79

Question 1

Forms 10-K and
10-Q

Answer 1

These financial filings are required of publicly traded firms with over $10 million in assets and 2,000 or more persons or over 500 non-accredited shareholders (there are three 10-Qs filed per year)

Question 2

Form 8-K

Answer 2

Form 8K is filed within four business days for any material event that could affect the issuer’s share price or financial condition.

Question 3

Form 3

Answer 3

Form 3 is filed within 10 calendar days to provide the SEC with notification of having achieved insider status. Insiders are defined as officers, directors, and owners of more than 10% of an issuer’s
voting securities.

Question 4

Form 4

Answer 4

Form 4 is filed within two business days to provide the SEC with notification of any changes in an insider’s position

Question 5

Schedule 13D

Answer 5

This schedule is filed by any person that acquires more than 5% of an issuer’s equity. It’s filed with the issuer, the SEC, and the exchange on which the stock trades within 10 days.
 Schedule 13D is the BEST source of information for determining the identity of the most recent
largest shareholders.

Question 6

Schedule
13E-3

Answer 6

Schedule 13E-3 is filed when an issuer or affiliate of the issuer (not a third party) plans to go private. Shareholders are required to vote (proxy) and be provided with a summary term sheet.
Schedule 13E-3 may be used for reverse stock splits or LBOs.

Question 7

Schedule 13G

Answer 7

Schedule 13G is an alternative to 13D and is filed by an institutional investor (e.g., a mutual fund) that has no intention of exhibiting control over the issuer

Question 8

Schedule 13F

Answer 8

Schedule 13F is filed quarterly by institutional investment managers that exercise investment discretion over at least $100 million in equity securities. It’s filed regardless of the SEC registration status of the filer.

Question 9

Form 14A

Answer 9

Proxy Statements (used when a vote is required by shareholders)
A definitive proxy is filed with the SEC on the same day it’s sent to shareholders. In some cases (e.g., business combinations and M&As), a preliminary proxy must be filed with the SEC for prior review.

 The preliminary proxy statement must be filed with the SEC at least 10 days prior to the date that the definitive proxy is sent to shareholders.
 A definitive proxy must be sent to shareholders 20 days prior to meeting

Question 10

Form S-1

Answer 10

Form S-1 is a registration form which is used for most IPOs (long-form) or for issuers that are not eligible for filing Form S-3.

Question 11

Form S-3

Answer 11

Form S-3 is a short-form registration statement which is used by issuers that have been SEC reporting companies for at least 12 months and have $75 million public float in voting and nonvoting common equity.

Question 12

Form S-4

Answer 12

Form S-4 is used when new securities are being offered in connection with a merger. It’s required to be filed by the acquirer and a proxy is required to be issued by the target.
The target’s shareholders vote on the approval of merger, while the acquirer’s shareholders vote on issuing shares to be used in the merger

Question 13

Schedule TO

Answer 13

A tender offer is a solicitation by the issuer or a third party to purchase securities (usually at a premium) for a limited period. In addition to 13D, Schedule TO is filed by any person that makes a tender offer and becomes the owner of more than 5% of a company
 Offers must be kept open for 20 business days.
 If the terms are amended, the offer must remain open for at least 10 business days from the amendment.
 No open market transactions are permitted.
− Persons making the TO cannot purchase the same security or convertible in the open market during duration of the offer.
 Shareholders can tender shares ONLY if they have a net long position on the shares (options must be exercised for the underlying stock to be included).

Question 14

Schedule 14D-9

Answer 14

Schedule 14D-9 is filed by certain persons (the issuer and other owners of the company) and includes recommendations or solicitations that relate to the TO. Essentially, it becomes the target’s official stance on the offer.

Question 15

Regulation FD

Answer 15

According to FD, if material, non-public information is improperly disclosed, the information must be disseminated to the public. If the disclosure was intentional, issuer must file a public statement immediately. If the disclosure was unintentional, it must do so within 24 hours.
 Created to protect retail investors

Question 16

Trust Indenture
Act of 1939

Answer 16

Requires a trustee that’s appointed by the issuer to act in the bondholders’ best interest; applies only to corporate debt.

Question 17

Rule 137

Answer 17

BDs may publish research reports when they’re not acting as underwriters

Question 18

Rule 138

Answer 18

BDs may publish research reports when they are acting as underwriters for another class of security (e.g., if the issuer’s common stock is under registration, a BD may comment on its non-convertible debt).

Question 19

Rule 139

Answer 19

If the issuer is a reporting company or WKSI, BDs may publish reports when they’re acting as underwriters for the underlying security, but only if they’re continuing their regular coverage.

