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Financial Management Ch 19-20 Study Guide Questions




Question;I. Fill in the blank using a number of terms listed below:After-tax,Best efforts sale,Conversion price,Convertible- securities,Cost of capital,Debt,Descending price,Diluted EPS,Dutch auction,Exercise,Expire,Floorprice, Going public,Interest, Margin,NASD,Par value,Preferred stock,Private- placement,Prospectus,Registration,SEC,Securitization,Spread,Sweetener,Tax- deductible,Treasury stock,Underwriting,Warrant1. Warrants and convertibles may make a company?s securities more attractive to a broader range ofinvestors and hence lower its ____________________.2. A ____________________ is similar to bonds in some respects and to common stock in other ways.Unlike interest on debt, its dividends are not _____________________ by the issuing corporation. So ithas a higher cost of capital than debt.3. A _______________ is an option issued by a company to buy a stated number of shares of stock at aspecified price. They are generally distri buted with debt, or preferred stock, to induce investors to buythose securities at lower cost.4. ______________________are bonds or preferred stocks that can be exchanged for common stock, underspecific terms, at the option of the holder. Unlike the exercise of warrants, they do not provide addi tionalcapital to the issuer.5. A _________________ is the feature that makes a security more attractive to some investors, therebyinducing them to accept a lower current yield. Convertible features and warrants are the examples.6. The higher of a convertible bond?s straight-debt value or its conversion value is called the___________________.7. In reporting its earnings, a firm with warrants and convertible securities must report both basic EPS and____________________.8. Warrants will certainly be exercised if the stock?s market price is above the ___________ __price and thewarrant is about to ______________.9. Warrants are often attached to a(n) ________ issue in order to induce investors to purchase the issue at arelatively low ____________ rate.10. The ____________________ is the effective price paid for one shares of common stock that will bereceived for each bond that is converted.11. When a convertible bond is issued, the conversion price is determined by dividing the _____________ ofthe bond by the number of shares received on conversion.12. ____________ increases the liquidity of the stock, establishes a market value, facilitates raising newequity, and allows the original owners to diversify. But it increases business costs, requires disclosure ofoperating data, and reduces the control of the original owners.13. A _______________ is the sale of stock to only one or a few investors, usually institutional investors. Theadvantages are lower flotation costs, and not subject to SEC registration.***To be continued on the next page***14. The ______ is the difference between the price at which an underwriter sells the stock in an IPO and theproceeds that the underwriter passes on to the issuing firm. In other words, it is the fee collected by theunderwriter, and it usually is seven percent of the offering price.15. ___________is a government agency which regulates the sales of new securities and the operations ofsecurities exchanges. Along with other government agencies and self-regulation, it helps ensure stablemarkets, sound brokerage firms, and the absence of stock manipulation.16. ___________ of securities is required of companies by the SEC before the securities can be offered to thepublic. Frequently, companies will file a master registration statement and then update it with a short-formstatement just before an offering. This procedure is termed shelf registration because companies put newsecurities ?on the shelf? and then later sell them when the market is right.17. The _________ is the percentage of a stock?s price that an investor has borrowed in order to purchase thestock. The SEC sets its requirements, which is the maximum percentage of debt that can be used topurchase a stock.18. A ______________ summarizes information about a new security issue and the issuing company. A ?redherring,? or preliminary prospectus, may be distributed to potential buyers prior to approval of theregistration statement by the SEC.19. After the registration has become effective, the securities, accompanied by the prospectus, may be offeredfor sale. ______________is an industry group primarily concerned with the operation of the over-thecounter (OTC) market.20. In a _________________, the investment banker is only committed to making every effort to sell thestock at the offering price. In this case, the issuing firm bears the risk that the new issue will not be fullysubscribed.21. By _________________, the investment banker agrees to buy the entire issue at a set price, and thenresells the stock at the offering price. Thus, the risk of selling the issue rests with the investment banker.22. __________________ is the process whereby financial instruments that were previously thinly traded areconverted to a form that creates greater liquidity (junk bonds). It also applies to the situation wherespecific assets are pledged as collateral for securities, and hence asset-backed securities are created(mortgage-backed securities).23. ____________________, also known as ___________________ auction, uses a bidding process to findan optimal market price for the stock, the highest price at which an issuing company can sell all theavailable shares.


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