Chapter 15 Flashcards

(33 cards)

1
Q

Venture Capital (VC)

A

Financing for new, often high-risk, ventures

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2
Q

Registration statement

A

A statement filed with the SEC that discloses all material information concerning the corporation making a public offering.

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3
Q

Prospectus

A

A legal document describing details of issuing corporations and the proposed offering to potential investors.

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4
Q

Red herring

A

A preliminary prospectus distributed to prospective investors in a new issue of securities.

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5
Q

Tombstone

A

An advertisement announcing a public offering.

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6
Q

General cash offering

A

A issue of securities offered for sale to the general public on a cash basis.

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7
Q

Rights offer

A

A public issue of securities in which securities are first offered to existing shareholders. Also known as rights offering.

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8
Q

Initial public offering (IPO)

A

A company’s first equity issue made available to the public. Also called unseasoned new issue.

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9
Q

Seasoned equity offering (SEO)

A

A new equity issue of securities by a company that has previously issued securities to the public.

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10
Q

Underwriters

A

Investment firms that act as intermediaries between a company selling securities and the investing public

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11
Q

What services are performed by underwriters?

A
  1. Formulating the method used to issue the securities
  2. Pricing the new securities
  3. Selling the new securities
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12
Q

Spread

A

Compensation to the underwriter, determined by the difference between the underwriter’s buying price and the offering price.

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13
Q

Syndicate

A

A group of underwriters formed to share the risk and help sell and issue.

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14
Q
A
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15
Q

Firm commitment underwriting

A

The underwriter buys the entire issue, assuming full responsibility for any unsold shares.

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16
Q

Road show

A

The underwriters and company management will do presentations in multiple cities, pitching the stock. Potential buyers provide information on the price they would be willing to pay and the number of shares they would purchase and a particular price.

17
Q

Book building

A

The process in a road show of soliciting information about buyers and prices and quantities.

18
Q

Best effort underwriting

A

The underwriter sells as much of the issue as possible but can return any unsold shares to the issuer without financial responsibility. Uncommon.

19
Q

Dutch auction underwriting

A

The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.

20
Q

Green shoe provision

A

A contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price. Also overallotment option.

21
Q

Lockup agreement

A

The part of the underwriting contract that specifies how long insiders must wait after an IPO before they can sell. Typically 180 days.

22
Q

What is the quiet period?

A

The firm and its managing underwriters must limit all communications with the public to ordinary announcements and other purely factual matter from the time a company seriously considers a IPO until 40 days following and IPO. SEC requirement.

23
Q

Why might the price of stock drop on the announcement of a new equity issue?

A

Managerial information
Debt usage
Issue costs

24
Q

What is the managerial information that could lead to a stock price drop following announcement of a new equity issue?

A

The managers may know the stock is overvalued.

25
What is the debt usage that can lead to a stock price drop with announcement of a new equity?
May reveal company has too much debt or too little liquidity
26
Term loans
Direct business loans of typically one to five years from commercial banks, insurance companies, and other lenders that specialize in corporate finance.
27
Private placement
Loans, usually long-term in nature, provided directly by a limited number of investors.
28
What are the advantages of direct long-term loans and private placements over a public bond issue?
1. Avoid cost of SEC registration. 2. Easier to renegotiate in the event of a default 3. Cost of distributing bonds is lower in the private market
29
What are the advantage of public bonds over private placement and term loans?
1. Direct placement is likely to have more restrictive covenants. 2. Lower interest rates in public bonds
30
What type of companies dominate the private placement bond market?
Life insurance companies and pension funds.
31
Shelf registration
Registration permitted by SEC Rule 415, which allows a company to register all issues it expects to sell within two years at one time, with subsequent sales at any time within those two years.
32
What are the arguments against shelf registration?
Higher cost of new issues because underwriters may not be able to provide current information therefore investors pay less. Maybe market overhang but no evidence.
33
What is market overhang?
The possibility that the company could increase the supply of stock at any time will negatively impact current stock prices.