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285 Cards in this Set
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An individual convicted of insider trading 4 years ago has served time in federal prison. She arrives at your office looking for a position as an investment banker. You would inform her that: a. She could be hired but would not be permitted to talk to the clients b. She may not be hired as an investment banker for 6 years c. She may provide advice only on private placements since these are exempt securities d. Her banking deals must be preapproved in writing by a principa |
Answers: B
A convicted felon is barred from the securities business for 10 years from the time of conviction. This type of ban is referred to as a statutory disqualification. A disqualified person may apply to an SRO to enter or reenter the securities industry before the 10-year period has elapsed. If the SRO grants the waiver, it must notify the SEC, which can overturn the waiver if it chooses. [60385] |
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An investment banking representative would like to borrow funds from a neighbor who is a customer of her firm. Which of the following statements is TRUE? 1. He is not required to notify or receive approval from his firm |
Answer: 4
Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying any one of the following provisions. 1. The customer and the registered person are immediate family members. If the conditions indicated in provisions 3, 4, or 5 prevail (such as borrowing from a neighbor), the firm must approve the lending activity prior to the execution of the loan. If the loan is based on provision 1 or 2, firm notification or firm approval is not required. (74313) |
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An individual is hired by a broker-dealer to work in the public finance department of the firm. She will be advising issuers on structuring municipal revenue bonds that will be sold to institutional investors. Which of the following statements is TRUE? 1. She may qualify by passing the Series 7 (General Securities) examination.2. She may qualify by passing the Series 79 (Investment Banking) examination. 3. She is required to pass both the Series 7 (General Securities) examination and the Series 79 (Investment Banking) examination. 4. She is not required to pass any qualification examination. |
Answer: 1
FINRA registration rules require all persons involved in the investment banking or securities business, who function as representatives of a member firm, to be registered in a category appropriate to the function they perform. The rule defines investment banking activities as work performed by associated persons of a broker-dealer whose activities primarily involve: 1. Advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including but not limited to origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or2. Advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion. The rule does not cover individuals whose investment banking work is limited to public (municipal) finance offerings or direct participation program offerings. The registration category further would not cover individuals whose investment banking work is limited to effecting private securities offerings. An individual working in the public finance department generally will advise municipalities issuing revenue bonds. She would be required to pass either the Series 7 (General Securities Registered Representative Examination), or Series 52 (Municipal Securities Representative Examination). [60404] |
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Which of the following statements is TRUE concerning the restricted and watch lists that are maintained by a broker-dealer? 1. The restricted list does not apply to solicited transactions with customers of the broker-dealer.2. The restricted and watch lists must be distributed to all employees of the broker-dealer. 3. An explanation of the reason for a security's addition or deletion from a restricted or watch list must be included. 4. A broker-dealer that does not conduct investment banking business, do research, or engage in arbitrage activities does not maintain restricted and watch lists. |
Answer: 4
Only firms that engage in investment banking, research, or arbitrage activities are required to maintain restricted and watch lists. However, these firms must have written procedures to address the use of material nonpublic information by its employees. The restricted and watch lists include securities that employees are either restricted or prohibited from trading, or issues that are subject to closer scrutiny by the member firm. The restrictions or limitations associated with the lists apply to both employees and to solicited transactions with customers. The restricted list must be distributed to employees, while the contents of the watch list are generally known only to selected members of the legal and compliance departments. The firm's written supervisory procedures should include a description regarding when and why securities have been added or removed from the lists. The restricted and watch lists should include the name of the contact person who added to, or deleted the security from, the list; however, the rationale for the decision is not required. [60446] |
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Which of the following statements is FALSE regarding a firm's anti-money laundering program? 1. The program must comply with a blueprint or template supplied by the SEC.2. The program must be designed to comply with the Bank Secrecy Act. 3. The program must provide for annual testing of the system. 4. The firm must designate a specific individual responsible for implementing the firm's anti-money laundering program and must identify the person to FINRA. |
Answer: 1
2. The program must be designed to comply with the Bank Secrecy Act. 3. The program must provide for annual testing of the system. 4. The firm must designate a specific individual responsible for implementing the firm's anti-money laundering program and must identify the person to FINRA. Explanation: |
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Chester Tetley, an investment banking representative with May B. Enside, Inc., a FINRA member firm, is involved in an underwriting of Nanorobotics, Inc. Chester has revealed to numerous family members the effect that this offering may have on other companies in the industry, including some that are on his firm's restricted list. Numerous short positions were established based on this information. According to industry rules, if Enside becomes aware of these trades, it must: I. File a quarterly report with its SRO concerning the trades in question II. File a quarterly report with the SRO only if disciplinary action is taken III. Suspend Chester until the issue has been resolved IV. Sign a written statement that the firm has procedures in place to monitor trading of employees and family members of employees 1. I and III only2. I and IV only 3. II and III only 4. II and IV only |
Answer: 2
Because these trades may involve the misuse of material nonpublic information, the firm must file a report with the SRO by the 15th day of the month following the calendar quarter in which the trade occurred. A report must be filed regardless of whether any action has been taken. Chester need not be suspended, but the firm must sign a written statement that it has procedures in place to monitor trading by employees, family members of employees, and trades executed for the firm's proprietary accounts. [60449] |
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A Currency Transaction Report (CTR) must be filed within how many days? 1. 152. 30 3. 60 4. Immediately |
Answer: 1
The Bank Secrecy Act (BSA) requires financial institutions such as broker-dealers to file reports and keep records concerning cash transactions. A Currency Transaction Report (CTR) is also called a FinCEN Form 104. It is filed by financial institutions for deposits and withdrawals that exceed $10,000 in a single business day. The form must be filed no later than the 15th day following the transaction. A Suspicious Activity Report (SAR), which is also called a FinCEN Form101, must be filed no later than the 30th day after the member firm discovers the suspicious activity. (74310) |
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A person would not be subject to a statutory disqualification if he: 1. Has been suspended from membership in any SRO2. Stands accused of stock manipulation 3. Is subject to an order of the SEC precluding his industry activities 4. Was expelled from a foreign securities exchange |
Answer:2
As cited in the 1934 Act, a person would be subject to statutory disqualification for all of these reasons with the exception of an accusation of a criminal offense. The individual would need to be convicted of the offense to be subject to statutory disqualification. [60388] |
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The head of investment banking at a member firm wishes to open an account at another member firm. The firm opening the account: 1. Is prohibited from opening the account2. Need not notify the employee's firm if it is a cash account, but must send a notice if it is a margin account 3. Must give notice to the employee's member firm and must inform the employee his employer will be notified 4. Must give notice to the employee's member firm, but need not inform the employee that his employer will be notified |
Answer: 3
According to FINRA rules, if an employee of a member firm wishes to open an account at another member firm, the firm carrying the account must inform the individual that his employer will be notified of this type of account. Also, duplicate confirmations of all trades will be made available to the employing firm. [60428] |
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All FINRA members must have an anti-money laundering compliance program that includes all the following requirements EXCEPT: 1. A designated compliance officer to administer the program2. An ongoing program to train personnel 3. Disclosure to FINRA of the name of the designated compliance training officer 4. An independent audit function to test the program's effectiveness |
Answer: 3
According to FINRA, all member broker-dealers must have an AML compliance program that includes policies and procedures reasonably designed to detect money laundering and must report suspicious transactions. The requirements include the designation of a compliance officer who is responsible for the program, an ongoing employee training program, and an independent audit function to test the program's effectiveness. The name of the person overseeing the anti-money laundering program must be provided to FINRA, not the name of the training officer. [60409] |
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According to FINRA rules, an e-mail complaint: 1. Does not constitute an official complaint and does not need to be retained by the broker-dealer2. Must be maintained for four years 3. Must be maintained for six years 4. Must be maintained for the life of the member firm |
Answer: 2
Records of customer complaints must be maintained for four years according to FINRA record-keeping rules. Complaints can be delivered in any written format, including letters, e-mails, and text messages. [66216] |
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You are working on an M&A transaction representing the sell-side and performing due diligence. You discover that that the subject company generates significant business in Cuba. The firm's BEST course of action is to: 1. Report this information to the SEC2. Report the transaction to OFAC immediately 3. Block the transaction and report to OFAC within 30 days 4. Block the transaction and report to OFAC within 10 days |
Answer: 4
The Office of Foreign Assets Control (OFAC) administers U.S. economic sanctions and embargos with a number of countries such as Cuba, North Korea, Iran, and Syria. A U.S. bank that has knowledge of a payment to or from one of these countries is required to block the transaction and report it to OFAC within 10 days. (74309) |
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Which TWO of the following statements are TRUE concerning a broker-dealer's Written Supervisory Procedures checklist? I. A broker-dealer that intends to expand its business into investment banking must submit a completed Written Supervisory Procedures checklist. II. FINRA does not approve a broker-dealer's Written Supervisory Procedures checklist. III. The Written Supervisory Procedures checklist includes documentation and actions regarding the use of material nonpublic information by a broker-dealer. IV. Although the preparation of a Written Supervisory Procedures checklist is recommended by FINRA, the document is not a mandatory component when a broker-dealer develops its written supervisory procedures. 1. I and III |
Answer: 1
The Written Supervisory Procedures (WSP) checklist outlines the activities of a broker-dealer applying for FINRA membership, or a broker-dealer that is expanding its scope of business. The WSP checklist must be submitted as part of the application process. FINRA staff members review and approve the document, although approval does not protect the firm from future supervisory deficiencies. The WSP checklist serves as a guideline for preparing the supervisory procedures and subsequent supervisory reviews. [60443] |
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Sarah Collins is an investment banking representative working on a team that is currently putting together an offering of Biomitosis, Inc. Sarah has been instructed to obtain information from the research department regarding the subject company. Which TWO of the following statements are TRUE concerning the request for information? I. Sarah is permitted to contact the research analyst directly. II. Sarah must route her request through the legal/compliance department of her firm. III. The firm's research analyst who follows Biomitosis is permitted to discuss the proposed transaction with the issuer. IV. The investment banking firm must maintain written records concerning all requests between Sarah and the research department. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 4
According to SEC rules, firms must establish written procedures for dealing with material nonpublic information, including information passed between departments. These written procedures require the legal/compliance department to be notified of requests for information among the investment banking, research, and sales departments. A research analyst is not permitted to contact the subject company at the request of investment banking, or solicit investment banking business on behalf of the member firm. The broker-dealer must maintain a list of the interdepartmental communications and requests for information. [60447] |
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All of the following statements regarding Continuing Education for an associated person of a broker-dealer are TRUE, EXCEPT: 1. He will be required to retake the applicable qualification examination to meet FINRA requirements regarding Continuing Education2. All registered persons are required to complete the Regulatory Element 3. There is both a Regulatory and a Firm Element requirement 4. The person will have all registrations deemed inactive if he fails to complete the Regulatory Element of the Continuing Education program |
Answer: 1
All registered persons are subject to Continuing Education requirements, as adopted by the securities industry. The program consists of Regulatory Element and Firm Element components. All registered persons are required to complete the Regulatory Element. However, all registered representatives who have contact with the public are also subject to the Firm Element. Persons subject to the Regulatory Element, who do not complete it within specified periods, are subject to having their registrations deemed inactive. [60393] |
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An investment banking representative has been communicating with a client about the progress of an upcoming equity underwriting. There have been numerous pieces of correspondence between the representative and the client. Is this correspondence subject to review by a principal? 1. Only outgoing correspondence is subject to review by a principal.2. Review by a principal of both incoming and outgoing correspondence is required. 3. Outgoing correspondence is subject to approval by a principal, while incoming correspondence must only be reviewed. 4. No review of correspondence by a principal is required. |
Answer: 2
Each member must develop written procedures that are appropriate to its business, size, structure, and customers, for the review of incoming and outgoing written (i.e., nonelectronic) and electronic correspondence with the public, relating to its investment banking or securities business. [60407] |
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During a routine audit, an examiner for a self-regulatory organization has found what she believes to be a pattern of excessive corporate underwriting fees, charged by the firm's investment banking department. Disciplinary actions for such violations would be imposed under the: 1. 1933 Securities Act's antifraud provisions2. FINRA Code of Procedure 3. FINRA Code of Arbitration 4. SEC's Corporate Finance Department |
Answer: 2
The underwriting of corporate securities is governed by FINRA rules. Disciplinary actions for violations of FINRA rules are imposed under FINRA's Code of Procedure. The regulatory group that reviews corporate financing compensation is the Corporate Financing Department. It is part of FINRA. [60903] |
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An investment banking representative would NOT need to notify his employer to open an account if he was effecting transactions in which of the following securities? 1. Investment-grade, nonconvertible bonds2. An actively managed emerging markets mutual fund 3. An exchange-traded fund (ETF) that is indexed to the S&P 500 4. A Real Estate Investment Trust listed on the NYSE |
Answer: 2
Normally an employee of a FINRA member firm who wishes to open an account at another member firm must notify the other firm, in writing, prior to opening a securities account. An exception is made if the employee effects transactions only in mutual funds, unit investment trusts, and variable annuities. [60430] |
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An investment banking representative wants to set up an investment program for a charity for which she will not be receiving compensation. Which of the following statements is TRUE? 1. She must receive written approval of her broker-dealer2. She is required to provide written notification to FINRA 3. She is required to provide verbal notice to her broker-dealer 4. She is required to provide written notice to her broker-dealer |
Answer: 4
