Question & Answer

Explain the incentive for private equity funds to invest in a firm and improve its operations. (LO1) 

Businesses valued at less than $50 million or so rarely go public. Explain the limitations to such businesses if they did go public. (LO3)

Explain the dilemma of stock analysts who work for securities firms and assign ratings to large corporations. Why might they prefer not to assign low ratings to weak but large corporations? (LO6)

Explain how venture capital (VC) funds finance private businesses as well as how they exit from their participation in a firm. (LO1)

Describe international ETFs, and explain how ETFs are exposed to exchange rate risk. How do you think an investor decides whether to purchase an ETF representing Japan, Spain, or some other country? (LO7)

Explain how shareholder protection varies among countries. Explain how enforcement of securities laws varies among countries. Why do these characteristics affect the valuations of stocks? (LO7)

Denton Company plans to engage in an IPO and will issue 4 million shares of stock. It is hoping to sell the shares for an offer price of $14. It hires a securities firm, which suggests that the offer price for the stock be $12 per share to ensure that all the shares can be easily sold. Explain the dilemma here for Denton Company. What is the advantage of following the securities firm’s advice? What is the disadvantage? Is the securities firm’s incentive to place the shares aligned with that of Denton Company? (LO3)

Briefly describe the provisions of the SarbanesOxley Act. Discuss how this act affects the monitoring performed by shareholders. (LO6)

How do you think accounting irregularities affect the pricing of corporate stock in general? From an investor’s viewpoint, how do you think the information used to price stocks changes in response to accounting irregularities? (LO6)

Describe spinning and laddering in the IPO market. How do you think these actions influence the price of a newly issued stock? Who is adversely affected as a result of these actions? (LO3)

How have international mutual funds (IMFs) increased the international integration of capital markets among countries? (LO7)

Are organized stock exchanges used to place newly issued stock? Explain. (LO5)

Explain why stocks traded on the New York Stock Exchange generally exhibit less risk than stocks that are traded on other exchanges. (LO5)

Explain how ADRs enable U.S. investors to become part owners of foreign companies. (LO7)

Describe how the interaction between buyers and sellers affects the market value of a firm and explain how that value can subject a firm to the market for corporate control. (LO6)

Explain why the stock price of a firm may rise when the firm announces that it is repurchasing its shares. (LO4)

Discuss the concept of asymmetric information. Explain why it may motivate firms to repurchase some of their stock. (LO4)

How do IPOs perform over the long run? (LO3)

What does it mean to “flip” shares? Why would investors want to flip shares? (LO3) 

What is the meaning of an initial return for an IPO? (LO3)

Describe a lockup provision and explain why it might be required by the lead underwriter. (LO3)

Describe the process of bookbuilding. Why is bookbuilding sometimes criticized as a means of setting the offer price? (LO3)

Explain the use of a prospectus developed before an IPO. Why does a firm do a road show before its IPO? What factors influence the offer price of stock at the time of the IPO? (LO3)

Explain the difference between obtaining funds from a venture capital firm and engaging in an IPO. Explain how the IPO may serve as a means by which the venture capital firm can cash out. (LO1)

Why do firms engage in IPOs? What is the amount of the fees that the lead underwriter and its syndicate charge a firm that is going public? Why are there many IPOs in some periods and few IPOs in other periods? (LO3)