Chapter 3

Question 1

Investment Banker

Answer 1

Middleman who brings together investors and firms issuing new securities

Question 2

Initial Public Offering (IPO)

Answer 2

First sale of common stock to the general public

Question 3

Underwriting

Answer 3

Purchase of an issue of new securities for subsequent sale by investment bankers

Question 4

Syndicate

Answer 4

professional financial services alliance formed for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually.

Question 5

Best effort agreement

Answer 5

Investment Banker doesn’t guarantee that sale will happen but agrees to make the best effort

Question 6

Preliminary Prospectus

Answer 6

Initial document detailing the financial condition of a firm that must be filled out with the SEC

Question 7

Securities and Exchange Commission (SEC)

Answer 7

Government agency that enforces the federal securities laws

Question 8

Private Placement

Answer 8

Nonpublic sale of securities to a financial institution

Question 9

Securities Investor Protection Corporation (SIPC)

Answer 9

Federal agency that insures investors against failure by brokerage firms

Question 10

What are the five competitive forces in a marketplace?

Answer 10

• the threat of new entrants
• the threat of substitute products
• the bargaining power of buyers
• the bargaining power of suppliers
• the rivalry among current competitors

Question 11

What are the three major factors that determine the market value of a company’s share of stock

Answer 11

• the amount of cash flows expected to be generated for a benefit of stockholders
• the timing of these cash flows
• the risk of the cash flows

Question 12

P/E ratio

Answer 12

Also known as the price to earnings ratio. It is the market earnings per share / current earnings per share