Question 20

Sarbanes-Oxley

Answer 20

SARBOX establishes disclosure and corporate governance rules for publicly traded companies and makes senior management more directly accountable for the company’s internal control system and its
release of financial information to the public.
 Financial information must be certified by CEO and CFO (“Signing Officers”)

Question 21

Rule 14d-10

Answer 21

In a tender offer, there’s no preferential pricing; therefore, all shareholders must be offered the same price regardless of their ownership position. Rule 14d-10, which is also referred to as the Best Price Rule, provides an exception if the compensation is approved by the compensation committee of the target

Question 22

Hart-ScottRodino Antitrust
Act (HSR Act)

Answer 22

This federal antitrust act requires certain parties to file notice with the FTC before a merger deal may be completed.
 The merger may not be completed until 30 days after notice is filed (15 days if the transaction is all
cash).
 HSR also requires financial investors to file and comply with a 30-day waiting period unless the purpose is for investment purposes only.

Question 23

Regulation MA

Answer 23

This regulation is designed to facilitate communications and disclosures which are made by companies that are engaged in M&A transactions. Under this rule, summary term sheets provide shareholders with all of the pertinent information about the transaction.

Question 24

Securities that
are exempt from
SEC registration

Answer 24

 U.S. government or agency securities
 Municipal bonds
 Short-term debt (maturity less than 270 days) - Commercial paper
 Commercial bank securities
 Securities issued by non-profit organizations

Question 25

Regulation A (A+

Answer 25

Exempt transaction for small businesses  Offering limited to $75 million over 12 months − No more than $22.5 million (30% of the amount offered) may be on behalf of selling shareholders  Offering circular must be filed with the SEC  “Testing the waters” is allowed

Question 26

Rule 147

Answer 26

Intra-state exemption which is available to issuers that sell within ONE state:  Issuer must have its “principal place of business” in that state and satisfy any one of the following four requirements: − 80% of assets located within that state − 80% of revenues generated within that state − 80% of net proceeds from sale used in state; and − A majority of the issuer’s employees are based in that state  Resale to non-state residents is permissible after six months from date of last sale (formerly nine months)

Question 27

Regulation S

Answer 27

Provides a registration exemption to U.S. companies that issue securities for sale outside of the U.S. provided the following:  No offer is directed to a U.S. resident and  The transaction is effected through an overseas securities market Reg S securities may be resold to a U.S. resident after 40 days for debt, or one year for equities

Question 28

Private Placements Section 4(2)

Answer 28

Registration exemption for securities that DO NOT involve a public offering.

Question 29

Private Placements * Section 4(5)

Answer 29

Registration exemption for securities transactions that meet the conditions below:  Offering doesn’t exceed $5 million  No advertising or public solicitation can be used  Offering may be sold only to accredited investors (sophisticated) * Reg D exemption allows for a limited number of non-accredited investors (35)

Question 30

* Reg D

Answer 30

This registration exemption is available to issuers that conduct private placements Rule 504 Up to $10 million Rule 506 Unlimited No more than 35 non acredited Accredited investors have a net worth of $1 million (excluding primary residence) OR annual income of $200,000 ($300,000 for spouses)  Regulation D Road shows require pre-qualification of investors  506 (c) offerings allow issuers and placement agents to use general solicitation if reasonable steps are taken to verify that all potential investors are accredited

Question 31

Rule 144A

Answer 31

Registration exemption for securities that are sold to QIBs and allows QIBs to freely trade private placements amongst themselves with no holding period  Same class of securities as listed on an exchange are ineligible

Question 32

Rule 144

Answer 32

Permits the sale of Restricted and Control stock  Restricted Stock is unregistered (e.g., Reg D private placement, Reg S, or employee stock that’sreceived as compensation) − Resale restrictions with regards restricted stock are: 1. The company must have publicly held available shares, and 2. The shares are subject to a six-month holding period  Control Stock (affiliated) is registered stock that’s purchased and owned by corporate insiders (i.e.,control persons) which are the company’s officers, directors, and greater than 10% shareholders − Has no mandatory holding period  To sell either restricted or control stock: − SEC must be notified at time the sell order is placed − Over any 90-day period, the maximum sale allowed is the greater of 1% of outstanding shares or the average weekly trading volume over prior four weeks − Exemption from notifying the SEC is available if the sale doesn’t exceed 5,000 shares or the dollar amount doesn’t exceed $50,000 − When shares sold under Rule 144, they become registered stock

Question 33

Pre-Registration

Answer 33

 Document preparation and due diligence begins  No communication with public unless it’s 30 days prior and there’s no mention of the offering

Question 34

File Registration Statement

Answer 34

Begins the 20-day "Cooling Off' period  No sales or money may be accepted  Issuer distributes preliminary prospectus (Red Herring) − Used to obtain indications of interest (non-binding) − Omits final price and effective date  Blue Sky provisions − Registration of securities (by issuer) and B/Ds, RRs, at state level