The SRO rule on private securities transactions (selling away) requires an investment banking representative to provide written notice to her firm if she will be engaging in securities transactions that are not within the scope of her firm's business. If she will be compensated for the transactions, she must also receive written approval from her firm to participate. If she will not be compensated, her firm still has the right to impose conditions on her participation. (74312) |
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Jake lost $14,000 on a new issue and complained to his investment banking representative. The firm provided a written response, and although Jake did not receive any reimbursement, he was satisfied with the response. The firm is required to: 1. Report the complaint promptly to FINRA2. Report information concerning the complaint quarterly to its SRO 3. Have the compliance department conduct an investigation within 30 days 4. Do nothing, since resolved issues do not trigger reporting requirements |
Answer: 2
Member firms are required to report to the appropriate SRO statistical and summary information regarding customer complaints, on a quarterly basis. If the complaint from a customer involves theft, forgery, or misappropriation of funds, the firm must notify the SRO promptly. [60901] |
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A broker-dealer's AML compliance program must provide for testing of the functionality of the program at least: 1. Monthly2. Quarterly 3. Semiannually 4. Annually |
Answer: 4
Testing of the AML program must be conducted annually. More frequent testing is required if circumstances warrant it. If the member does not execute transactions for customers, or otherwise hold customer accounts, or acts as an introducing broker with respect to customer accounts (e.g., engages solely in proprietary trading or conducts business only with other broker-dealers), then independent testing is required every two years. [60411] |
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Selling away takes place when an investment banking representative: 1. Sells his firm's client list to nonaffiliates without his firm's permission |
Answer: 2
Selling away occurs when a registered representative (including investment banking representatives) engages in private securities transactions, selling securities outside his regular scope of employment without his firm's approval. [60431] |
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An office that is solely involved in structuring public offerings, but has no responsibility for supervising the activities of persons associated with the member firm at other branch offices, would be subject to inspection by the member firm: 1. Semiannually2. Annually 3. With regularity 4. Every 3 years |
Answer: 2
An office that is involved in structuring public offerings would be considered an Office of Supervisory Jurisdiction (OSJ) and subject to annual inspection by the member firm. Branch offices that supervise nonbranch offices are also subject to annual inspection. Nonsupervisory branch offices are subject to inspection every three years, while nonbranch offices are subject to inspection with regularity. [60416] |
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An investment banking representative leaves his current firm and is given a copy of his Form U5. When applying for a new position at another broker-dealer, his potential employer asks for a copy of the document. The applicant should supply this document within: 1. 2 business days2. 3 business days 3. 5 business days 4. 30 business days |
Answer: 1
Form U5 should be supplied to the new employer within 2 business days, provided the applicant has received a copy. If the former employer failed to provide the Form U5 to the applicant for registration, it should be provided within 2 business days of the request. [60415] |
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Which of the following activities would violate industry rules concerning gifts and gratuities? 1. Taking a client to a dinner valued at $80 per person2. Attending a concert with your client valued at $105 per ticket 3. Giving a $300 wedding gift to your brother who is employed at a member firm 4. Giving two tickets to your client to attend a basketball game valued at $65 per ticket |
Answer: 4
Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate business travel. In order for the activity to be considered an expense, the associated person employed by the broker-dealer must attend the event with the client. Choice (d) would violate the gift limit rule since the value of two tickets ($130) exceeds the $100 limit. An exemption is provided if the gift is given to another family member for an event based on a family relationship (e.g., a wedding). [60915] |
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Joe is an accountant who, on occasion, has directed some of his clients to Matterhorn Securities, where he maintains a brokerage account. Joe has suggested to his registered representative that in light of the steady business that Joe has done with the firm over the years, he would like to be able to receive some form of compensation for all the business he has directed to Matterhorn. Which of the following statements is TRUE? 1. It is up to the discretion of the firm as to whether it wishes to reward Joe with such benefits.2. The firm may offer Joe commission rebates, but that is all. 3. Industry rules provide for isolated and nonrecurring compensation in these instances. 4. Once Joe has introduced 50 clients to the firm, it is standard industry practice to offer such persons compensation based on the business conducted by these new accounts. |
Answer: 3
SRO rules specifically state that compensation to nonregistered persons is permitted if, among other things, it is paid on an isolated basis, and is not based on business generated by such accounts. |
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2. The principal must review the complaint and submit a written response to the customer. 3. A memo must be prepared describing any action taken in response to the complaint. 4. The firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted. |
All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years. |
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All of the following statements regarding private securities transactions by a person associated with a member firm are TRUE EXCEPT: 1. The transactions may not involve private placements, even if the activity is otherwise acceptable2. If an investment banking representative will be compensated, the firm must approve the transaction in writing 3. If an investment banking representative will not be compensated, the firm must be notified of the representative's participation 4. An investment banking representative's personal transactions in mutual funds are not covered by this rule |
Answer: 1
Private securities transactions are transactions outside the regular scope of an associated person's employment with a member firm. An associated person engaging in such transactions must provide written notice to the employing member. In addition, if an investment banking representative is to receive compensation for the transaction, the member must specifically approve the transactions in writing in order for the person to participate. However, personal transactions in investment company and variable annuity securities are not covered by this rule. There is no specific prohibition regarding private placements. [60432] |
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An investment banking representative wishes to sell interests in a private placement to her clients. The private placement is not being offered through her firm. If she will not be compensated for the transactions, she must: 1. Provide written notice to FINRA2. Provide written notice to her firm 3. Provide verbal notice to her firm 4. Receive written approval from her broker-dealer to participate |
Answer: 2
The SRO rule on private securities transactions (selling away) requires an investment banking representative to provide written notice to her firm if she will be engaging in securities transactions that are not within the scope of her firm's business. If she will be compensated for the transactions, she must also receive written approval from her firm to participate. If she will not be compensated, her firm still has the right to impose conditions on her participation. [60436] |
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Which TWO of the following statements are TRUE regarding the Code of Arbitration? I. Disputes between members must be submitted to arbitration. II. Disputes between members and clients must be submitted to arbitration. III. Arbitration is final and binding. IV. Arbitration is subject to an appeals process. 1. I and II2. I and III 3. II and III 4. II and IV |
Answer: 2
Disputes between members must be submitted to arbitration. However, if a dispute involves a customer, the customer may not be forced into arbitration. All arbitration decisions are final and binding. Arbitration is usually chosen over litigation because it is less costly. The only instances where a member may seek a resolution through civil court against another member (or associated person against a member) are nonbusiness related issues, such as those involving sexual/racial discrimination or harassment. [60905]
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Rule 104 of Regulation M defines stabilizing as: 1. Any purchase of, or bid for, a security by an underwriter or underwriting syndicate, prior to the effective date of the registration statement for the security being offered2. The placing of any bid or the effecting of any purchase for the purpose of pegging, fixing, or otherwise maintaining the price of a security 3. The setting of an offering price for a distribution at any price under the current market value of the security, if the security is currently trading in the secondary market 4. Any transaction by a participant in a security distribution that is nonmanipulative |
Answer: 2
he SEC defines stabilizing as the placing of any bid or the effecting of any purchase for the purpose of pegging, fixing, or otherwise maintaining the price of a security. As its definition implies, the act of stabilizing is manipulative. However, if performed in accordance with Rule 104 of Regulation M, stabilizing is allowed so that the benefits of an orderly distribution of securities can be realized. Purchases by the syndicate that are solely manipulative, rather than assisting in the distribution, are illegal. [60367] |
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Emperor LLC has an office location whose sole function is to solicit investment banking services. The status of the office is a(n): 1. Office of convenience2. Nonbranch office 3. Branch office 4. OSJ |
Answer: 2
An office whose sole function is to solicit investment banking services confers nonbranch status. One of the exceptions from the definition of a branch office is a non-sales location. This office would be considered a non-sales location. If investment banking services are performed in this office, registration as a branch would be required. If the office structures investment banking deals, it would be an OSJ. [60418] |
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An employee of a small broker-dealer engages in investment banking activities and institutional sales. This employee is required to: 1. Pass the Investment Banking qualification exam only2. Pass the General Securities qualification exam only 3. Pass either the Investment Banking qualification exam, or the General Securities qualification exam 4. Pass both the Investment Banking qualification exam and the General Securities qualification exam |
Answer: 4
An employee engaged in both investment banking activities and general securities business (institutional sales, retail sales, or research) is required to pass both examinations. The Series 7 is the General Securities Representative Examination and the Series 79 is the Limited Representative -- Investment Banking Examination. [60403] |
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2. Posting the Office of Foreign Assets Control (OFAC) list in a conspicuous place 3. Subjecting AML procedures to an outside audit 4. All of the above |
Answer: 3
The validity and thoroughness of the AML procedures must be verified through an independent audit. Exchange notification is not required. The OFAC list contains the names of known and suspected terrorists. There is no requirement to post the list. [60419] |
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Amy Angree is unhappy with her registered representative. The client feels that her $500,000 loss was due primarily to several unsuitable IPO recommendations. Amy has offered to mediate the issue with the firm. Which of the following statements concerning this process is TRUE? 1. Amy will give up her rights under the Code of Arbitration, if she pursues mediation.2. The process is voluntary for both parties. 3. Mediation panels typically have at least 3 members. 4. The mediator may not be a FINRA member. |
Answer: 2
Mediation is a voluntary process entered into in an effort to solve a dispute. There is a single mediator who may be any neutral third party agreed to by the participants. Parties may withdraw from mediation and pursue other remedies, such as arbitration, or civil court proceedings. [61241] |
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A broker-dealer's AML compliance program must be approved: 1. In writing by a member of senior management2. By FINRA and a member of senior management of the broker-dealer 3. By the SEC and the head of compliance for the broker-dealer 4. In writing by both the CEO and the CFO |
Answer: 1
Each member's anti-money laundering program must be approved in writing by a member of senior management. [60412] |
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An investment banking representative has been accused of violating an SRO rule. The complaint is heard by a Hearing Panel of FINRA. All of the following outcomes are possible EXCEPT the investment banking representative: 1. Is fined2. Is sentenced to two years in prison 3. Settles the complaint by agreeing to a censure 4. Is suspended from associating with a member firm for 90 days and appeals the decision |
Answer: 2
A self-regulatory organization (SRO), such as FINRA, does not have the authority to sentence anyone to prison. SROs may fine, censure, suspend, or expel members. Findings of a Hearing Panel of FINRA may be appealed to the National Adjudicatory Council (of FINRA). [60904] |
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An investment banking representative has obtained confidential information while performing due diligence on a new issue. If the broker-dealer has insider trading policies in place, and the representative mentions the information to a customer who uses the information to avoid a loss by selling the stock, which of the following individuals is/are subject to sanctions under SEC insider trading rules? I. The customer II. The registered representative III. The broker-dealer 1. I only2. I and II only 3. I, II, and III 4. None of the above, since no profit was earned |
Answer: 2
Anyone using material nonpublic information is subject to insider trading sanctions, regardless of the outcome of the transactions. Persons who pass inside information that is used by others are also subject to sanctions. Broker-dealers are liable for insider trading violations of the persons they control. Broker-dealers must institute procedures to detect and prevent the use of inside information. Since the question references that the broker-dealer has insider trading policies in place, the broker-dealer would not be subject to sanctions. [60455] |
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When a broker-dealer hires an individual who was previously employed by a different broker-dealer, the hiring firm is required to: 1. Verify the employment status of the individual with the prior employer before filing a new Form U42. Check with the human resources department of the previous employer to confirm that the employment record of the individual was clean 3. Review the Termination Notice filed by the previous employer 4. Inquire as to whether the individual made any political contributions to local elected officials |
FINRA Rule 3010(e) requires firms to investigate the qualifications of the newly hired individual by reviewing the U5 submitted by the previous securities industry employer, within 60 days of filing the U4 with FINRA. [60387] |
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John Casey, an investment banking representative, has just landed a new client, Elmsford Tool and Dye Co. of Elmsford, Illinois. Part of the new client agreement requires Elmsford to sign a predispute arbitration agreement. This agreement must disclose all of the following items EXCEPT: 1. Both parties agree that in the event of arbitration, the decision reached by the panel will not be contested2. A majority of the arbiters will be from within the industry 3. The arbiters do not need to provide the reasoning behind any award 4. Each party is vacating its right to seek a resolution through a civil court proceeding |
Answer: 2
Under the FINRA Code of Arbitration, a dispute between a member firm and a customer requires that the majority of the arbiters be from outside the securities industry (public arbiters), although a customer may request that the arbitration panel be composed entirely of industry arbiters. If the dispute is between member firms, all the arbiters will be from within the industry. The decision reached by the arbitration panel is final and binding. Additionally, the arbiters do not need to explain their reasoning, and all parties abandon (vacate) the right to sue if dissatisfied with the decision. [60753] |
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A Suspicious Activity Report (SAR) must be filed within: 1. 10 days2. 15 days 3. 30 days 4. 60 days |
Answer: 3
A Suspicious Activity Report (SAR) is also called a FinCEN Form101. According to the Bank Secrecy Act (BSA), it is filed by a financial institution if a transaction has involved at least $5,000, and the member firm knows, or has reason to believe, the funds are derived from an illegal activity, designed to avoid filing of other forms, or has no legitimate, lawful purpose. It must be filed no later than the 30th day after the member firm discovers the activity. In addition, the firm would not notify the person who entered into the transaction about which the report is being filed. [61333] |
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Your firm has been hired to represent the purchaser in an acquisition of a foreign company listed on the NYSE. The target is a global provider of power and automation technologies, including oil and gas projects. In performing your due diligence, you discover the company and its subsidiaries made improper payments totaling more than $1.1 million dollars to government officials in Angola, Nigeria, and Kazakhstan. What is the MOST appropriate action to take? 1. Notify the SEC and the DOJ2. Notify FINRA 3. Instruct your client that the merger must be cancelled 4. Instruct your client that the merger may be completed, since the target is a foreign company |
