Issuing Securities Quizz 01+02

Question 1

Limited liability protects senior debtholders more than junior debtholders

Answer 1

False

Question 2

Suppose a corporation currently has 11 million shares issued at a price of $60, of which 10 million are outstanding at a price of $50 per share. Total shareholders’ equity amounts to $250 million. What is the ratio of the market value to the book value of that corporation?

Answer 2

2

Question 3

What is the formula for book value of equity?

Answer 3

Common shares + additional paid-in capital - treasury shares + retained earnings

Question 4

Preferred stock is senior to all kinds of junior debt

Answer 4

False

Question 5

In case of liquidation, a convertible bond is always senior to common stocks

Answer 5

True

Question 6

The book debt-to-equity ratio should be preferred to the market debt-to-equity ratio for all purposes because it contains more information on the operations the firm has undertaken in the past

Answer 6

False

Question 7

If the market value of equity of a corporation is lower than its book value, its stock is underpriced

Answer 7

False

Question 8

Claims of equity holders are senior to claims of bondholders, because they are exposed to more risk than bondholders

Answer 8

False

Question 9

Suppose at the end of a given year, a corporation has 1 million shares outstanding at a price of $44 per share. It has cumulative retained earnings of $30 million and bought back shares worth $5 million. No new shares were issued and no dividends were paid that year and operations generated a profit of $15m. What is the value of the net common equity of that respective firm?

Answer 9

84 million

Question 10

The market debt ratio is always smaller than the book debt ratio

Answer 10

False

Question 11

Dual class shares describe the co-existence of primary and secondary shares in a company.

Answer 11

False

Question 12

An underwriter with a firm commitment makes a loss if he/she is not able to sell all shares of the IPO.

Answer 12

False

Question 13

According to Winner’s curse theory of underpricing, the higher the information asymmetry between the investors, the higher the amount of underpricing.

Answer 13

True

Question 14

According to winner’s curse theory of underpricing, some investors have information advantage over some others. In this setting, the secondary market for the new shares cannot be efficient.

Answer 14

False

Question 15

In a SEO, subscription rights (SR) protect all existing shareholders from transfer of wealth and dilution of voting rights, even those who neither participate nor sell their rights.

Answer 15

False

Question 16

A company plans to make an SEO with 2Mn new shares. To participate in the SEO, an investor needs 5 subscription rights for 1 new share. The stock price before the SEO was 110 and after the SEO it is 100. Then, the new shares were issued at

Answer 16

50

Question 17

CureVac, a biotech company from Tübingen, currently conducting research on vaccines against SARS-Cov-2, went public on August 14 on the NASDAQ by selling 13,333,333 newly issued shares at a price of $16 per share. Furthermore, its underwriters got the option to sell an additional 2 million shares at the quoted price of $16 per share. At the end of 14th of August, CureVac’s (ticker: CVAC) shares traded at $55.90.

Which of the followings is closer to the money raised by CureVac including the over-allotment option?

Answer 17

$245 million

Question 18

Suppose a corporation currently has 20 million shares outstanding at a price of $15 per share. It announces an SEO of 5 million shares in order to raise $55 million and grants subscription rights to the existing shareholders to preserve their fraction of ownership in the firm. What is the value of one right?

Answer 18

$0.8

Question 19

Venture capitals provide money to their portfolio companies typically in 3-5 stages. This is called staged financing and designed to overcome moral hazard.

Answer 19

True

Question 20

Book building is a process in which the firm who wants to go public chooses an underwriter or a lead underwriter.

Answer 20

False