Question 35

Effective Date Determined by the SEC

Answer 35

 Final statutory prospectus (full disclosure document) must be delivered to all purchasers  Aftermarket prospectus delivery rules: − 25 days for an exchange-listed IPO, including Nasdaq − 40 days for a non-listed registered secondary − 90 days for a non-listed IPO

Question 36

Financial Statement - (Re-filing requirement)

Answer 36

Balance sheet for the last two years; income statement and cash flows for the last three years Financials are required to be re-filed if they become stale:  For Large/Seasoned Filers (WKSI) – more than 129 days (130 days is considered stale)  For Unseasoned/Small Reporting Company Filers (non-WKSI) – more than 134 days (135 days is considered stale)

Question 37

“Gun-Jumping

Answer 37

Refers to non-allowable communication during the "Cooling Off" period related to new issues; communications not deemed to be a prospectus (e.g., tombstone ad) Two Safe Harbors which allow communication to be released by the issuer (or on its behalf): 1. Factual Business Information (Reporting and Non-Reporting Issuer safe harbor) 2. Forward Looking Information (Reporting Issuer-Only safe harbor)

Question 38

General Types of Communication

Answer 38

 Written Communication: includes written, printed, broadcast and graphic communication  Graphic Communication: refers to electronic media, such as email, CDs, SMS  Oral Communication: live and in real-time

Question 39

Well Known Seasoned Issuer (WKSI) and Seasoned Issuer

Answer 39

 Eligible to use Form S-3 or Form F-3 PLUS  Within 60 days of determining eligibility, issuer must pass one of the following tests: 1. Public Float Test - $700 million of common equity 2. Non-Convertible Test - $1 billion in aggregate non-convertible debt issuances in prior three years  May not be an ineligible issuer (i.e., blank check company, shell company, LP)  Majority owned subsidiary of a WKSI may also qualify Benefits:  Automatic Shelf Registration (ASR) – Available for three years; effective immediately; not subject to SEC review  “Pay-as-you-go” filing fees are assessed only when securities are pulled from shelf, not when registering

Question 40

Seasoned Issuer

Answer 40

Eligible to use Form S-3 or Form F-3 for primary offerings, but doesn’t meet the other financial tests to be a WKSI

Question 41

Unseasoned issuer

Answer 41

Not eligible to file a Form S-3 or Form F-3

Question 42

Non-Reporting Issuer

Answer 42

The company has not yet filed reports (10-Ks) with the SEC An example is a company that’s filed a Form S-1 and is in the process of conducting an IPO.

Question 43

Equity Research Blackout Periods: Manager/Co-Manage Underwriter/Syndicate Member Selling Group

Answer 43

IPO: 10 days all 3 Follow on: 3 days for manager/co manager only

Question 44

Free Writing Prospectus (FWP) Defined as any document that’s used in connection with an offering which is not a statutory prospectus

Answer 44

Filed with SEC when it’s sent and is used by:  WKSIs – anytime  Seasoned Issuers – after their registration statement has been filed  Unseasoned and Non-reporting Issuers – after their registration statement has been filed; it must be proceeded or accompanied by a statutory prospectus  Ineligible Issuers – they’re not permitted to use an FWP

Question 45

C Corporation

Answer 45

 Limited liability for owners  Unlimited number of shareholders  Corporation is a taxable entity; shareholders are taxed again if cash dividends are paid out. Qualifying dividends are taxed at a lower rate than ordinary income.  Cannot pass through losses

Question 46

Subchapter S Corporation

Answer 46

 Limited liability for owners  No more than 100 shareholder (married couple is considered as one shareholder)  Not a viable option for an IPO (first convert to a C Corporation)  S Corporation is not a taxable entity; only shareholders are taxed  S Corporation passes through income and losses

Question 47

Real Estate Investment Trust (REIT)

Answer 47

 Unlimited number of shareholders (many trade on exchanges)  At least 75% is invested in real estate activities  Must distribute at least 90% of income (if done, the REIT will not be taxed)  Shareholders invest to receive dividends (taxed at the same rate as ordinary income)  Can only pass through income, not losses

Question 48

Chapter 11 Reorganization

Answer 48

 Most are voluntary, with the filing done by the company  Company and management continue to exist  The filer is referred to as the debtor-in-possession (DIP)  DIP files the plan or reorganization

Question 49

Chapter 7 Liquidation

Answer 49

 Trustee files the plan  Company and management cease to exist  Assets are sold off to pay creditors and other investors

Question 50

Payment Priority

Answer 50

 Secured creditors are paid first up to the value of the collateral, then unsecured as follows: − Administrative claims − Employee back wages − Other unsecured debt (senior first, then subordinated debt)  Preferred stockholders  Common stockholders

Question 51

No SEC or FINRA recordkeeping requirement applies to documents that are produced by issuers (e.g., prospectus).