Answer: 1
This question concerns the Foreign Corrupt Practices Act (FCPA). The law prohibits corrupt or improper payments to foreign government officials for the purpose of obtaining business. The antibribery provision of the law applies to U.S. companies, the U.S. subsidiary of a foreign company, as well as any foreign private issuer that is an SEC reporting company. The position of the SEC and the Department of Justice (DOJ) is non-U.S. companies that issue stock or trade as an ADR in the U.S. are subject to the FCPA. If improper payments are found in the due diligence process (which should uncover them), the best action for the investment banking firm to take is disclosure to the SEC and the DOJ. In many situations, the merger may be allowed to proceed, with a settlement that may include fines and penalties. [99906] |
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An investment banking representative's registration has been deemed inactive since he has failed to complete the Regulatory Element of Continuing Education. How much time does he have to complete the CE requirement before he is required to retake the Series 79 Examination? 1. 30 days |
Answer: 4
All registered persons are required to participate in Regulatory Element training on the second anniversary of their initial securities registration, and every three years thereafter, for the remainder of their careers. The representative has 120 days from each required anniversary date to complete the Regulatory Element training. If the person does not complete the training within the prescribed time frame, that person's registration will become inactive. A registered person may remain inactive for two years. Once this two-year period has elapsed, a person must requalify for registration by passing the appropriate examination. Please note that a person who is deemed inactive may satisfy the CE requirement within the two-year period and need not requalify by exam. [99909] |
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The filing of Form 8-K, pursuant to the Securities Exchange Act of 1934, is required for which of the following circumstances? I. A change in control of the registrant II. A change in the registrant's accountant III. The resignation of a director IV. A change in fiscal year 1. I and II only2. II and III only 3. II and IV only 4. I, II, III, and IV |
Answer: 4
All companies that are registered with the Securities and Exchange Commission are required to file Form 8-K for current reporting, upon the occurrence of any material event that would affect its financial condition or the value of its shares and that would be deemed of significant interest to the public. Each occurrence listed would necessitate the filing of Form 8-K. It would also be required if the firm were involved in a bankruptcy proceeding or if the firm acquired or disposed of a significant amount of assets not deemed to be in the ordinary course of business. [60664] |
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A managing director of your firm has asked you to research the most recent source of information of the largest shareholders of a company. The BEST method of finding this information is to review: 1. Form 13F2. The annual report 3. The proxy 4. Form 13D |
Answer: 4
Information on the largest shareholders of an SEC reporting company may be found in three places -- a 13D, a 10-K (annual report), and a proxy. A 13D filing is triggered when a person or group of persons acquires ownership exceeding 5% of a company's equity. Since this filing is required within 10 days of the transaction, it is the most recent source of information. The annual report or 10-K and the proxy provide information on the largest shareholders, but are filed only once a year. A 13F filing is made by institutional investment managers who exercise investment discretion over at least $100,000,000 in equity securities. This filing discloses its equity securities holdings and would only be a good source of information for obtaining all of the holdings of an individual money manager |
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A preliminary proxy statement must be filed with the SEC: 1. 10 business days prior to the date the definitive proxy is sent to shareholders2. No later than the day the definitive proxy is first sent to shareholders 3. Within 10 days of the date the definitive proxy is first sent to shareholders 4. 10 calendar days prior to the date the definitive proxy is sent to shareholders |
Answer: 4
In certain circumstances, a preliminary proxy statement is required to be filed with the SEC at least 10 calendar days prior to the date the definitive proxy is sent to shareholders. A definitive proxy statement must be filed with the SEC no later than the date it is first sent to shareholders. (74316) |
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2. Form 10-K 3. Form 13D 4. Form 5 |
Answer: 1
Form 4 is filed by insiders of a corporation when they buy or sell shares of their company. The form must be filed no later than the second business day following the transaction. Form 5 is filed annually by insiders. Form 10-K is filed annually, while 10-Q is filed quarterly, and are the company's filings with the SEC. Form 13D is used to report acquisitions of more than 5% by individuals. [61289] |
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You have been asked to research the largest shareholders of a company, since your firm is representing the buy-side in an M&A transaction. Which TWO of the following forms should you review? I. A 13D II. A 13F III. A 10-Q IV. A proxy 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 2
Information on the largest shareholders of an SEC reporting company may be found in three places; a 13D or 13G filing, a 10-K (annual report), and a proxy. A 13D filing is triggered when a person or group of persons acquires ownership exceeding 5% of a company's equity. (The filing is required within 10 days of the transaction.) Schedule 13G is an alternative to Schedule 13D. It is usually filed by institutional investors (such as an investment company) that have no intention to influence or control the issuer. Although a 10-K provides information on the largest shareholders, this information is not found in a 10-Q. Rule 13f-1 of the Securities Exchange Act of 1934 requires quarterly filings (13F) by institutional investment managers who exercise investment discretion over at least $100,000,000 in equity securities. This filing discloses all of its equity securities holdings. A 13F is a good source of information to find out how many shares of all companies are owned by an investment manager such as a hedge fund. |
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Which of the following statements is TRUE concerning disclosure of the attendance of the directors on the board? 1. Disclosure is required of any director who attended less than 50% of the meetings.2. Disclosure is required of any director who attended less than 75% of the meetings. 3. Disclosure is required of the attendance record of all independent directors. 4. Disclosure is required of the attendance record of all directors. |
Answer: 2
Under Regulation S-K, an issuer is required to disclose the following information in its annual filing with the SEC. This information is usually found in the company's annual proxy statement to shareholders. * The number of meetings of the BOD, including regular and special meetings held during the last fiscal year* The name of each director who, during the last fiscal year, attended less than 75% of the meetings |
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Westwood Electric Company is making a cash tender offer for the outstanding shares of the Tecova Corporation. If an investment banking representative wants to review the recommendations of the board of directors, she should examine the: 1. Proxy statement2. Schedule TO 3. 8-K filings 4. Schedule 14D-9 |
Answer: 4
SEC Rule 14d-9 concerns recommendations, or solicitations by the subject company and other parties. The rule requires Schedule 14D-9 to be filed by certain persons such as: * The subject company, any officer or director, or employee of the affiliate of the subject company* Any owner of any security of the subject company, the bidder, or any affiliate of the bidder * Any other person who makes a solicitation or recommendation to shareholders on behalf of any of the above Schedule 14D-9 is filed with the SEC. A letter from the board of directors addressing its recommendation concerning the tender offer would be attached as one of the exhibits of the Schedule 14D-9. [60922] |
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Which TWO of the following investors must file Form 13G? I. A portfolio manager who has controlled more than 5% of the outstanding shares of a publicly traded company through the end of a calendar year II. An insider who intends to sell restricted stock III. An investor whose ownership level first exceeded 10% of the outstanding shares of a publicly traded company in the previous calendar month IV. A publicly traded company that intends to acquire another publicly traded company 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 3
Form 13G is filed within 45 days of the end of the year. It is an alternative to 13D, and is usually filed by institutional investors who have no intention of influencing or controlling the issue. Any person who becomes the beneficial owner of more than 5% of any class of equity security registered under the Securities Exchange Act of 1934 must file a statement of beneficial ownership on Schedule 13D with (i) the issuer, (ii) each exchange on which the security trades, and (iii) the SEC. The report must be filed within 10 days after the acquisition. Form 13G is also filed within 10 days of the end of the month in which an investor's ownership first exceeds 10%. [60671] |
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Three hedge funds, each owning 3% of a company, are disappointed in the current management and want to form a group to have the company seek strategic alternatives. Which of the following statements is TRUE? 1. The group is required to file Form 13D2. The group is required to file Form 13F 3. The group is required to file Form 3 4. This event does not trigger an SEC filing requirement |
Answer: 1
A 13D filing is made within 10 days of a person, or group of persons, acquiring ownership of more than 5% of a company's equity. Since the three investors forming a group will own more than 5% of the equity, they are required to file a 13D. A group is defined as persons agreeing to act together for the purpose of acquiring, holding, voting, or selling the equity securities of an issuer. (74318) |
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A managing director is working with a client and needs your assistance in preparing financial ratios. The company will be filing its 10-Q in a few weeks, but has just issued a press release with its third-quarter results. To find the most up-to-date financial statements, the investment banking representative would review the: 1. Most recent 8-K filing2. Most recent proxy statement 3. Most recent annual report 4. Last quarter's 10-Q |
Answer: 1
An event that materially affects the issuer's financial condition, or share price, requires a report to be submitted to the SEC on Form 8-K. One of these events includes the results of its operations and financial condition. The company would include its press release with its financial statements as an exhibit to the 8-K filing. The exhibit would be included with the company's next 10-Q filing. [61205] |
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You are seeking information on insider sales. Which of the following forms would be the best source for such information? 1. Form 42. Form 10-K 3. Form 10-Q 4. Form 13D |
Answer: 1
Form 4 is filed by insiders of a corporation when they buy or sell shares of their company. The form must be filed no later than the second business day following the transaction. Form 10-K is filed annually while 10-Q is filed quarterly and is the company's filing with the SEC. 13D is used to report acquisitions of more than 5% by individuals. [61290] |
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A definitive proxy statement must be filed with the SEC: 1. 10 business days prior to being sent to shareholders2. 10 calendar days prior to being sent to shareholders 3. No later than the day it is first sent to shareholders 4. Within 10 days of the date it is first sent to shareholders |
Answer: 3
A definitive proxy statement must be filed with the SEC no later than the date it is first sent to shareholders. In certain circumstances, a preliminary proxy statement is also required to be filed with the SEC at least 10 days prior to the date the definitive proxy is sent to shareholders. [61313] |
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Which TWO of the following documents contain information on executive stock options? I. The shareholder proxy II. Form S-1 III. Form 144 IV. 10-K footnotes 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 2
Information on executive stock options can be found in the shareholder proxy and in the footnotes of the annual report (Form 10-K). [60597] |
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2. Inky Foods must publicly release the earnings figures within 24 hours 3. Belinda now has a fiduciary responsibility to abstain from the use of the information until it is disseminated 4. It is not considered material information, as long as the earnings match industry expectations |
Answer: 2
According to Regulation FD, issuers are barred from selectively providing nonpublic information to securities professionals. If a company official intentionally provides such information to a securities professional, a simultaneous disclosure to the public is required. If the disclosure was unintentional, the company has 24 hours to make a public announcement of the information. Fiduciary responsibilities exist for individuals such as the company's accountants, lawyers, and investment bankers. These individuals are required to keep material nonpublic information confidential. Fiduciary responsibilities do not extend to research analysts unless there are unique circumstances -- for example, the analyst or his spouse is a member of the board of directors of the company. [60683] |
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An investment banking representative is concerned with the impact of stock option compensation paid to senior executives on the firm's future profitability. Which of the following documents would be the most useful to research? 1. Form 8-K2. Form 10-K 3. Form 4 4. The proxy statemen |
Answer: 4
The most complete information regarding the impact of stock option compensation paid to senior executives is found in the firm's proxy statement. Annual reports on Form 10-K and registration statements might simply refer you to the information in the proxy statement. |
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All of the following information may be found in a Schedule 13D EXCEPT: 1. Whether the filer is an individual or a group2. The name of the financial institution that is providing the funds for the purchase 3. The number of shares that are currently being held by the filer 4. A standstill agreement |
Answer: 2
A 13D filer is required to provide certain information such as: * The security and issuer* The identity and background of the filer, which may be an individual or a group * The source and amount of funds, or considerations that were used for the purchase. This section will indicate if the funds used to purchase the securities were borrowed, or came from an existing cash position of the filer. * The purpose of the transaction. This important section indicates if the filer wants to acquire the company, or is purchasing the shares as an investment. * The number of shares and the percentage ownership of the filer * Contracts or relationships regarding the securities of the issuer, e.g., a standstill agreement * Any material to be filed as exhibits, e.g., a merger agreement or a tender offer agreement Although the source of the funds is disclosed, the name of the financial institution providing the funds is not a required disclosure. The filer is required to update the schedule promptly for any material changes. [61203] |
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2. Previous proxy statements filed with the SEC 3. Previous corporate finance documents filed with FINRA 4. Previous 10-K filings with the SEC |
Answer: 2
Since shareholders will need to vote on the proposed merger, a proxy statement must be issued. Issuers will usually hire a financial adviser to write a fairness opinion, ensuring that the price for the target company is fairly valued. This document will include valuation metrics that are relevant for the sector, a comparison with other companies, and valuations of recent M&A transactions in the sector. [61142] |
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A large media company is planning to spin off its cable television division. You have been asked to review comparable transactions related to this market. Which of the following choices is the BEST source of information about previous transactions in the sector? 1. Form S-4 filings2. Form S-1 filings 3. Form 10-K filings 4. Proxy statements |
Answer: 4
A company that is planning a spinoff will hold a special meeting for shareholders to vote on the proposal. The important information relevant to the transition will be contained in the proxy statement. [60946] |
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You are seeking information on insider purchases. Which of the following filings would be the BEST source for such information? 1. Form 32. Form 4 3. Form 5 4. Schedule 13D |
Answer: 2
Form 4 is filed by any insider of a corporation who buys or sells shares of his company. The form must be filed no later than the second business day following the transaction. Form 3 is filed when a person initially becomes an insider. Form 5 is an annual filing by insiders. An insider is defined as any person who is an officer, director, or owner of more than 10% of the equity. The filings apply to insiders of an SEC registered company. Schedule 13D is used to report acquisitions of more than 5% of the equity of a company. [61291] |
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An issuer is required to furnish an annual proxy statement to shareholders at least: 1. 10 calendar days prior to the meeting2. 20 calendar days prior to the meeting 3. 20 business days prior to the meeting 4. 30 calendar days prior to the meeting |
Answer: 3
According to SEC Rule 14c-2, an issuer is required to furnish an annual proxy statement at least 20 calendar days prior to the meeting date. An exception to this rule is granted if the issuer sends shareholders a notice of Internet availability at least 40 days prior to the meeting date. The notice will identify to shareholders how they may obtain the proxy materials free of charge through a Web site. [61376] |
