; III) interest payments A. I only B. II only C. I and II only D. III only - CORRECT ANS-C. I and II only Dividend policy changes are decided by: I) the managers of a firm; II) the government; III) the board of directors A. I only B. II only C. III only D. I and II only - CORRECT ANS-C. III only

Which of these dates, when arranged in chronological order, occurs last? A. dividend payment date B. ex-dividend date C. record date D. dividend declaration date - CORRECT ANS-A. dividend payment date Which of the following lists events in chronological order from earliest to latest? A. Record date, declaration date, ex-dividend date B. Declaration date, record date, ex-dividend date C. Declaration date, ex-dividend date, record date D. Record date, ex-dividend date, declaration date - CORRECT ANS-C. declaration date, ex- dividend date, record date Which of the following dividends is never in the form of cash? I) regular dividend; II) special dividend;

III) stock dividend; IV) liquidating dividend A. I only B. II only C. III only D. I, II, and IV only - CORRECT ANS-C. III only Firms can repurchase shares in the following ways: I) open market repurchase; II) tender offer; III) Dutch auction; IV) direct negotiation with a major shareholder A. I only B. II only C. III only D. I, II, III, and IV - CORRECT ANS-D. I, II, III, and IV A Dutch auction is the same as a(an):

A. discriminatory price auction. B. uniform price auction. C. English auction. D. share repurchase. - CORRECT ANS-B. uniform price auction The par value of the outstanding shares is known as: A. retained earnings. B. legal capital. C. book value of equity. D. additional paid-in capital. - CORRECT ANS-B. legal capital Consider the procedure whereby the firm states a series of prices at which it is prepared to repurchase stock. Shareholders then submit offers indicting how many shares they wish to sell and at which price. The firm then calculates the lowest price at which it is able to buy the desired number of shares. This procedure is known as a(n): A. open market repurchase.

B. Dutch auction. C. green mail. D. tender offer. - CORRECT ANS-B. Dutch auction What is the likely impact on a typical individual investor if a firm undertakes a stock repurchase in lieu of a cash dividend? A. Lower income taxes, if capital gains tax rates are less than dividend tax rates B. Higher income taxes, if capital gains tax rates are less than dividend tax rates C. Lower share price D. A tax-free transaction - CORRECT ANS-A. lower income taxes, if capital gains tax rates are less than dividend tax rates Suppose that there are no taxes, transactions costs, or other market imperfections. Which of the following actions is most likely to make shareholders better off? A. Increase dividends. B. Reduce share repurchases. C. Announce that dividends will not change for at least three years.

D. Eliminate negative-NPV projects. - CORRECT ANS-D. Eliminate negative-NPV projects Which of the following are true? I) Firms have long-run target dividend payout ratios. II) Dividend changes follow shifts in long-term, sustainable earnings. III) Managers are reluctant to make dividend changes that might have to be reversed. A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-D. I, II, and III According to survey data, which is the least-often cited dividend policy consideration? A. Firms want to avoid dividend reductions. B. Firms desire a smooth dividend policy. C. Firms avoid dividend policy reversals.

D. Firms would prefer to raise new funds rather than reduce dividends. - CORRECT ANS-D. firms would prefer to raise new funds rather than reduce dividends Generally, firms engage in stock repurchases during: I) boom times as firms accumulate excess cash; II) recessions due to low stock prices; III) times when competitor's stock prices are dropping A. I only B. II only C. III only D. II and III only - CORRECT ANS-A. I only According to financial executives' views on dividend policy, which of the following statements is most frequently cited? A. We try to avoid reducing the dividend. B. We try to maintain a smooth dividend stream. C. We look at the current dividend level.