Question 52

E-mail, instant messaging, or any other type of electronic communication must be able to be stored by a member firm

Question 53

Market capitalization includes restricted stock, but public float doesn’t include it.

Question 54

A Section 11 Defense is an SEC rule which provides an exemption from liability for certain parties in an offering of securities if they’re able to prove that they had no knowledge of the fraud (however, it cannot be used by an issuer).

Question 55

A Private Investment in Public Equity (PIPE) is a type of private placement in which a broker-dealer acts as a placement agent for the restricted securities of an issuer that already has publicly traded securities.

Question 56

The Green Shoe Clause is good for 30 days and allows an underwriter to sell more shares than originally being offered (over-allotment) and go back to the issuer to receive up to an additional 15% (for short covering transactions)

Question 57

338(h)(10) Election is a provision in the IRS tax code by which (under certain conditions) a stock sale may be treated as an asset sale for tax reporting purposes in an M&A transaction. Also, it allows the buyer to step-up its cost basis for future tax purposes.

Question 58

In an auction for a company, a letter of intent (LOI) is non-binding

Question 59

A two-step merger (a tender offer, followed by a short-form merger agreement) is quicker than a one-step merger (requires target shareholder vote).

Question 60

Book Value =

Answer 60

Com. Shareholder Equity ÷ Number Common Shares Outstanding

Question 61

Tangible Book Value =

Answer 61

Total Assets – Total Liabilities – Intangible Assets – Goodwill

Question 62

Days Sales Outstanding:

Answer 62

(Acct Rec ÷ Total Credit Sales) x Number of Days

Question 63

Interest Coverage Ratio:

Answer 63

EBITDA ÷ Interest Expense

Question 64

Debt-to-EBITDA Ratio

Answer 64

(Short + Long-Term Debt) ÷ EBITDA

Question 65

Accounts Receivable Turnover:

Answer 65

Sales on Credit (current year) ÷ Average Acct Rec.

Question 66

Inventory Turnover Ratio:

Answer 66

COGS ÷ Average Inventory

Question 67

Earnings Available to Common:

Answer 67

Net Income – Preferred Dividends

Question 68

Basic EPS:

Answer 68

Earnings Available to Common ÷ Avg. Common Shares Outstanding

Question 69

Return on Equity:

Answer 69

Earnings Available to Common ÷ Avg. Common Shareholder Equity

Question 70

Dividend Payout Ratio:

Answer 70

Annual Dividend ÷ EPS

Question 71

Price-to-Book Ratio:

Answer 71

Market Price Common ÷ Book Value

Question 72

Price-to-Free Cash Flow

Answer 72

Market Price Common ÷ Free Cash Flow per Share

Question 73

Free Cash Flow Yield:

Answer 73

Free Cash Flow Per Share ÷ Market Price Common

Question 74

Market Value Per Share:

Answer 74

Market Cap of Common ÷ Number of Common Shares Outstanding

Question 75

Cost of Equity (Gordon Growt

Answer 75

k* = D1 ÷ P0 + g

Question 76

Free Cash Flow to Firm (FCFF)

Answer 76

EBIT x (1-Tax Rate) + Deprc. and Amort. – Capital Exp. +/- Change to Work. Cap

Question 77

Free Cash Flow to Equity (FCFE):

Answer 77

Net Income + Deprc. and Amort. – Capital Exp. +/- Change to Working Capital

Question 78

Terminal Value (DCF):

Answer 78

Expected Cash Flow ÷ (Discount Rate – Terminal Growth Rate)

Question 79

Enterprise Value (perpetuity method):

Answer 79

Cash Flow x (1+g) ÷ (Discount Rate – Growth Rate)

Question 80

Exchange Ratio (Acquisition):

Answer 80

Offer Price of the Target Company ÷ Market Price of the Acquiring Company

Question 81

Economic Value Added (EVA):

Answer 81

[EBIT x (1 – Tax Rate)] – [WACC x Investment Capital]

Question 82

Return on Invested Capital (ROIC):

Answer 82

[EBIT x (1 – Tax Rate)] ÷ Investment Capital

Question 83

Price/Book - best for

Answer 83

Financial service companies

Question 84

Price/Funds from Operations best for

Answer 84

REITs

Question 85

Normalized, Relative P/E best for

Answer 85

Cyclical companies

Question 86

Price/Sales Ratio best for

Answer 86

Companies with negative earnings or retail companies – same leverage

Question 87

Earnings Yield best for

Answer 87

Companies with negative earnings

Question 88

EV/EBITDA best for

Answer 88

Basic (heavy) industry companies

Question 89

EV/Sales best for

Answer 89

Retail companies – different leverage

Question 90

PEG Ratio best for

Answer 90

Companies with high P/E ratios