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2. ADV 3. 13G 4. 10-Q |
Answer: 3
Information on the largest shareholders of an SEC reporting company may be found in three places -- a 13D or 13G filing, or a 10-K (annual report). A 13D filing is triggered when a person or group of persons acquires ownership exceeding 5% of a company's equity. (The filing is required within 10 days of the transaction.) Schedule 13G is an alternative to Schedule 13D. It is usually filed by institutional investors (such as an investment company) that have no intention to influence or control the issuer. Although a 10-K provides information on the largest shareholders, this information is not found in a 10-Q. In order to register as an investment adviser with the SEC, the applicant must file Part 1 and Part 2 of Form ADV with the SEC. Rule 13f-1 of the Securities Exchange Act of 1934 requires quarterly filings (13F) by institutional investment managers who exercise investment discretion over at least $100,000,000 in equity securities. This filing discloses its equity securities holdings. [99889] |
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The Trust Indenture Act of 1939 establishes: 1. A legal relationship between a municipal issuer and a trustee for the benefit of bondholders2. A legal relationship between a corporate issuer and a trustee for the benefit of bondholders 3. The requirements for call provisions in nonexempt issues 4. Prospectus requirements |
Answer: 2
The Trust Indenture Act relates to the issuance of corporate debt instruments. It requires that a trustee be appointed to act in the bondholders' interest. [60941] |
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Which of the following description best defines the term duration? 1. A measure of a fixed-income security's relative interest-rate risk2. A measure of a fixed-income portfolio's average yield 3. The period before a fixed-income security will be called 4. The measure of volatility that compares an equity security to the S&P 500 Index |
Answer: 1
Duration measures price sensitivity for fixed-income securities given changes in interest rates. For example, a bond with a seven-year duration would experience a 7% change in price for every 1% change in market interest rates. [60704] |
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One of your investment banking clients has a significant amount of cash on hand. The client has sought your firm's advice regarding income-producing equity investments. Which TWO of the following investments pay a dividend but are NOT eligible for the corporate dividend exclusion? I. Common stock II. A money-market fund III. Preferred stock IV. A real estate investment trust 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 4
Corporations are allowed an exclusion on dividends received from investments in common and preferred stock. Real estate investment trusts (REITs) make distributions in pretax dollars. The payout from a REIT normally results from collections of rent or mortgage interest. Money-market fund dividends are distributions of interest earned on short-term debt securities. [60637] |
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A company has a $100,000,000 bond outstanding with an 8.5% coupon paid semiannually. The bond is callable in five years at 104.5% of par and in nine years at 103.5% of par. How much capital is required if the issuer wants to call in the bond at the earliest call date? 1. $108,000,000 |
Answer: 2
If the bond is called at the earliest call date, the issuer would be required to pay 104.5% of par plus the last semiannual interest payment. The principal payment is $104,500,000 ($100,000,000 x 104.5%) and the last interest payment is $4,250,000 ($100,000,000 x 8.5% = $8,500,000 / 2). |
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Which of the following risks is considered unique to an investor holding a CMO? 1. Prepayment risk2. Credit risk 3. Interest-rate risk 4. Reinvestment risk |
Answer: 1
The risk that an investor will receive her principal earlier than projected (prepayment risk) instead of at one time is the most important risk concerning mortgage-backed securities such as CMOs. Although all fixed-income securities will have interest-rate risk, prepayment risk is unique to CMOs. Historically, CMOs have been highly rated, due to the underlying mortgages backing these securities. This risk did increase significantly in 2008. [60712] |
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Which of the following statements is TRUE concerning the tax treatment of CMOs? 1. The interest is fully taxable.2. The principal is fully taxable. 3. The interest is exempt from federal tax but subject to state and local taxes. 4. The interest and principal are exempt from state and local taxes. |
Answer: 1
The interest received from collateralized mortgage obligations (CMOs) is fully taxable (federal, state, and local taxes). The principal payments are considered a return of capital and are not taxable. Investors receive their principal payments each month instead of receiving the entire amount of principal at maturity. [60713] |
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Brawn subordinated debentures have a conversion price of $40. The bonds are selling in the market for 91% of par value. If the common stock is trading at $36, which TWO of the following statements are TRUE? I. The stock is selling at a discount to parity with the bond. II. The stock is selling at a premium to parity with the bond. III. A profitable arbitrage opportunity exists by liquidating the stock after converting the bond. IV. Liquidating the stock after converting the bond would not be currently profitable. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 2
The conversion ratio, which is not given, is found by dividing the par value of the bond ($1,000) by the conversion price ($40). This equals 25 to 1 ($1,000 / $40). The market price of the common stock is $36 per share. The value of the stock upon conversion is $900 ($36 x 25); therefore, the stock is selling at a discount to parity with the bond. If the bonds were converted and the stock was then sold at the market price, the investor would have a loss. [60693] |
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When fixed-income securities that are securitized are issued, they are backed by which TWO of the following assets? I. A company's inventory II. Credit card receivables III. Accounts receivable IV. Home equity loans 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 4
When fixed-income securities are issued, they may be backed or secured by many different types of assets, such as pools of credit card receivables, home equity loans, auto loans, or student loans. These assets are pooled and the income to bondholders is contingent upon the payments made by the borrowers. These securities are referred to as asset-backed securities. Bonds may also be issued backed by pools of mortgage loans made to homeowners. Bonds that are securitized are not usually issued backed by pools of a company's current assets, such as inventories and accounts receivable. [61325] |
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2. 5.60% 3. 6.25% 4. 8.50% |
Answer: 3
The current yield is found by dividing the annual interest payment by the current market price. The bonds pay interest of $50 per year. The bonds are currently trading at a 20% discount to par; therefore, the bonds are priced at 80% of par, or $800 ($1,000 x .8). The current yield is 6.25% ($50 / $800). The fact that the bond will mature in 12 years is not necessary to find the current yield, although it is needed to find the yield to maturity. [60700] |
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As yields decline, the prices of long-term maturity bonds increase at a faster rate than the prices of intermediate maturity, or short-term maturity bonds. This condition is known as: 1. Duration2. Positive convexity 3. Negative convexity 4. Laddering a portfolio |
Answer: 2
For a given yield change, the prices of long-term bonds are more volatile than short-term bonds. The relationship between yield and price is not linear; the term that describes this phenomenon is convexity. Positive convexity describes the condition where, as yields decline, prices increase at a faster rate for long-term bonds as compared to intermediate or short-term bonds. Duration measures price sensitivity for fixed-income securities given changes in interest rates. [60943] |
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If a company issues a PIK bond, where does the interest show up on its financial statement? 1. It is added to other income2. It is subtracted from other income 3. It is added to interest expense 4. It is subtracted from interest expense |
Answer: 3
A Payment In Kind (PIK) bond pays interest in both a cash coupon and additional principal. It is usually a type of mezzanine financing that allows the issuer to conserve cash and pay bondholders additional principal instead of a higher cash coupon rate. Although the PIK interest is not paid in cash, the accrued interest is added to the interest expense on the income statement. Subject to certain limitations, this allows the issuer to claim an interest deduction on the payments, thereby reducing its taxes. (74324) |
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Which of the following choices is an advantage of a stock appreciation right (SAR) as compared to employee stock options? 1. Stock appreciation rights are granted at a lower exercise price.2. Stock appreciation rights do not require the employee to put up funds. 3. Stock appreciation rights have shorter vesting schedules. 4. Stock appreciation rights do not have an expiration date. |
Answer: 2
Stock appreciation rights do not require employees to put up funds. The employee has the right to receive the difference between the current market value of the company's stock and a fixed price. Employee stock options require the payment of funds in order to acquire the stock. Both types of securities are similar in that the instrument has a strike price or grant price, a vesting schedule, and an expiration date. [60938] |
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If an issuer defaults on one of its bond issues, which of the following would provide other creditors with the BEST type of protection? 1. A sinking fund2. Call provisions 3. A positive covenant 4. A cross default clause |
Answer: 4
A cross default clause in a bond indenture would provide protection to other creditors by triggering a default if any of the bonds issued by the same company defaulted. A sinking fund provision requires the issuer to make payments to a trustee in order to repurchase outstanding bonds. This is done so that, by the time the final maturity date arrives, the issuer has already paid off a certain percentage of the issue. A subordination clause would restrict the issuer's future borrowings by stating that all future lenders are subordinate to existing bondholders. Covenants are protective agreements that the borrower pledges for the protection of the lender. Covenants can be positive, which require certain actions on the part of the issuer, or negative, which limit certain actions. An example of a positive covenant is a situation where an issuer is required to maintain a minimum amount of working capital or debt coverage ratio, while a negative covenant would restrict an issuer from selling assets or issuing additional debt. (74325) |
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A bank sells its credit card receivables to a trust. If the trust creates a bond backed by these receivables: 1. This is an asset-backed security2. This is a collateral trust bond 3. The bank is responsible for paying back the credit card receivables 4. This type of security is backed by the FDIC |
Answer: 1
Securities that are secured by mortgages, car loans, and credit card receivables are called asset-backed securities. [60944] |
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2. The shares may be traded in the U.S. as a sponsored ADR. 3. The shares may be traded in the U.S. but would not be known as an ADR. 4. The shares may not be traded in the U.S |
Answer: 1
An American Depositary Receipt may be sponsored by the company whose common stock underlies the ADR, or it may be unsponsored. In a sponsored ADR, the company pays a depositary bank to issue shares in the U.S. Many of the largest ADRs are sponsored. This allows the company to raise capital in the U.S. and list the ADR on the NYSE, or Nasdaq. In an unsponsored ADR, the company does not pay for the cost associated with trading in the U.S. A depositary bank issues the ADR. In an unsponsored ADR, the issue will trade in the OTC market, and will usually be quoted on the Pink Sheets. [61221] |
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MX Radio has issued a PIK bond that pays cash interest of 10% and 2% PIK interest. An investor who purchased this security with a par value of $100,000 would receive: 1. $12,000 of cash interest that is taxable as ordinary income2. $10,000 of cash interest and $2,000 of principal, both of which are all taxed as ordinary income 3. $10,000 of cash interest and $2,000 of principal with, only $10,000 being taxed as ordinary income 4. $10,000 of cash interest and $2,000 of principal, with $10,000 taxed as ordinary income and $2,000 taxed as a capital gain |
Answer: 2
A Payment In Kind (PIK) bond may pay interest in both a cash coupon and additional principal. It is usually a type of mezzanine financing that allows the issuer to conserve cash and pay bondholders additional principal instead of a higher cash coupon rate. In some cases, the issuer has the option to pay cash interest or PIK interest. Although this investor is only receiving $10,000 in cash, the IRS treats the additional principal of $2,000 taxable as ordinary income. This is similar to the tax consequence on a zero-coupon, where no interest is received until maturity, but the investor is taxed each year based on an accreted amount of interest. [61334] |
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A corporation's long-term debt would most likely be called when interest rates: 1. Rise above the bond's nominal yield2. Rise above the bond's yield to maturity 3. Fall below the bond's nominal yield 4. Fall below the bond's yield to maturity |
Answer: 3
The indenture between the issuer and bondholder for long-term debt often contains a call provision that allows the issuer, at its option, to redeem the bonds before maturity. Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline. The issuer may then refinance the debt at a lower rate of interest. For instance, if an issuer's outstanding bond is paying a coupon rate (nominal yield) of 9% at a time when similar bonds are paying only 5%, it can reduce its interest costs by calling in the 9% bonds and issuing new ones at 5%. As rates decline, the bond's yield to maturity, or yield to call, also would decline. [60698] |
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All of the following statements are TRUE regarding warrants EXCEPT: 1. Warrants are frequently attached to a new issue of stock or bonds2. Warrants may trade on an exchange or in the OTC market 3. Warrants receive dividends when declared by the board of directors 4. Some warrants are perpetual and have no expiration date |
Answer: 3
The holder of a warrant would not be entitled to dividends paid on the underlying stock. Warrants allow an investor to purchase the stock of the same company at a specific price, for a specific period. Some warrants may be perpetual. They are frequently issued attached to stock or bonds and, when detached, will trade either on an exchange or in the OTC market. [60649] |
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2. Global Depositary Receipt 3. Eurodollar bond 4. Eurobond |
Answer: 2
A Global Depositary Receipt (GDR) allows an issuer to raise capital internationally. It is an offering of a security that is sold in two or more markets. The GDR may be denominated in U.S. dollars, or any other currency. If this security was being offered in the United States, it would be referred to as an American Depositary Receipt. [60939] |
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A customer owns 500 shares of Oakleaf Corporation. The corporation is engaging in a rights offering. The terms of the offering are 10 rights plus $20 to buy one new share of stock. If the customer wants to subscribe to the rights offering, how many additional rights would he need to buy 100 shares of stock? 1. 502. 100 3. 500 4. 1,000 |
Answer: 3
The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wants to subscribe to 100 shares of stock, the investor would need 1,000 rights (10 rights x 100 shares = 1,000 rights). The investor owns 500 shares of stock and will receive 500 rights from the corporation (one right for each share owned). If the customer wants to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 500 rights. [60647] |
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When asset-backed securities are sold to investors, they are backed by all of the following choices, EXCEPT: 1. Credit card receivables2. Car loans 3. Home equity loans 4. Property, plant, and equipment |
Anwer: 4
When fixed-income securities are issued, they may be backed or secured by many different types of assets, such as pools of credit card receivables, home equity loans, auto loans, or student loans. These assets are pooled, and the income to bondholders is contingent upon the payments made by the borrowers. They are referred to as asset-backed securities. Asset-backed securities are not usually backed by fixed assets, such as plant and equipment. (74328) |
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2. By dividing the annual income by the current price 3. To the final maturity date 4. To the call date |
Answer: 4
The yield for a bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that would be earned if the bonds were called at the call price, rather than held to the maturity date. Industry rules require broker-dealers to quote the lower estimate of the yield to call or the yield to maturity. If the bond had been selling at a discount, it would have been quoted on a yield to maturity basis. If a bond is selling at a premium and callable at a premium, the yield may be to the final maturity or the call date, whichever is less. In each case, the investor would receive a quote based on the most conservative scenario. This is referred to as the yield to worst. [60942] |
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A method of voting that gives smaller, less substantial stockholders a greater degree of voting power over the larger, more substantial stockholders is: 1. Statutory voting2. Cumulative voting 3. Voting by proxy 4. Special majority voting |
Answer: 2