D. We are reluctant to make a change that may have to be reversed. - CORRECT ANS-A. we try to avoid reducing the dividend Generally, investors interpret the announcement of an increase in dividends as: A. bad news and the stock price drops. B. good news and the stock price increases. C. a nonevent and does not affect the stock price. D. very bad news and the stock price plunges. - CORRECT ANS-B. good news and the stock price increases Generally, investors interpret the announcement of a decrease in dividends as: A. bad news and the stock price drops. B. good news and the stock price increases. C. a nonevent and does not affect the stock prices. D. very good news and the stock price jumps up. - CORRECT ANS-A. bad news and the stock price drops Generally, investors view the announcement of an open-market repurchase program as:

A. bad news and the stock price drops. B. good news and the stock price increases. C. a nonevent and does not affect the stock price. D. very bad news and the stock price plunges. - CORRECT ANS-B. good news and the stock price increases A key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that: A. future stock prices are certain. B. firms have an adequate supply of Treasury shares. C. there exists a risk-free asset. D. new shares are sold at a fair price. - CORRECT ANS-D. new shares are sold at a fair price Miller and Modigliani's indifference proposition regarding dividend policy: A. assumes that tax rates increase at the same rate as inflation.

B. assumes that investors can sell their stock at a fair price. C. states that investors are indifferent between stock dividends and cash dividends. D. states that investors are indifferent between stock repurchases and cash dividends. - CORRECT ANS-B. assumed that investors can sell their stock at a fair price The following are indicators that the firm has a cash surplus: I) Free cash flow is reliably positive. II) The firm has a low debt ratio compared to similar firms. III) The firm has sufficient debt capacity to cover unexpected opportunities or setbacks. A. I only B. II only C. III only D. I, II, and III - CORRECT ANS-D. I, II, and III The dividend-irrelevance proposition of Miller and Modigliani depends on the following relationship between investment policy and dividend policy: A. Changes in investment policy will alter dividend policy.

B. Changes in dividend policy will alter investment policy. C. Investment policy is independent of dividend policy. D. Dividends are tax-deductible and investments are depreciable. - CORRECT ANS-C. Investment policy is independent of dividend policy Company X has 100 shares outstanding. It earns $1,000 per year and expects to pay all of it as dividends. If the firm expects to maintain this dividend forever, calculate the stock price today. (The required rate of return is 10%.) A. $110 B. $100 C. $90 D. $10 - CORRECT ANS-B. $100 Dividends = 1000/100 = $10; P = 10/0.1 = $100. Company X has 100 shares outstanding. It earns $1,000 per year and announces that it will use all $1,000 to repurchase its shares in the open market instead of paying dividends. Calculate the number of shares outstanding at the end of year 1, after the first share repurchase, if the required rate of return is 10%. A. 110.0

B. 100.0

C. 90.91

D. 89.0 - CORRECT ANS-C. 90.91

Share price at beginning of year = [$1000/0.1]/100 = $100 per share. Share price at end of year, before repurchase, equals $100 × 1.10 = $110. Number of shares purchased = $1,000/$110 = 9.09. 100 - 9.09 = 90.91 shares remain. One possible reason that shareholders often insist on higher dividends is: A. they agree with Miller and Modigliani. B. the capital gains tax disadvantage. C. the stock market is efficient. D. they do not trust managers to spend retained earnings wisely. - CORRECT ANS-D. they do not trust managers to spend retained earnings wisely The rightist position is that the market will reward firms for having: A. a high dividend yield. B. a low dividend yield

C. good management, regardless of dividend yield. D. a zero payout policy. - CORRECT ANS-A. a high dividend yield According to behavioral finance, investors prefer dividends because: A. investors prefer the discipline that comes from spending only the dividends. B. dividends generate lower taxes. C. the stock market is efficient. D. dividends provide a tax deduction. - CORRECT ANS-A. investors prefer the discipline that comes from spending only the dividends If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date? A. Fall by more than the amount of the dividend B. Fall exactly by the amount of the dividend C. Fall by less than the amount of the dividend D. Cannot be predicted - CORRECT ANS-C. fall by less than the amount of the dividend