Chapter 12 Financing and Listing Securities RQ Flashcards
How often are 30-year Government of Canada bonds auctioned?
A. Monthly.
B. Quarterly.
C. Semi-annually.
D. Annually.
C. Semi-annually.
The Canadian Government holds regularly scheduled quarterly auctions of benchmark two-, five- and ten-year bonds, and semi-annual auctions for the benchmark 30-year bond.
Identify the group that is allowed to submit bids to the Bank of Canada for government securities auctions.
A. Government securities distributors
B. Primary bond dealers.
C. Members of the Canadian Payments Association.
D. Members of the Canadian Securities Dealers.
A. Government securities distributors.
Only those institutions recognized as government securities distributors are permitted to submit bids to the Bank of Canada. Primary dealers are a special set of this group.
ABC company has 15.5 million shares issued of which 15 million are outstanding. Company X owns 4 million shares and Pension Fund Y owns 3 million shares. Calculate the public float of ABC.
A. 8 million shares.
B. 8.5 million shares.
C. 11.5 million shares.
D. 15 million shares.
A. 8 million shares.
Public float refers to the part of issued shares that are outstanding and available for trading by the public. Public float excludes shares owned in large blocks by institutions.
What situation would cause the number of shares outstanding to be lower than the number of shares issued?
A. Some shares are owned as part of a control block.
B. Some shares are held by senior management of the company.
C. The company redeemed some of the shares.
D. The company has not yet issued all authorized shares.
C. The company redeemed some of the shares.
If a company redeems or repurchases some of the issued shares, then, shares outstanding may be less than shares issued.
Why might an issuer prefer to use the Short Form Prospectus System?
A. The issuer has less continuous disclosure requirements to fulfill.
B. It shortens the time period by which a new issue may be offered to the public.
C. It helps selling the issue in the public.
D. It permits the issue to be offered in all Canadian jurisdictions automatically.
B. It shortens the time period by which a new issue may be offered to the public.
Certain issuers may access capital markets without the necessity of preparing a full preliminary and final prospectus prior to a distribution. The Short Form Prospectus System may be used only by certain senior reporting issuers. These are issuers who have made public distributions and who are subject to continuous disclosure requirements of annual financial and other required information. The short form prospectus works on the theory that much of the information that would be included in a full prospectus is already available and widely known because of this continuous disclosure. The system shortens the time period and streamlines the procedures by which qualified issuers can access Canadian securities markets through prospectus offerings.
The system used for issuing short form prospectuses was substantially overhauled as of December 30, 2005 resulting in certain previous requirements being eliminated and the system becoming more streamlined. Under the new system, an issuer is permitted to use a short form prospectus if it:
files electronically using SEDAR;
is a reporting issuer in at least one Canadian jurisdiction;
has filed current annual financial statements and a current AIF in at least one Canadian jurisdiction in which it is a reporting issuer;
is not an issuer whose operations are ceased or whose principal asset is cash, cash equivalents or exchange listing (i.e., capital pool companies); and
has equity securities listed and posted for trading or quoted on a short form eligible exchange (i.e., TSX, TSX V Tiers 1 and 2 and CSE).
Under certain circumstances a long form prospectus will still be required.
A company sells 1 million shares at $27.50/share to the financing group which sells them to the banking group for $28.00/share. The lead underwriter receives a fee of $0.50 per share. The shares are sold to the public for $30.00/share. Calculate the amount of proceeds the company will receive.
A. $27 million
B. $27.5 million
C. $28 million
D. $30 million
B. $27.5 million
The company sells 1 million shares to the financing group for $27.50/share. Therefore, the total proceeds are 1 million x $27.50 or $27.50 million. The $0.50/share underwriting commission is reflected in the cost to the banking group of $28.00. The total underwriting cost is $2.50/share, that is, the difference between the $30.00 price to the public and the $27.50 proceeds to the company.
The lead underwriter provides after-market stabilization after the close of a new issue by using the “over-allotment option”. Why would this provision help stabilize prices if the market price was above the issue price?
A. Dealer purchases to cover short positions would increase the demand for the stock.
B. Dealer sales to cover short positions would increase the supply of the stock.
C. The extra stock available from the over-allotment option would increase the supply of stock.
D. The extra stock available from the over-allotment option would increase the demand for the stock.
C. The extra stock available from the over-allotment option would increase the supply of stock.
With the “over-allotment option” available, the dealer initially sells more stock than the original offer by the issuer to the public. If the market price subsequently increases above the offer price, the dealer exercises the over-allocation option and uses the additional shares to cover his short position. The extra supply will help moderate price.
The Government of Canada is issuing $1.25 billion fixed-coupon marketable bonds. The table below lists the competitive bids from government securities distributors. The Government is awarding $30 million of the bond issue to the non-competitive bidders. Calculate how much each competitive bidder will receive.
Bidder Competitive Bid Yield Size
1 4.021% $250 million
2 4.026% $250 million
3 4.033% $250 million
4 4.044% $250 million
5 4.051% $250 million
6 4.062% $250 million
A. The first 4 bidders will receive $250 million each and the 5th bidder will receive $220 million.
B. The first 5 bidders will receive $250 million each.
C. The first bidder will receive $220 million and the next four bidders will receive $250 million each.
D. The first 5 bidders will receive $244 million each.
A. The first 4 bidders will receive $250 million each and the 5th bidder will receive $220 million.
The non-competitive bidders will receive their $30 million. That leaves $1.220 billion to be distributed to the competitive bidders. The first 4 bidders will receive $250 million. The 5th bidder will receive $220 million.