A method of voting that gives larger, more substantial stockholders a greater degree of voting power over smaller, less substantial stockholders is statutory voting. Under statutory voting, each stockholder has one vote per share, per election. For example, if a corporation is electing three directors, and a shareholder owns 100 shares, the shareholder could cast 100 votes in each election. Cumulative voting permits shareholders to concentrate their votes for one favored candidate. For example, if a corporation is electing three directors and a shareholder owns 100 shares, that shareholder could cast 300 votes for one director, potentially having a larger influence on that one election. [61206] |
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A major difference between futures contracts and forward contracts is: 1. Forward contracts do not relate to commodities and futures contracts do2. An investor may not be short in a futures contract 3. Investors may not offset forward contracts without permission 4. Futures contracts may not be offset without permission |
Answer: 3
One of the major differences between futures contracts and forward contracts is the ability to offset each position. In a futures contract, the investor may offset the position at any time before the contract is assigned; however, in a forward contract, the agreement between the two parties may not be assigned without the permission of the other party. [60760] |
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If an options contract is exercised, which of the following statements is TRUE? 1. The buyer of a call must deliver the underlying stock.2. The buyer of a put will receive the underlying stock. 3. The seller of a put will be required to buy stock. 4. The seller of a call will lose the premium. |
Answer: 3
If a put option is exercised, the buyer has the right to put (deliver) the underlying stock to the seller at an agreed-upon price. The seller or writer has the obligation to accept delivery of the stock at the exercise or strike price. [60755] |
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Your firm is the lead underwriter for a Jupiter Oil Exploration debt offering. Jupiter is issuing $200 MM of 5 3/4% bonds, due July 1, 2026. The bonds are priced at 99 1/2% of par value. An institutional client would like to know the approximate yield to maturity on the bond. You would reply that the yield would be: 1. 5 1/4%2. Less than 5 3/4% 3. 5 3/4% 4. Greater than 5 3/4% |
Answer: 4
The 5 3/4 % bonds are priced at a discount (99 1/2%) to par value ($1,000). An investor who purchases the bonds at the offering price, and who holds the bonds to maturity, would receive the par value of $1,000. Additionally, the investor's semiannual interest received is also assumed to be reinvested at prevailing rates. The interest earned on interest, coupled with the increase in the value of the bond, will provide a yield to maturity that is greater than 5 3/4%. [60699] |
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The Electro Corporation intends to raise additional funds from its existing shareholders to avoid diluting their interest in the company. The corporation would be engaging in a: 1. Rights offering2. Secondary distribution 3. Primary offering 4. Private placement |
Answer: 1
The corporation would be engaging in a rights offering. It will issue rights to all existing shareholders of common stock enabling them to purchase a pro rata portion of the new stock. This will allow them to maintain the same level of equity ownership in the company. The subscription price is set at a discount from the current market price of the stock. If the offering is successful, the issuer is able to complete the offering without using an underwriter and, therefore, it may be cheaper. [60646] |
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A provision in a bond indenture that would protect a bondholder if the issuer defaults on any bond in its debt structure is referred to as a: 1. Sinking Fund2. Cross default clause 3. Subordination clause 4. Positive covenant |
Answer: 2
A cross default clause in a bond indenture would provide protection to bondholders of this security by triggering a default if any of the bonds issued by the same company defaulted. A sinking fund provision requires the issuer to make payments to a trustee in order to repurchase outstanding bonds. This is done so that, by the time the final maturity date arrives, the issuer has already paid off a certain percentage of the issue. A subordination clause would restrict the issuer's future borrowings by stating that all future lenders are subordinate to existing bondholders. Covenants are protective agreements that the borrower pledges for the protection of the lender. Covenants can be positive, which require certain actions on the part of the issuer, or negative, which limit certain actions. An example of a positive covenant is when an issuer is required to maintain a minimum amount of working capital or debt coverage ratio, and a negative covenant would restrict an issuer from selling assets or issuing additional debt. [61323] |
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What is the correct order of dates, from earliest to latest, relating to the payment of a cash dividend to a shareholder of a public company? I. The record date II. The declared date III. The payment date IV. The ex-dividend date 1. I, II, III, IV2. II, I, IV, III 3. II, IV, I, III 4. IV, II, I, III |
Answer: 3
The board of directors of a company determines the declaration, record, and payable dates. The ex-dividend date is determined by the appropriate regulator and is a function of the settlement date. First the board declares a dividend, to shareholders of record as of a later date, which is payable on a certain date after the record date. The ex-dividend date is two business days prior to the record date. [99870] |
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A company has a $200,000,000 bond outstanding with an 8% coupon paid semiannually. The bond is callable in four years at 103.5% of par and in seven years at 102.5% of par. How much capital is required if the issuer wants to call in the bond at the earliest call date? 1. $200,000,0002. $207,000,000 3. $215,000,000 4. $223,000,000 |
Answer: 3
If the bond is called at the earliest call date, the issuer would be required to pay 103.5% of par plus the last semiannual interest payment. The principal payment is $207,000,000 ($200,000,000 x 103.5%) and the last interest payment is $8,000,000 ($200,000,000 x 8% = $16,000,000 / 2). [99884] |
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Which of the following is included when calculating a company's public float? 1. The number of shares held by institutional and retail investors2. The number of shares held by institutional investors, retail investors, and company insiders 3. The number of shares of restricted stock only 4. The number of shares of treasury stock only |
Answer: 1
The public float of a company is the number of shares held by public investors, both retail and institutional. It excludes stock owned by affiliated persons of a company and is found by subtracting restricted stock from the number of outstanding shares. By contrast, market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, restricted shares, and shares held by insiders, but do not include treasury stock (shares repurchased by the company). (71280) |
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2. M2 money supply 3. New building permits 4. CPI |
Answer: 4
The CPI (Consumer Price Index) is not considered a leading economic indicator. [60514] |
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If inflation and unemployment are low, but energy prices are expected to rise, what results would be expected of stock prices and actions of the FRB? 1. Stock prices would peak and the money supply would loosen.2. Stock prices would peak and the money supply would tighten. 3. Stock prices would correct themselves and the money supply would loosen. 4. Stock prices would correct themselves and the money supply would tighten. |
Answer: 2
Low unemployment and lower-than-expected inflation generally signal the peak of a market. Although the inflation numbers may be low, expectations of higher inflation may cause the FRB to reduce the money supply to keep inflation in check. [60611] |
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Which of following actions by the Federal Reserve Board would result in a decrease in the money supply? 1. The purchase of securities in the open market2. The sale of securities in the open market 3. A decrease in the discount rate 4. A decrease in reserve requirements |
Answer: 2
The sale of securities by the Federal Reserve Board in the open market would result in the withdrawal of reserves from the banking system and result in a decrease in the money supply. All of the other actions by the FRB would result in an increase in the money supply. [60690] |
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Which of the following choices is NOT considered to be a leading economic indicator? 1. Plant and equipment orders2. Industrial production 3. Building permits 4. Index of consumer expectations |
Answer: 2
Industrial production is a coincident business cycle indicator; the other choices are leading indicators. The following is a list of leading economic indicators. * Average workweek (manufacturing)* Initial unemployment claims * New orders for consumer goods and equipment * Vendor performance * Plant and equipment orders * Building permits * Interest rate spreads, 10-year Treasury bonds less federal funds * Stock prices (S&P 500) * The Money Supply (M2) * Index of consumer expectations |
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A reduction in the rate of inflation is known as: 1. Stagflation2. Deflation 3. Disinflation 4. Stagnation |
Answer: 3
A reduction in the rate of inflation is known as disinflation. This should not be confused with deflation which occurs when prices and business activity decline. Stagnation is a period of no economic growth, or economic decline. Stagflation is a combination of inflation and stagnation. This occurs when the economy is stagnant but prices are rising. [60951] |
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Which of the following measurements is a lagging economic indicator? 1. Manufacturing and trade sales2. The money supply 3. The Index of Industrial Production 4. The average duration of unemployment |
Answer: 4
The average duration of unemployment is considered a lagging indicator. The money supply is a leading indicator. Manufacturing and trade sales and the Index of Industrial Production are coincidental indicators. [60691] |
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All of the following choices are leading economic indicators EXCEPT: 1. New orders for consumer goods and services2. Manufacturing and trade sales 3. The S&P 500 Stock Index 4. Money supply |
Answer: 2
The manufacturing and trade sales figure is a coincident indicator. The others are leading indicators. [60563] |
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Windsor Corporation has 7,000,000 shares of common stock ($.01 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price is $20. The market capitalization of Windsor Corporation's common stock is: 1. $130,000,0002. $140,000,000 3. $100,000,000 4. $90,000,000 |
Answer: 4
Market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, and restricted shares held by insiders, but does not include treasury stock (shares repurchased by the company). Therefore, there are 4,500,000 shares outstanding at a $20.00 market price for a total of $90,000,000. [60652] |
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Which of the following choices is considered a leading economic indicator? 1. Changes in wholesale prices of raw materials2. Industrial production 3. Average duration of unemployment 4. Commercial and industrial loans outstanding |
Answer: 1
Choice (2) is considered a coincident indicator, while (3) and (4) are lagging indicators. [60492] |
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Recommendations to a customer: 1. Must be approved in advance by a principal2. Must be suitable on the basis of the facts disclosed regarding the customer's other holdings and financial situation 3. Must be approved in advance by a principal and must be suitable on the basis of the facts disclosed regarding the customer's other holdings and financial situation 4. Are not covered by FINRA rules |
Answer: 2
Recommendations to customers must be suitable based on the customer's financial means and investment objectives. Once the registered representative has determined the investor's status, recommendations may be made without requiring the advance approval of a principal of the firm (unless the firm has a policy of requiring such advance approval). FINRA does not require a principal to approve recommendations in advance. [60661] |
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List the following interest rates from the lowest to the highest rate charged. I. Broker loan rate II. Prime rate III. Discount rate IV. Federal funds rate 1. I, II, III, IV |
Answer: 3
Federal Funds Rate -- The rate charged by commercial banks with excess reserves on overnight loans Discount Rate -- The rate charged by the Federal Reserve Board on loans to member banks Broker Loan Rate --, The rate charged on loans to broker-dealers on funds used by clients for margin transactions, also referred to as the broker call rate Prime Rate -- The rate banks charge their best customers on loans Currently, the federal funds rate is the lowest of the four listed, followed by the discount rate, broker loan rate, and the prime rate. Prior to 2003, the discount rate was lower than the federal funds rate, but there is no choice listed in this question with that being the correct order. (72512) |
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A company issues 2,000,000 shares of common stock with a $1.00 par value at a public offering price (POP) of $11. If the total underwriting fee is 77 cents and the selling concession is 46 cents, what is the increase in the company's net worth? I. $11,000,000 II. $19,540,000 III. $20,460,000 IV. $22,000,000 |
Answer: 3
A company's net worth or shareholder equity will increase when it issues common stock. The amount of the increase is found by taking the net proceeds received per share, $10.23 ($11.00 - 77 cents), and multiplying it by the number of shares being issued (2,000,000). The net worth will increase by $20,460,000 ($10.23 x 2,000,000). There is no need to subtract the selling concession of 46 cents since it is included in the total underwriting fee. |
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When do you use 13E-3 and what is the filing deadline? |
Use: Going Private
Filing Deadline: concurrently with a tender offer, registration statement, or other privatization document |
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When do you use Form 3 and what is the filing deadline? |
Use: Individual becomes corporate insider
Filing Deadline: within 10 business days |
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When do you use Form 4 and what is the filing deadline? |
Use: Corp insider changes holdings
Filing Deadline: within 2 business days |
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When do you use Form 5 and what is the filing deadline? |
Use: Corp insider reports transactions in sec's not in public market
Filing Deadline: 45 calendar days of fiscal year end |
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When do you file a 13D and what is the filing deadline? |
Use: Statement of beneficial ownership (e.g. greater than 5%)
Filing Deadline: 10 business days of transaction or any material change to ownership (1%) or intentions |
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When do you file a 13G and what is the filing deadline? |
Use: Passive statement of beneficial ownership (institutions only)
Filing deadline: 45 calendar days of calendar year end when owning 5% If passive investor hits 10%, it must be filed at the end of that month |
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When do you file a 13F and what is the filing deadline? |
Use: Quarterly filing by institutional investment managers ($100mm+ in assets)
Filing deadline: 45 calendar days of quarter end |
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When do you use Form 144 and what is the filing deadline? |
Use: Corp insider getting ready to sell shares
Filing deadline: up to first day of 90‐day period when shares are sold |
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What is a 10Q and what is the filing deadline? |
Use: Quarterly financial report
Filing deadline: Large Accelerated ‐ 40 calendar days |
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What is a 10K and what is the filing deadline? |
Use: Annual financial report
Filing deadline: Large Accelerated ‐ 60 calendar days |
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What is a 8K and what is the filing deadline? |
Use: Current report ‐ newsworthy items
Filing deadline: 4 business days of event |
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What is an S-1? |
Long form registration statement for IPOs |
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What is an S-3? |
Short form registration statement for IPOs |
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What is an S-4? |
Merger registration |
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What is an S-8? |
Employee Benefit plans |
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Who uses S-11? |
REITS |
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What is a 20F and when is the deadline for filing? |
Use: Annual report by foreign issuer
Filing deadline: 6 months after end of fiscal year |
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What is a PRE14A and when is the filing deadline? |
Use: Preliminary Proxy Statement
Filing deadline: Distributed to shareholders and filed with SEC 10 business days prior to definitive proxy
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What is a DEF14A and when is the filing deadline? |
Use: Definitive Proxy Statement
Filing Deadline: Distributed to shareholders and filed with SEC 20 business days prior to shareholder meeting |
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You are assisting on the corporate financing team for Westwind, a multinational transportation company. Westwind takes a minor restructuring charge that includes employee severance and asset write-downs. The extent of these charges would be found by: I. Looking at a footnote to the income statement II. Looking at the operating expenses on the income statement III. Computing the change in retained earnings IV. Reviewing the financing section of the statement of cash flows 1. I and III only2. I and II only 3. III and IV only 4. II and IV only |
Answer: 2
Restructuring charges are reflected on the income statement in the operating section, as well as the footnotes of the 10-K. For example, if in 2007, Westwind took a restructuring charge consisting of asset write-downs and employee severance that resulted in negative operating earnings, this would be reflected in the operating expenses on the income statement and in a footnote to the income statement. The asset write-downs would also impact the balance sheet through lower carrying values of fixed assets. Adjustments would also be made in the operating cash flow section, as asset write-downs do not consume cash. Liabilities related to severance would be reflected on the balance sheet. [60489] |
