Chapter 19: The Capital Market
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1. 3 primary means by which
companies offer securities to the
general public--Public Issue
2. The actual market value of a right
will differ from its theoretical
value for all of the following
reasons EXCEPT for:
3. Automatic Shelf Registration
4. Because of US "Securities
Offering Reform" ______ can take
advantage of a special
streamlined "shelf registration"
process that provides for
automatic effectiveness of a
registration statement upon filing
with the SEC (i.e., no SEC review).
5. A best efforts offering is
sometimes used in connection
with a _____ of new, long-term
securities
6. Best Efforts Offering--Public
Issue
7. Blue Sky Laws
8. Capital Market
-Traditional (firm 9. Comment The SEC will send a comment letter to the
commitment) Letter issuing firm to amend any deficiencies or
underwriting misleading information in the preliminary
-Best efforts offering prospectus
-Shelf registration (most
10. A company Standby Arrangement
popular in recent years)
can ensure
The size of the firm's the complete
marginal tax rate success of a
rights offering
by making use
of a
A more flexible form of
shelf registration only 11. Competitive The issuing company specifies the date that
available to well-known Bid--Public sealed bids will be received, and competing
seasoned issuers that Issue syndicates submit bids at the specified time
becomes effective upon and place; the syndicate with the highest bid
immediately filing with wins the security issue
the SEC
12. Event Risk The risk that existing debt will suffer a
Only well-known decline in creditworthiness because of the
seasoned issuers issuance of additional debt securities,
(WKSIs) usually in connection with corporate
restructurings
13. Ex-Rights -Companies distribute rights with a format
Date-- very similar to cash dividends
Privileged -The board of directors declares a record
Subscription date and an ex-rights date: the first date on
Public Issue which a stock purchaser no longer receives
the right to subscribe to additional shares
through the recently announced rights
offering
A security offering in 14. Financial Financial institutions that accept money from
which the investment Intermediaries savers and use those funds to make loans
bankers agree to use and other financial investments in their own
only their best efforts to name; they include commercial banks,
sell the issuer's securities; savings institutions, insurance companies,
the investment bankers pension funds, finance companies, and
do not commit to mutual funds
purchase any unsold
15. Financial Include insurance companies and pension
securities
intermediaries funds
US state laws regulating _________
the offering and sale of
16. Financial All institutions and procedures for bringing
securities
Markets buyers and sellers of financial instruments
The market for relatively together
long-term (greater than
17. Free-Writing Written or electronic communications, other
one year original
Prospectuses than preliminary or final prospectuses, that
maturity) financial
constitute an offer of securities related to a
instruments (e.g., bonds
registered offering
and stocks)
18. If an investment banker has agreed Results in no 26.
to sell a new issue of securities on assumption of
a best-efforts basis, the issue underwriting risk by
the investment banker
19. In a common stock rights offering Set below the current
the subscription price is generally: market price of the 27.
stock
20. In calculating the value of one The subscription price
right when the stock is selling per share
"rights-on," the analyst needs to
know the number of rights needed
to buy one share of stock and:
21. Initial Public Offering (IPO) A company's first
offering of common
stock to the general
public
28.
22. Investment Banker--Public Issue -A financial institution
that underwrites
(purchases on a fixed
price at a fixed date)
new securities for
resale
-When a company
issues securities to the
general public, it
usually uses the
services of an
investment banker
29.
-Acts as a middleman
between those who
need funds and those
who have savings
-Buys new securities
from the issuing 30.
company at
wholesale and resells
31.
them at retail to
investors
-They receive the
difference between
the prices as their
underwriting spread
23. An IPO is sold in the secondary False, primary market
market
24. The issuing of a security can be True
interpreted as giving some
information about the issuing 32.