When participating in a new underwriting, the dealer normally prepares a thorough study of the company, the industry in which it operates, the financial position of the company, future prospects and risk factors. What is this report called?
A. Initial public offering report.
B. Listing agreement.
C. Due diligence report.
D. Offering memorandum.
C. Due diligence report.
The due diligence report is prepared by the dealer when negotiations begin for the issue of new securities. The report analyzes all factors about the company pertinent to the evaluation of the new issue.
Identify the disadvantages of listing on an exchange.
Additional disclosure requirements Market visibility Market indifference Facilitates valuation A. 1 and 2. B. 1 and 3. C. 2 and 4. D. 3 and 4.
B. 1 and 3.
Additional disclosure requirements and market indifference are two disadvantages that companies must consider when listing on an exchange. Additional disclosure requirements consumes management time, while market indifference, as evidenced by low trading volume and poor market performance are a matter of public record and can affect a company’s future plans to raise additional capital – it becomes more difficult to raise additional capital by issuing more shares if investors can clearly see that the company’s shares have traded poorly in the past. Increased market visibility and the facilitation of valuation are considered advantages to listing.
ABC Inc. has been actively trading on the TSX for 12 years and has always complied with all rules and filing requirements. The company wishes to raise another $20 million in equity. How do you recommend they do this?
A. They must distribute their new shares using the capital pool company method as they are already trading on the TSX.
B. They can use the junior company distribution method as they are trying to raise less than $25 million.
C. They must use a prospectus as they are already trading on the TSX.
D. They can use the short form prospectus as they are complying with all the conditions necessary.
D. They can use the short form prospectus as they are complying with all the conditions necessary.
The company can make use of the short form prospectus as it has complied with all conditions. They are not required to use a full prospectus. The Capital Pool Company method and the junior company distribution method are not appropriate for their situation as they are trading on the TSX.
Identify the disadvantages of issuing bonds.
Bonds are less flexible than equity as the assets are pledged to a trustee.
The coupon rate is higher than the coupon rate on a debenture.
Non-payment of interest can lead to default.
The underwriting discount is usually greater than if the company issued equity.
A. 1 and 3.
B. 1 and 4.
C. 1, 2 and 3.
D. 1, 3 and 4.
A. 1 and 3.
Bonds are less flexible than equity as the assets of the company must be pledged to a trustee. A company not paying the interest owed will be in default which could cause bankruptcy. The coupon rate on the bond will be lower than the coupon rate on a debenture. Underwriting costs are usually more expensive for equity than for debt.
What is the name of the preliminary document that is filed with the regulators when a company is issuing an IPO?
A. A Blue-sky Information Circular.
B. A Red Herring Prospectus.
C. A Greensheet Prospectus.
D. A Greenshoe Information Circular.
B. A Red Herring Prospectus.
Most provinces require the filing of both a preliminary prospectus (also called a red herring prospectus) and a final prospectus. The preliminary prospectus must have on its front cover, in red ink, a statement to the effect that the prospectus has been filed, is not in final form, and is subject to completion or amendment. This prominent warning states that the securities may not be sold, nor may offers to buy be accepted, until a receipt for the final prospectus has been obtained from the provincial securities commission that leads the review of the prospectus.
The Government of Canada is issuing fixed-coupon marketable bonds. The table below lists the competitive bids from government securities distributors. If the Government is awarding $1.25 billion of the bond issue to the competitive bidders, calculate the yield that will be awarded to the firms that submitted a non-competitive tender?
Bidder Competitive Bid Yield Size 1 4.021% $250 million 2 4.026% $250 million 3 4.033% $250 million 4 4.044% $250 million 5 4.051% $250 million 6 4.062% $250 million A. 4.021 B. 4.035 C. 4.040 D. 4.062
B. 4.035
Bids can also be submitted on a non-competitive tender basis, whereby the bid is accepted in full by the Bank of Canada and bonds are awarded at the auction average. The first 5 bidders would be successful. The non-competitive yield is an average of these five bids. Note that 4.021 + 4.026 + 4.033 + 4.044 + 4.051 = 20.175 and 20.175 / 5 = 4.035. The most common problem with this calculation is that a calculator is rounding off the answer of 4.035 to 4.04 because the calculator is set to two decimal places. If this is the case, it is recommended that the calculator be set to, at minimum, 6 decimal places to avoid rounding errors. For more information on setting decimal places, check your calculator manual.
ECE Inc., which trades on the TSX, is about to announce the acquisition of a major competitor and wants to make sure that the information is released everywhere at the same time. What could it ask the exchange to do to facilitate the dissemination of this information?
A. Request a halt in trading.
B. Request that trades temporarily not be reported.
C. Request a suspension in trading.
D. Request a temporary delisting.
A. Request a halt in trading.
A temporary halt in the trading of a security can be ordered or arranged at any time to allow significant news to be reported and widely disseminated (e.g., a pending merger or a substantial change in dividends or earnings).