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Axis Chemicals has contacted your firm with the intention of expanding its capital base through an additional offering of common stock. The company's results show an increase in sales of 33% during the last quarter; however, in the past, the company has been involved in channel stuffing. As an investment banking representative, which TWO areas should be reviewed to gain a better understanding of the company's revenues during the last quarter? I. Footnotes and the disclosure statement of nonrecurring items II. Accounts receivable growth exceeding sales growth III. Days sales outstanding (DSO) IV. Revenue recognition policy 1. I and II2. I and IV 3. II and III 4. III and IV |
Answer: 3
Channel stuffing is a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public. Through channel stuffing, distributors temporarily increase accounts receivables. However, if unable to sell the excess products, retailers will return the excess items to the distributor. The distributor must adjust accounts receivable and its bottom line. Channel stuffing ultimately catches up with the company. It cannot maintain sales at the rate it is stuffing. This is usually done fraudulently to raise the value of the stock. Channel stuffing is illegal. An investment banking representative would want to carefully review a company's financial statements to see if the accounts receivable growth rate exceeds the sales growth rate and analyze any significant changes in a company's Days Sales Outstanding (DSO). [60487 |
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You are conducting the financial analysis of a company. The managing director who asked you to prepare the analysis has just informed you that, during an earnings call, the CFO announced that the company has successfully reduced its working capital. Which of the following actions would cause this to happen? 1. There was an increase in accounts receivable.2. There was a reduction in accounts payable. 3. Debt was issued to fund capital expenditures. 4. Inventory levels have declined. |
Answer: 4
A successful reduction of working capital implies beneficial conditions associated with balance sheet measurements. A company that can carry a lower amount of inventory would realize a successful reduction in working capital. An increase in accounts receivable would increase working capital. If accounts payable declines, the company has paid down these obligations with cash, and working capital would not change. Debt issued to fund capital expenditures would increase long-term liabilities. The investment in capital expenditures would increase fixed assets. Neither of those changes would affect working capital. |
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Company D shows an increase in its deferred tax liability. How will this affect Company D's cash flow statement? 1. Operational cash flow will increase.2. Operational cash flow will decline. 3. Financing cash flow will increase. 4. Financing cash flow will decline. |
Answer: 1
Under generally accepted accounting principles (GAAP), firms record tax expenses based on pretax net income. However, taxable income and pretax net income may differ due to depreciation expenses. Accelerated depreciation would create a deferred tax liability in the early years of an asset's life. This would increase the operational cash flow of the company since it is reporting a higher level of expenses for tax purposes. The amount of additional operational cash flow may be calculated by subtracting the expense for the straight-line method of depreciation from the accelerated depreciation and multiplying this by (1.0 - the tax rate). [60606] |
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A company is considering a project that will generate pretax profits of $6,000,000 over three years. The company wants to record the entire amount this year for tax purposes. If the company's marginal tax rate (MTR) is 39% and its effective tax rate is 33%, it will have a deferred tax asset of: 1. $1,220,0002. $1,320,000 3. $1,560,000 4. $2,000,000 |
Answer: 3
When corporate accounting income and taxable income differ, it may create a deferred tax asset or deferred tax liability on a balance sheet. If taxable income is greater than accounting income, this will create a deferred tax asset. (The opposite result will create a deferred tax liability.) In this example, the company's taxable income exceeds its accounting income. In effect, the company prepaid its taxes on the income. To calculate the deferred tax asset, first find the amount of taxable income that exceeds the accounting income and then multiply this amount by the marginal tax rate (not the effective tax rate). The company should have recorded income of $2,000,000 in each of three years. Taxable income exceeds accounting income by $4,000,000 ($6,000,000 - $2,000,000). The deferred tax asset is $1,560,000 ($4,000,000 x .39). |
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I. The cost of goods sold will increase II. The cost of goods sold will decrease III. The income tax will increase IV. The income tax will decrease 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 2
Last-in, first-out accounting would reflect a higher cost of goods sold. The latest inventory would be produced at a higher cost. Since this inventory is used first, it is more expensive than the first-in inventory method during an inflationary period. Changing the inventory method from FIFO to LIFO would increase expenses, not reduce expenses, since we assume a rising price environment. With this inventory method (LIFO), the company would show a lower EBIT and, therefore, lower taxes. (74336) |
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Two automobile manufacturers have defined benefit pension plans. Company ZBT uses a discount rate of 5% to calculate its pension fund liabilities, and Company SMI uses a 7.5% discount rate to calculate its pension fund liabilities. Which of the following statements is TRUE? 1. Company ZBT is using a more aggressive method of accounting.2. Company SMI is using a more aggressive method of accounting. 3. Company ZBT will have higher pension fund assets. 4. Company SMI will have higher pension fund assets. |
Answer: 2
Aggressive accounting refers to a method of accounting that is used to report lower expenses and higher income, or to overstate assets while understating (not recognizing or lowering) liabilities. In regard to accounting practices for defined benefit pension plans, using a low discount rate is conservative, and using a higher discount rate would be aggressive. The present value calculation is based on dividing the liabilities by (1.0 + discount rate). Therefore, the higher the discount rate, the lower the present value of the fund's long-term liabilities. In order to calculate either company's pension fund assets, you would need to be given the expected return on the assets in the plan. [61378] |
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Cheap Buy, a large electronics retailer is anticipating receiving revenue of $60,000,000 over three years. The company wants to record the entire amount this year for tax purposes. If the company's MTR is 35% and its effective tax rate is 33%, it will have a deferred tax: 1. Asset of $14,000,0002. Asset of $13,000,000 3. Liability of $14,000,000 4. Liability of $13,000,000 |
Answer: 1
When corporate accounting income and taxable income differ, it may create a deferred tax asset or deferred tax liability on a balance sheet. If taxable income is greater than accounting income, this will create a deferred tax asset. (The opposite result will create a deferred tax liability.) In this example, the company's taxable income exceeds its accounting income. In effect, the company prepaid its taxes on the income. To calculate the deferred tax asset, first find the amount of taxable income that exceeds the accounting income and then multiply this amount by the marginal tax rate (not the effective tax rate). The company should have recorded income of $20,000,000 in each of three years. Taxable income exceeds accounting income by $40,000,000 ($60,000,000 - $20,000,000). The deferred tax asset is $14,000,000 ($40,000,000 x .35). [61380] |
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A manufacturing company has the following changes to its financials. Its depreciation expense has decreased, and it has declared and paid a cash dividend. Which TWO of the following statements are NOT TRUE? I. Operating cash flow would increase. II. Operating cash flow would decrease. III. Retained earning would increase. IV. Retained earnings would decrease. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 1
Operating cash flow takes into consideration depreciation in its calculation. A decrease in depreciation will mean less of an add-back when calculating operating cash flow and, therefore, it will decrease. Cash dividends are paid out of retained earnings, which would result in a decrease in retained earnings. Remember to read the question carefully since it is asking which statements are not true. [61388] |
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A company has revenue of $284 million, EBIT of $115 million, debt of $320 million, and equity of $210 million. If the tax rate is 35%, what is the company's return on capital? 1. 14%2. 22% 3. 23% 4. 35% |
Answer: 1
The formula to calculate return on capital or return on invested capital is EBIT or operating income multiplied by the complement of the tax rate, which is then divided by capital or invested capital. Although there are numerous formulas used to calculate capital or invested capital, based on the information given in this question, we would use total debt and equity. $115 million x (1.00 - .35) is equal to $74.75 million. Total capital is $530 million ($320 + $210). The return on capital is 14% ($74.75 million / $530 million). [61401] |
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A company has the following financial information. EBIT = $85 MM The company is planning a follow-on offering in which the company will sell an additional two million shares and selling shareholders will sell an additional two million shares. Using the growth rate given, what will the company's EPS be after the offering? 1. $1.672. $1.83 3. $1.90 4. $2.07 |
Answer: 4
The following steps are needed to calculate the answer. The EBIT would increase to $92.65MM ($85 MM x 1.09). Next, subtract the interest expense of $22.5 MM ($300 x 7.5%) which equals earnings before tax of $70.15 MM ($92.65 MM - $22.5 MM). The net income would be equal to $45.60 MM ($70.15 MM x .65). The number of outstanding shares would increase by two million, not four million, since the selling shareholders' shares are already included in calculating the existing outstanding shares. In other words, only the shares sold by the company increase the shares outstanding. The EPS after the offering is $2.07 ($45.60 MM / 22 MM). Since cash dividends are paid after net income, the amount paid out is not relevant in calculating the revised EPS. [99871] |
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Company ZBT has a $300 MM bond issue with a semiannual 11% coupon outstanding and is approached by an investment banking firm to refinance the issue since interest rates have been declining. If the issue is refinanced at a rate of 7%, what is the impact on the company's net income, assuming a 35% tax rate? 1. An increase of $7.8 MM2. An increase of $4.2 MM 3. An increase of $12 MM 4. A decrease of $4.2 MM |
Answer: 1
The company's interest expense would decline from $33 MM ($300 x 11%) to $21 MM ($300 x 7%). The net income would increase by the decline in interest payments multiplied by the complement of the tax rate. The decline is $12 MM and the complement of the tax rate is .65 (1.00 - 35%); therefore, the net income would increase by $7.8 MM ($12 MM x .65) [99873] |
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MSD Pharmaceuticals has retained earnings at the end of 2009 of $39,095.1 MM and net income in 2009 of $3,325.5 MM. In 2010, the company's net income increased by 8% and at the end of the year it paid a cash dividend of $3,310.7 MM. What is the 2010 ending balance of the company's retained earnings if it has a 35% tax rate? 1. $42,686.6 MM2. $42,405.8 MM 3. $39,375.9 MM 4. $39,109.9 MM |
Answer: 3
The company's tax rate is irrelevant since we are given net income (an after-tax number). The company's net income in 2010 is $3,591.5 MM ($3,325.5 MM x 1.08). The company paid a cash dividend of $3,310.7 MM and, therefore, the difference between the net income and the dividends paid is $280.8 MM ($3,591.5 MM - $3,310.7 MM), which would increase the company's retained earnings. The ending retained earnings balance would be $39,375.9 ($39,095.1 MM + $280.8 MM). [99876] |
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Relevant information to answer the following question is found in Calculate the debt-to-total-capital ratio for Hart Industries. 1. 10%2. 16% 3. 19% 4. 54% |
Answer: 2
There are a few different methods used to calculate the debt-to-total-capital ratio for a company. Two of the most popular methods are using the book value of both the debt and equity, and using the market value of the debt and equity. The information in Exhibit 58 allows us to calculate the market value of the equity, but not the market value of the debt. Since we are given the book or balance sheet value for both debt and equity, we will use this formula. Long- term debt is $93,800,000 and the shareholder equity is $494,500,000. The debt-to-total-capital ratio is 16% ($93,800,000 / [$93,800,000 + $494,500,000]). Remember, the question is asking for the debt-to-total-capital ratio, not the debt-to-equity ratio. A more conservative calculation of debt-to-total-capital would include short-term debt and would equal 24%, which is not one of the choices given. [99893] |
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The Big N, a company listed on the Nasdaq Global Select Market, currently has 4,000,000 shares outstanding. Its net income is currently $8,600,000 and is expected to grow at 16%. If Big N conducts a public offering of 2,500,000 shares of common stock, with the company selling 1,500,000 shares and the shareholders selling 1,000,000 shares, what is the impact of the offering on expected EPS? 1. It would not be accretive or dilutive to EPS.2. It would be dilutive by 96 cents. 3. It would be dilutive by 49 cents. 4. It would be dilutive by 68 cents. |
Answer: 4
The expected net income can be found by multiplying the current amount by the expected growth rate ($8,600,000 x 1.16 = $9,976,000). The EPS would be $2.49 ($9,976,000 / 4,000,000 shares) without the additional shares being offered. The number of outstanding shares would increase by 1,500,000 if the company conducted an offering of additional shares. (The shares sold by selling shareholders do not increase the number of outstanding shares since this amount is already included in the amount of shares outstanding.) The EPS after the offering is $1.81 and, therefore, would be dilutive by 68 cents ($2.49 - $1.81). [99894] |
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A company has the following financial information. EBIT of $150,000,000 This company is planning an initial public offering in which it will sell four million shares. Shareholders will be selling an additional four million shares. The offering is expected to receive proceeds of $25.00 per share after underwriting expenses. If the entire proceeds to be received by the company are going to pay down debt, what is the pro forma EPS of the company after the offering? 1. $4.842. $4.55 3. $5.85 4. $6.22 |
Answer: 3
Although the total offering is eight million shares, the company is selling only four million. Based on this fact, the company will receive only proceeds of $100,000,000 ($25.00 x 4,000,000). The proceeds from the other four million shares will go to the selling shareholders. The amount of debt will decline from $400 million to $300 million. In addition, since the company is selling only four million shares, the number of outstanding shares will increase to 14 million, not 18 million. When selling shareholders offer stock, it does not increase the number of outstanding shares.
EBIT$150,000,000 Interest$24,000,000($300 million at 8%) EBT$126,000,000 NI$81,900,000($126,000,000 x
The pro forma EPS is $5.85 ($81,900,000 / 14,000,000). [99897] |
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The following financial information was taken from the 10-K of Cecil Industries. The balance sheet has cash and equivalents of $2,850,000, accounts receivable of $6,325,000, and inventory of $6,384,000. The company had total credit sales of $41,190,000 and EBIT of $24,850,000. The company's Days Sales Outstanding (DSO) is: 1. 6.51 days2. 55.28 days 3. 86.16 days 4. 91.63 days |
Answer: 2
A company's Days Sales Outstanding measures the average time (in number of days) it takes to turn accounts receivables into cash. The formula used to calculate DSO is accounts receivable (from a balance sheet) / (total credit sales, which is found on the income statement, divided by the number of days in the period being analyzed). The number of days in the period is usually 360, but other periods may also be used, such as 91 days or 35 days. Since this question refers to a company's 10-K, we used 360 days. $6,325,000 / ($41,190,000 / 360) = 55.28 days. An alternative formula is (accounts receivable divided by total credit sales) multiplied by the number of days in the period. [99901] |
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2. An NOL may be carried back two years and carried forward 20 years. 3. An NOL may be carried back two years and carried forward three years. 4. An NOL may be carried back two years and carried forward indefinitely. |
Answer: 2
Net operating losses that a company has had in past years may be used to offset income. This would enable a company to use losses in the past to lower taxable income by either carrying back or carrying forward these losses. Under IRS guidelines, an NOL may be carried back two years and carried forward for a period of 20 years. [99914] |
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What is the formula for enterprise value (EV)? |
Enterprise Value = Market Capitalization + Long-Term Debt + short term debt + capital lease obligations - Cash and Cash Equivalents |
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What is the formula for equity value? |
equity value = enterprise value + cash and cash equivelents - debt |
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How do you calculate growth rate given ROE and retention rate? |
g = b x ROE
Where: |
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What is the formula for the Gordon Growth Model?