company
25. Letter Stock Privately placed
common stock that
cannot be
immediately resold
Letter stock is Privately placed
common stock that
cannot be
immediately resold to
the general public
The market price of K-T-Lew $1.20
Corporation's common stock is $60 (60-54)/(4+1)
per share, and each share gives its
owner one subscription right. Four
rights are required to purchase an
additional share of common stock
at the subscription price of $54 per
share. If the common stock is
currently selling "rights-on," the
theoretical value of a right is
closest to
Negotiated Basis--Public Issue The issuing company
selects an investment
banking firm and
works directly with
that firm in
determining the
essential features of
the issue; together
they discuss and
negotiate a price for
the security and the
timing of the issue
Over-Subscription Privilege-- The right to purchase,
Privileged Subscription on a pro rata basis,
any unsubscribed
shares in a rights
offering
_____ permits what is known as a SEC Rule 415
shelf registration
Preemptive Right--Privileged The privilege of
Subscription shareholders to
maintain their
proportional
company ownership
by purchasing a
proportionate share
of any new issue of
common stock, or
securities convertible
into common stock
A preliminary prospectus is known Red Herring
as a
33. Primary Market -A market where new securities are
bought and sold for the first time (a
"new issues" market)
-Funds raised through the sale of
new securities flow from the buyers
of securities (the savings sector) to
the issuers of securities (the
investment sector)
34. Private (or direct ) The sale of an entire issue of
Placement unregistered securities (usually
bonds) directly to one purchaser or
a group of purchasers (usually
financial intermediaries)
35. Private Placement-- Securities made to a limited number
Public Issue of investors, sometimes only one,
and with considerably less
regulation
36. Private placements True
typically do not have
to be registered with
the SEC
37. A privileged False, existing shareholders are
subscription is one given preference
offered only to the
privileged few who
have a net worth of
over $100 million
38. Privileged The sale of new securities in which
Subscription (Rights existing shareholders are given a
Offering) preference in purchasing these
securities up to the proportion of
common shares that they already
own
39. Privileged -The principal sales tool for a
Subscription Vs. public issue is the investment
Public Issue banking organization
-The principal sales tool for a
privileged subscription is the
discount from the current market
price
-Flotation costs of a rights offering
are also lower than that of a public
issue due to its underwriting
40. Prospectus Part 1 of the registration statement
filed with the SEC; it discloses
information about the issuing
company and its new offering, and
is available as a separate
communication to investors
41. Public Issue Sale of bonds or stock to the
general public
42. Red Herring The preliminary prospectus; it
includes a legend in red on the
front page stating that the
registration statement has not
yet become effective
43. Registration Statement The disclosure document filed
with the SEC to register a new
securities issue; the registration
statement includes the
prospectus and other
information required by the SEC
44. Registration with the SEC False, ONE state
is not required if the new
stock issue is intended for
investors only in 2 states,
say Oregon and California
only
45. Right--Privileged A short-term option to buy a
Subscription certain number (or fraction) of
securities from the issuing
corporation; also called a
subscription right
46. Rule 144a makes it False, easier
tougher to resell privately
placed securities
47. The Sarbanes-Oxley Act A series of corporate and
of 2002 (SOX) was largely accounting frauds involving
a response to: Enron, Arthur Andersen,
WorldCom, and numerous
others
48. SEC The US government agency
responsible for administration
of federal securities laws;
including the 1933 and 1934
Acts
49. Secondary Market -A market for existing (used)
securities rather than new issues
-Transactions involving these
existing securities do not
provide additional funds to
finance capital investment
50. Securities Act of 1933 Generally requires that public
offerings be registered with the
federal government before they
may be sold; also known as the
Truth in Securities Act
51. Securities Exchange Act Regulates the secondary
of 1934 market for long-term securities-
-the securities exchanges and
the over-the-counter market
52. The shareholder True, eventually the rights will expire 60. To say that there is Management has more
may dispose of "asymmetric information" in accurate information than
rights issued in a the issuing of common stock investors have
rights offering or debt means that
simply by doing
61. A traditional underwriting Competitive bid, negotiated
nothing
bid can be either a __________ basis
53. Shelf registration True or a _________--Public Issue
offers increased
62. Underwriting (Firm -Bearing the risk of not being
flexibility,
Commitment )--Public Issue able to sell a security at the
allowing a
established price by virtue of
company to time
purchasing the security for
its sale of
resale in the public
securities to
-If the security does not sell
market
well, the investment banker
conditions
takes the hit, not the
54. Shelf A procedure that allows a company to company
Registration-- register securities in advance that it may
63. Underwriting Syndicate-- -A temporary combination of
Public Issue want to sell and essentially put that
Public Issue investment banking firms
registration "on the shelf" until it makes a
formed to sell a new security
sales offering; also called SEC Rule 415;
issue
these securities can be sold piecemeal
-Mitigates risk if security
whenever the company chooses
does not sell well
55. SOX Addresses, among other issues,
64. The US Securities and True, only makes sure there is
corporate governance, auditing and
Exchange Commission (SEC) no misinformation
accounting, executive compensation, and
does not evaluate the
enhanced and timely disclosure of
investment value or merit of
corporate information
the securities it reviews
56. Standby A measure taken to ensure the complete
65. Value of Rights--Privileged -What gives a value its right
Arrangement-- success of a rights offering in which an
Subscription is that it allows you to buy
Privileged investment banker or group of
new stock at a discount from
Subscription investment bankers agrees to "stand by"
the current market price
to underwrite any unsubscribed (unsold)
-The discount given is to
portion of the issue
ensure the successful sell of
57. Standby True the new issue
arrangements -For most rights offerings,
are used to the subscription price
ensure the discount from the current
success of a market price ranges between
rights offering 10 and 20%
58. The theoretical $58.80 66. Well-Known Seasoned Essentially large, actively
value of one [(60)(4) + 54] / (4+1) Issuers traded companies with
share of K-T-Lew established US public track
common stock records
when it goes "ex-
67. What are the primary The number of investors
rights" is closest
differences between a involved and the regulations
to
public issue and private governing the issuance
59. Tombstone An announcement placed in newspapers placement?--Public Issue
Advertisement and magazines giving just the most basic
68. When stocks are bought True
details of a security offering; the term
"rights-on," the buyer is
reflects the stark, black-bordered look of
generally entitled to
the ad
receive one right for each
share of stock owned
69. When the investment banker bears the risk of not being able to sell a new security at the established price, this Underwriting
is known as: