Chapter 22

Question 1

capital buyout

Answer 1

Investors’ funds are pooled and used
to buy a controlling interest in a public company
that is then taken private.

Question 2

confidential memorandum

Answer 2

A document that presents
detailed financial information required by
prospective buyers prior to making an offer to
acquire a firm

Question 3

definitive agreement

Answer 3

A legally binding contract that
details the terms and conditions for an acquisition of one firm by another

Question 4

due diligence

Answer 4

A 20- to 40-day period used by
the buyer of a firm to verify the accuracy of the
information contained in the confidential memorandum.

Question 5

early stage investing

Answer 5

Investment by a venture capital
firm in a company that is in the very beginning
stage of its development.

Question 6

fully subscribe

Question 7

glass seagall act

Answer 7

Law that made it illegal for commercial banks to underwrite securities for sale to
the public.

Question 8

investment banks

Question 9

later stage investing

Answer 9

: Investment by a venture
capital firm in a company to help the firm grow
to a critical mass needed to attract public
financing.

Question 10

letter of intent

Answer 10

A document issued by a prospective
buyer that signals a desire to go forward with a
purchase and that outlines the preliminary terms
of the purchase.

Question 11

limit order

Answer 11

: An order placed by a customer to buy
stock that specifies a maximum price or an order
to sell stock that places a minimum acceptable
price

Question 12

margin credit

Answer 12

: Loans advanced by a brokerage house
to help investors buy securities.

Question 13

market makers

Answer 13

Dealers who buy or sell securities
from their own inventories, thereby ensuring that
there is always a market in which investors can
buy or sell their securities.

Question 14

market order

Answer 14

An order placed by a customer to buy
stock at the current market price.

Question 15

mergers and aquisitions market

Answer 15

An informal and
unorganized market where firms are bought,
sold, or merged with other firms.

Question 16

oversubscribed

Question 17

primary market

Answer 17

A financial market in which new
issues of a security are sold to initial buyers

Question 18

private equity buyout

Answer 18

When a public company
becomes private.

Question 19

prospectus

Answer 19

A portion of a security registration
statement that is filed with the Securities and
Exchange Commission and made available to
potential purchasers of the security

Question 20

prudent man rule

Answer 20

This rule states that those with the
responsibility of investing money for others should
act with prudence, discretion, intelligence, and
regard for safety of capital as well as income.

Question 21

registration statement

Answer 21

Information about a firm’s
financial condition, management, competition,
industry, and experience that must be filed with
the Securities and Exchange Commission prior
to the sale to the public of any security with a
maturity of more than 270 days.

Question 22

seasoned statement

Question 23

seasoned issues

Answer 23

Securities that have been trading publicly long enough to have let the market
clearly establish their value.

Question 24

secondary market

Answer 24

A financial market in which securities that have previously been issued can be
resold.

Question 25

SEC

Question 26

seed investing

Question 27

short sell

Answer 27

An arrangement with a broker to borrow
and sell securities. The borrowed securities are
replaced with securities purchased later. Short
sales let investors earn profits from falling securities prices.

Question 28

stop loss order

Answer 28

An order placed with a broker to
buy or sell when a certain price is reached; it is
designed to limit an investor’s loss on a security
position.

Question 29

syndicate

Answer 29

A group of investment banks that come
together for the purpose of issuing a security.
The syndicate spreads the risk of the issue
among the members. Each participant attempts
to market the security and shares in losses.

Question 30

tombstone

Answer 30

A large notice placed in financial
newspapers announcing that a security will be
offered for sale by an underwriter or group of
underwriters.

Question 31

undersubscribed

Answer 31

d: Having received fewer offers to buy
than there are securities available for sale.