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P = d1 / (k - g)
Where: |
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What is the formula to calculate total value of the firm using the stable growth FCFF model? |
total value = FCFF at end of period/(WACC - Growth Rate) |
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The RSR Corporation has a 50% debt/equity ratio, an FCFF of $9,000,000, debt of $25,000,000, a 14% cost of equity, a long-term growth rate of 5%, an 8.00% pretax cost of debt, and a tax rate of 36%. If the company has 8,000,000 shares of common stock outstanding, what is the equity value per share using the stable growth FCFF model? 1. $7.542. $13.34 3. $15.41 4. $16.34 |
Answer: 4
The stable growth FCFF (free cash flow for the firm) model may be used when a firm has stable cash flows that are expected to grow at a certain rate. The formula to calculate the total value of the firm is the FCFF at the end of the year divided by the WACC, less the growth rate. The FCFF at the end of the period is $9,450,000 using the 5% growth rate ($9,000,000 x 1.05). Since the debt/equity ratio is 50%, it is necessary to express debt as a percentage of total capital. This can be determined by assuming an equity value of 100; since debt is 50% of equity, the total capital is 150. 100 / 150 = 67% (equity capital is 67%) and 50 / 150 = 33% (debt capital is 33%). The weighted cost of equity is .0938 or 9.38% (.14 x .67). To determine the weighted cost of debt, an adjustment for the tax shield is necessary. The pretax cost of debt is multiplied by 1 minus the tax rate (.08 x .64 = .0512). This product is multiplied by the percentage of debt capital; therefore, the weighted cost of debt is .0169 or 1.69% (.0512 x .33). The WACC equals .1107 or 11.07% (.0938 + .0169). The total value of the firm is determined by dividing the projected FCFF of $9,450,000 by (WACC minus the growth rate). The total value of the firm = $155,683,690 ($9,450,000 / .0607). If the amount of debt is $25,000,000, the value of the equity is $130,683,690 ($155,683,690 - $25,000,000). $130,683,690 divided by 8,000,000 shares outstanding equals an equity value per share of $16.34. [61288 |
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Brawn Forgings, Inc. is a large capital intensive industrial company. Typically, the company's profitability is in line with its industry peer group, but occasionally it reports negative earnings in years of high capital expenditures. It plans to modernize several facilities in the next two years. Although Brawn currently has positive cash flow, it will need to issue debt and/or equity to fund the planned modernization. Rather than looking exclusively at the cost of debt, or equity, you intend to value the company as a whole. What is the best method to value the company? 1. The Gordon Growth Model2. The Dividend Discount Model 3. EV/EBITDA 4. ROIC |
Answer: 3
An important metric in valuing large, capital intensive companies is EV/EBITDA. In this metric the theoretic cost of acquiring a firm (EV) is divided by EBITDA (as a measurement of profitability), neutralizing the capital structure and accounting decisions affecting depreciation and amortization. The dividend discount model and the Gordon model are similar to each other, but the Gordon model should be used to value a firm that is stable, with dividends growing at a steady rate and expected to remain stable in the long term. The return on invested capital (ROIC) in isolation is not an effective valuation tool. It is normally divided by the weighted average cost of capital. The ROIC/WACC is used to determine the economic value of investments by the company, while the ROIC/WACC spread is used for comparisons between companies. [60536] |
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Company A has EBIT of $18 MM and depreciation and amortization of $5 MM. Your client is willing to pay 9.5x EBITDA, and the buyer can expect $3.5 million of synergies. The adjusted EBITDA multiple is: 1. 6.12. 8.2 3. 9.5 4. 11.2 |
Answer: 2
Adjusted EBITDA may be used in a potential acquisition. In this example, first multiply EBITDA of 23 ($18 MM + $5 MM) by 9.5, which equals a transactional value of $218.5 MM. Next, add the $3.5 MM of synergies to the $23 MM to arrive at adjusted EBITDA of 26.5. Divide the transactional value by the adjusted EBITDA, which equals 8.2 (218.5 / 26.5 = 8.2). |
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True/False: The exchange ratio during a stock merger is based on the market price of the target company stock. |
False: The exchange ratio is based on the acquisition price of the target company stock |
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Company W issued a nonconvertible bond at par that pays 6% interest semiannually. The bonds are currently trading at 98 and mature in 10 years. It pays taxes at a rate of 34%. What is Company W's cost of debt for the bond issue? 1. 3.96%2. 4.04% 3. 6.12% 4. 12.0% |
Answer: 1
To determine the cost of debt, it is necessary to adjust the nominal yield (the coupon rate) by the tax rate, rather than the current yield of the bond. Multiply the nominal yield by (100% - tax rate) or (100% - 34% = 66%). Although the coupons are paid semiannually, the annual coupon rate for the bond is 6%; therefore, the cost of debt is 3.96% (6% x 66%). Choice (b) is based on taking the current yield (6% divided by 98%) and multiplying it by (100% - the tax rate). Choice (d) is simply the current yield (6% divided by 98%). Also of note is the fact that, if the coupon rate were 12%, it would need to be adjusted by the tax rate. This would have indicated a 7.92% cost of debt -- a choice that does not appear in the question. [60603] |
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What is the formula to calculate change in shareholder equity from one year to the next (assume 2008 to 2009)? |
Stockholders' equity for 2009 will change as follows. Stockholders' equity 2008 $1,245,400 Plus net income for 2009 $1,393,350 Minus stock buyback for 2009 $567,500 Minus dividends paid $536,200 Minus preferred stock (at par value) $274,000 Projected common stockholders' equity |
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Which TWO of the following events will affect EPS and the P/E ratio if the price of common stock remains unchanged after the event? I. Acquiring a company that is neutral to earnings II. Issuing debt at a rate that is lower than WACC III. Issuing debt to build an office complex IV. Purchasing debt at a rate that is below WACC 1. I and III2. I and IV 3. II and III 4. II and IV |
Normally, issuing debt will increase a company's interest expense, lowering EPS and increasing the P/E ratio. However, issuing debt to finance a fixed asset (in this case an office building) would not immediately affect the company's earnings. The interest expense in such cases is capitalized and added to the cost basis of the asset. Acquiring a company that is neutral to earnings would be neutral to EPS. As such, it would not affect EPS or the P/E ratio if the price of the stock is unchanged. The purchase of debt would affect the investment account of a company. The investment income would be shown as other income on the income statement (below EBIT) and would increase pretax income, therefore increasing EPS. [60618]
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Calculate the implied equity value range given the following:
Sales = $280MM Net Income = $30MM Forward P/E Multiple Range = 18.00 - 24.00 Expected Growth Rate = 9% |
If given the P/E ratio and an estimate of net income, you can calculate the implied equity value. In order to answer this question we need to determine the implied equity value range using the forward P/E and the expected growth rate. STEP 1. The expected net income is $32,700,000 ($30 MM x 1.09). STEP 2. The implied equity value range is $588,600,000 ($32,700,000 x 18.00) to $784,800,000 ($32,700,000 x 24.00). |
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Your firm previously recommended that The Nitrozene Co. liquidate a portion of its significant cash equivalents to repurchase shares of common stock from the marketplace. The shares will be made available to employees who exercise company-issued stock options. During the buyback period, Nitrozene's market price has risen from $10 per share to $15 per share. If the company's book value per share is presently $2, which TWO of the following actions will result if the share buybacks continue? I. Nitrozene's ROE will increase. II. Nitrozene's ROE will decline. III. Nitrozene's book value per share will increase. IV. Nitrozene's book value per share will decrease. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 2
Nitrozene's return on equity will increase due to a reduced number of shares outstanding. The buyback of stock will affect the balance sheet (increasing the treasury stock account and reducing cash). The income statement will not be affected by the company buyback. Earnings available to common stockholders will remain unchanged, while the number of shares of common stock outstanding will decline. This will result in a higher level of earnings per share. The book value per share of Nitrozene will decline if the company increases the treasury stock account by repurchasing shares at a higher price than the current book value. Conversely, if a company repurchases stock below book value, the book value per share will increase. [60567] |
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The Girtz Corporation is considering the acquisition of the Yellow Company using common stock. Relevant financial information is found in Exhibit 1. Girtz plans to offer a premium of 20% over the market value of Yellow stock. What is the ratio of exchange of stock? 1. 0.52. 2.00 3. 1.5 4. .41 |
Answer 1:
The exchange ratio is $12/$24 or .50, or one-half share of Girtz stock for every share of Yellow stock. This is determined in the following manner. Based on the earnings per share and the price/earnings ratio, we can determine the market price of the shares.
The Girtz CorporationThe Yellow Company Earnings per share$2.00$1.25 Price/earnings ratio128 Market price per share$24 (12 x $2.00)$10 (8 x $1.25)
Offer to Yellow shareholders in Girtz stock (including the premium) equals $10 multiplied by 120% = $12 per share. [60482] |
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RLW Corporation has a price/earnings-to-growth (PEG) ratio of 1.95. Its EPS figure is $4.85. You have estimated that next year's EPS will be $5.29 . Based on this information, what would be your target price for an acquisition of RLW? 1. $722. $82 3. $84 4. $93 |
Answer: 4
To calculate the price target, determine the earnings growth rate and the price/earnings ratio, and then multiply this number by the EPS estimate. The growth figure is $.44 ($5.29 - $4.85). The growth rate is .090 or 9% ($.44 / $4.85). To determine the P/E ratio, multiply the growth rate by the PEG ratio (9 x 1.95 = 17.5). To determine the price target, multiply the P/E ratio by the EPS estimate (17.5 x $5.29 = $92.57, rounded to $93). [60517] |
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The ratio that incorporates the potential for the growth of the company and its prospects for continued revenue is known as the: 1. EV/EBITDA ratio2. EV/Sales ratio 3. P/E ratio 4. PEG ratio |
Answer: 4
The price/earnings-to-growth ratio (PEG) seeks to value a company in terms of growth potential and the possibility of continued revenues. [60579] |
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The annual report of Acme Corporation indicates quarterly earnings per share over the past year of $1.20, $1.26, $1.22, and $1.15. However, in the fourth quarter, the company took an extraordinary charge against earnings of $0.06 per share due to a change in inventory valuation. The stock is currently selling for 12.2 times its earnings. The market price of the common stock is: 1. $44.902. $58.19 3. $58.92 4. $59.66 |
Answer: 4
When calculating the trailing current price to earnings, the earnings per share figure for the prior fiscal year is totaled and the market price of the stock is divided by the total in order to calculate the P/E ratio. Reported Earnings = $1.20 + $1.26 + $1.22 + $1.15 = $4.83 The P/E ratio is based on earnings before extraordinary charges are added to reported earnings. In this example, $4.83 + .06 = $4.89 in earnings multiplied by the P/E ratio of 12.2, or $59.66. [60508 |
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The Kendall Corporation is contemplating an acquisition of Fulham Brothers Inc. What is the BEST measurement as to whether the acquisition will create value for shareholders? 1. The impact on Kendall's cash position2. Whether the earnings are accretive in the near term 3. Whether the ROIC exceeds the WACC 4. Whether key personnel at Fulham remain after the acquisition |
Answer: 3
An acquisition is accretive to shareholder value if the return on invested capital (ROIC) exceeds the weighted average cost of capital (WACC). [60581] |
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A corporation is planning to issue $20,000,000 face value of corporate bonds with a 6.4% coupon. The bonds will have a ten-year maturity. Expenses associated with the underwriting total 5.2% and are broken down as underwriting fees of 3.5%, advertising costs of 1.2%, and legal and accounting costs of 0.5%. What is the issuer's cost of captial for this debt issue? 1. 5.45%2. 6.24% 3. 6.42% 4. 6.75% |
Answer: 4
The cost of capital is calculated by dividing the interest expense by the net proceeds of the issue. The flotation costs include underwriting fees, advertising, legal, and accounting costs totaling $1,040,000 (5.2% x $20,000,000). The interest of $1,280,000 (6.4% x $20,000,000) is divided by the net proceeds of the issue which is $18,960,000 ($20,000,000 - $1,040,000). $1,280,000 / $18,960,000 = 6.75%. |
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Which of the following statements is TRUE regarding FCFF and FCFE? 1. FCFF is used to evaluate leveraged companies while FCFE is used to evaluate companies without debt.2. There is no difference in an unleveraged company. 3. FCFF is used for companies with low capital expenditures while FCFE is used for companies with high depreciation. 4. Only FCFE is adjusted for depreciation, capital expenditures, and changes to working capital accounts. |
Answer: 2
Free cash flow for the firm (FCFF) is used to evaluate the profitability of an entire business, rather than shareholder equity. The starting point for FCFF is EBIT multiplied by (1 - tax rate) and then adding depreciation and amortization, subtracting capital expenditures, and factoring in changes to working capital (WC). Increases in WC reduce FCFF; decreases in WC increase FCFF. It is also useful when evaluating companies with little or no debt. FCFE describes the funds available to owners of a company. Rather than beginning with EBIT, FCFE begins with net income. The adjustments made for depreciation and amortization, capital expenditures, and working capital are the same as described for FCFF. Therefore, if a firm has no debt, FCFF and FCFE are the same. [60609] |
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Which of the following sectors would have the greatest degree of operating leverage when GDP is increasing? 1. A knee and hip replacement manufacturer |
Answer: 4
Operating leverage is the degree to which a firm or a project relies on fixed, rather than variable, costs. In this question, you would look for the cyclical company with a high level of fixed costs. All the companies listed are manufacturers and would have some degree of operating leverage, but which entity will benefit most in an economic turnaround? The computer manufacturer is cyclical, while having a high fixed-cost structure. The tobacco company and knee/hip company are more defensive and their revenues will generally not rise as much as the revenues of the computer manufacturer. The aerospace contractor will benefit from an upturn in the aerospace cycle, which is contingent on government spending, not necessarily with a broad economic expansion. (74338) |
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Calculate growth rate given the following:
EPS = $2.50 Dividend = $1.50 ROE = 9.5%
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g = b x ROE
Where: The dividend payout ratio is 60% ($1.50 / $2.50). g = 40% x 9.5% |
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Calculate price per share given the following:
Projected dividend = $1.50 Cost of equity = 8% Growth rate = 3%
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the price can be determined by using the Gordon Growth Model: P0 = d1 / (k - g) Where:
P = 1.50/(8% - 3%) P = 1.50/5% P = $30
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In calculating a company's market capitalization, the treasury stock of a corporation is: 1. Subtracted from the market value of outstanding shares at cost2. Subtracted from market value at market value 3. Ignored 4. Added to market value at purchase cost |
Answer: 3
In order to calculate the market capitalization of a company, multiply the number of outstanding shares of common stock by the current market price. The number of outstanding shares does not include treasury shares, so the latter may be ignored. A company's outstanding shares are found by subtracting the number of treasury shares from the number of shares the company has issued. [61348] |
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An investment banking representative is considering using the price-to-book value ratio to value a proposed acquisition by an investment banking services client. Which TWO of the following statements are TRUE regarding using the price-to-book value ratio? I. Book value is a cumulative balance sheet amount and is generally positive even when EPS is negative. II. When measuring value per share, book value per share is a good measure for valuing companies composed mainly of illiquid assets. III. Book value per share is less volatile, which provides more meaningful comparisons when EPS is abnormally high or low. IV. When comparing different companies, price-to-book value will not provide long-term values and is, therefore, less valid. 1. I and III |
Answer: 1
The price-to-book value ratio uses historical balance numbers, is less volatile than earnings per share, and tends to be a positive number. Additionally, book value is more stable in times of abnormal earnings and provides for comparisons over the long term. It is a good method for comparison when looking at companies with high levels of liquid assets such as insurance and banking institutions. [61299] |
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You are reviewing an industry which exhibits the following characteristics. * The size of the top-ten companies ranges in market capitalization from $10 billion to $300 billion.* The companies within the industry have inconsistent dividend policies. * Reinvestment in research and development is necessary for growth within the industry. * The expected industry growth exceeds the average for the S&P 500. * Capital expenditures as a percentage of sales are lower than the S&P 500 average. Which of the following metrics is most appropriate to value the companies within the industry? 1. PEG2. DDM 3. EV/EBITDA 4. EV/Sales |
Answer: 1
The PEG ratio is the best solution, given the vast differences in company size, lack of consistent dividend policies, and lack of information about depreciation basis. EV/Sales is an acceptable choice but, given the growth rate of the industry, PEG is a better answer. [60519] |
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Of the following industry sectors, the one LEAST likely to use EV/EBITDAR as a valuation metric is a(n): 1. Restaurant chain2. Company that operates retail clothing stores 3. Airline 4. Real estate investment trust |
Answer: 4
Earnings before interest, taxes, depreciation, amortization, and rent is used in sectors that rely heavily on leases, or sale and leaseback arrangements. Since different companies within the same sector may have different lease or rental agreements, the use of EBITDAR as a measure is preferable over EBITDA. Restaurants, retail clothing stores, and airlines would typically have significant lease or rental agreements. The most frequently used valuation metric for a REIT is Funds from Operations (FFO), which is determined by taking the net income plus depreciation, and subtracting gains from the sale of assets. [60962] |
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As an investment banking representative, you are reviewing distressed companies for potential buyout opportunities. When identifying companies with low EV to EBITDA ratios, which of the following cash flow scenarios offers the greatest opportunity, based on expected acquisition costs and subsequent valuation? 1. Negative cash flows2. Negative cash flows after restructuring 3. Positive cash flows 4. Positive cash flows after restructuring |
Answer: 4
A distressed company with low enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) will provide the greatest opportunity, based on a relatively low expected acquisition cost and enhanced value, due to its positive cash flows following restructuring. This is likely to offer a greater (restructuring) opportunity than a company that already has positive cash flows, due to the lower cost of acquisition. [60556] |
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2. Research and development 3. Capital expenditures 4. Special charges |
Answer: 3
Earnings before interest, taxes, depreciation, and amortization may be an inadequate measurement when comparing companies with similar financial statements because it ignores capital expenditures. Capital expenditures are necessary to maintain and grow the business. [60593] |
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What is the formula for book value per share? |
Book value per share is calculated by using the following formula.
Shareholder Equity
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Episilon Financial currently has significant loan losses and holds reserves against those loans in the event that borrowers do not repay. Which of the following metrics is the BEST valuation tool for Episilon? 1. Enterprise value-to-sales2. Forward price earning ratio 3. Losses per million 4. Price-to-book ratio |
Answer: 4
Loan loss reserves represent a certain percentage of loans that will not be repaid and appear as a noncash charge to earnings. The creation of reserves provides a cushion against nonpayment. These reserves shrink when loans are charged off. The balance sheets of financial service companies, such as banks, insurance, and reinsurance companies are presumably liquid and are marked to the market, so the book value becomes a strong consideration in valuing the company. One of the most often-used valuation metrics for these types of companies is the price-to-book ratio. [61353] |
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Your client is a foreign industrial company listed on the NYSE. Your firm has been hired to sell certain assets of the company. In performing your due diligence, you discover the company and its subsidiaries received numerous contracts from foreign governments using suspicious practices. What is the MOST appropriate action to take? 1. File a suspicious activity report with FINRA2. Instruct your client that the asset sale must be cancelled 3. Notify the SEC and the DOJ 4. Instruct your client that the asset sale may be completed, since the target is a foreign company |
Answer: 3
This question concerns the Foreign Corrupt Practices Act (FCPA). The law prohibits corrupt or improper payments to foreign government officials for the purpose of obtaining business. The antibribery provision of the law applies to U.S. companies, the U.S. subsidiary of a foreign company, as well as any foreign private issuer that is an SEC reporting company. The position of the SEC and the Department of Justice (DOJ) is that non-U.S. companies that issue stock or trade as an ADR in the U.S. are subject to the FCPA. If improper payments are found in the due diligence process (which should uncover them), the best action for the investment banking firm to take is disclosure to the SEC and the DOJ. In many situations, the investment banking transaction may be allowed to proceed, with a settlement that may include fines and penalties. (74319) |
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Calculate price/share given the following:
Dividend: $0.40 Dividend yield: 1.8%
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Dividend/dividend yield = share price
.40/.018 = 22.22 |
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Calculate EPS given the following:
Dividend: $0.40 Dividend payout ratio: 35% Price per share: $22.22 |
Step 1: Dividend/dividend payout ratio = total earnings yield
Step 2: Total Earnings Yield - Dividend = EPS
.40/.35 = 1.14
1.14 - .40 = .74 |
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What is the formula for the Quick Assets Ratio? |
The Quick Assets Ratio (Acid Test Ratio) is generally expressed as (Current Assets - Inventories) / Current Liabilities. In the event a company has other current assets (such as prepaid expenses), these are deducted as well. Another often-used form of the Quick Assets Ratio is (Cash + Cash Equivalents + Accounts Receivable) / Current Liabilities. |
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You are attempting to determine outliers within the retail sector. Which of the following valuation methods would an investment banking representative apply when evaluating retail companies that have similar degrees of financial leverage? 1. Price/Earnings ratio2. Dividend Payout 3. EBIT/Interest 4. Price/Sales ratio |
Answer: 4
Price/Sales ratios among similar retailers are frequently within a narrow range of values. Companies outside of this range (outliers) are expected to have relatively strong or weak revenue growth. [60515] |
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If a dividend of $0.12 is paid quarterly and stock trades at $8.00, what is the dividend yield? |
dividend yield = annual dividend paid / stock price
$0.12 x 4 / $8.00 = 6% |
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The return on equity of a company will increase if: I. A gain is realized on the sale of an asset II. A loss is realized on the sale of an asset III. The company issues debt IV. The company repurchases debt at par 1. I and III only2. I and IV only 3. II and III only 4. II and IV only |
Answer: 2
The sale of an asset for more than its book value creates a gain for the corporation. (Cash increases by more than the asset value.) This would increase shareholders' equity and increase the return on equity. The sale of an asset at a loss would have the opposite effect. It would reduce the return on equity. If the company repurchases debt at par, this would reduce the interest expense of the company and increase net income. If the company issues debt, the additional interest expense would reduce net income. [60608] |
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What is the formula for EPS? |
EPS = (Net Income - Preferred Dividends) / Number of Shares of Common Outstanding |
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What is the formula for return on common equity? |
Return on Common Equity formula = (Net Income - Preferred Dividends) / Common Stockholders' Equity. |
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If a company issues a PIK bond, where does the PIK accrued interest show up on its income statement? 1. It is added to other income.2. It is subtracted from other income. 3. It is subtracted from interest expense. 4. It is added to interest expense. |
Answer: 4
A Payment In Kind (PIK) bond pays interest in both a cash coupon and additional principal. It is usually a type of mezzanine financing that allows the issuer to conserve cash and pay bondholders additional principal instead of a higher cash coupon rate. Although the PIK interest is not paid in cash, the accrued interest is added to the interest expense on the income statement. Subject to certain limitations, this allows the issuer to claim an interest deduction on the payments, therefore reducing its taxes. [61335] |
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What does the typical investment banker use for interest expense ratio? |
interest expense ratio = EBITDA / Interest Expense
Although some professionals use the formula of EBIT or operating income divided by interest expense to find a company's interest coverage ratio, many investment banking professionals use EBITDA instead of EBIT as the numerator. |
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If an investment banking representative wanted to calculate the market cap of a company, she would multiply the market price of the stock by the: 1. Total outstanding shares, including those held by institutions, retail investors, and restricted shares held by insiders2. Total outstanding shares, including those held by institutions, retail investors, and restricted shares held by insiders plus treasury stock 3. Public float, which is outstanding shares minus restricted stock 4. Shares held by institutions only |
Answer: 1
To calculate the market capitalization of a company, the representative would multiply the current market price of the common stock by the total outstanding shares, including those held by institutions, retail investors, and restricted shares held by insiders. [61360] |
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When attempting to value an initial public offering of securities, an investment banking representative would NOT use: 1. Sum-of-the-parts analysis2. Discounted cash flow analysis 3. Comparable company analysis 4. Comparable transaction analysis |
Answer: 4
Comparable transaction analysis, or M&A comparable analysis, is a valuation method used to value a company by comparing it to the transactional value of other companies in the same or similar industry sector. It is used to value the price an acquirer may offer a target company and would generally not be used to value an IPO. The other valuation methods may be used to value a company in order to determine its intrinsic value. [61370] |
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Company A has EBIT of $20 MM and depreciation and amortization of $6 MM. Your client is willing to pay 9 times EBITDA, and the buyer can expect $4 million of synergies. The adjusted EBITDA multiple is: 1. 10 |
Answer: 2
Adjusted EBITDA may be used in a potential acquisition. In this example, first multiply EBITDA of 26 by 9, which equals a transactional value of $234 MM. Next, add the $4 MM of synergies to the $26 MM to arrive at adjusted EBITDA of 30. Divide the transactional value by the adjusted EBITDA, which equals 7.8 (234 / 30 = 7.8). [61351] |
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The maximum amount that may be raised by an issuer seeking a registration exemption under Regulation A is: 1. 5,000,000 shares of common stock2. 5,000,000 shares of preferred stock 3. $1,500,000 of common stock 4. $5,000,000 of common stock |
Answer: 4
The maximum size of an offering under a Regulation A exemption is $5,000,000 (not the total number of shares), with no more than $1,500,000 of the $5,000,000 being sold on behalf of existing shareholders. |
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Unless registration is delayed, the effective date of a registration statement is generally on the: 1. 10th day after the registration statement is filed2. 10th business day after registration statement is filed 3. 20th day after the registration statement is filed 4. 20th business day after the registration statement is filed |
Answer: 3
Although there are exceptions, unless registration is delayed, the registration statement is effective on the 20th day after filing. [60784] |
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Regulation FD applies to: 1. Retail customers2. Issuers of securities 3. Institutional investors 4. Broker-dealers |
Answer: 2
Regulation FD applies to issuers of securities. It requires companies to disseminate quickly nonpublic, material information that has been disclosed to securities professionals or shareholders. In the event of an accidental leak of information, the company has 24 hours to release the information to the public. This regulation was designed to protect individual investors by requiring issuers to disseminate in a timely manner material information. [61020] |
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Under rule 144, how long must an insider wait to sell stock purchased on the open market? |
no waiting period
Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. |
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True or False.
According to rule 144, an insider can sell unlimited volume of stock on a given day. |
False
Both restricted and control stock are subject to the volume limitations under the Rule. [60352] |
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True or False.
If your firm renders a fairness opinion regarding the terms of the acquisition, it may not underwrite the new debt offering of Industrial Paper |
False
Although rendering a fairness opinion regarding the deal and underwriting the debt of Industrial Paper is a conflict of interest, it may be resolved through disclosure to all interested parties and investors |
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Hillary is an investment banking representative who intends to distribute a communication packet to several of her clients electronically regarding an upcoming investment banking transaction. If Hillary sends the e-mail to 15 existing clients, this communication is classified as a: 1. Free writing prospectus2. Violation of the Securities Act of 1933 3. Graphic communication 4. Statutory underwriting |
Answer: 3
The term graphic communication includes any form of electronic media including audio and videotapes, CD-ROM, facsimiles, Web sites, and voicemail messages, as well as substantially similar messages widely distributed by way of a computer. The term does not include a live or real-time communication, such as a live road show, but it would include a recorded version of a road show. [61005] |
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Christian and Nobel, a small investment banking firm, is underwriting an issue of common stock for Pearlman and Rabinowitz Diamond Wholesalers (PRDW), headquartered in New York City. PRDW has seven employees. They include two purchasing agents, one located in South Africa, and one in Mozambique, who purchase raw stones to be shipped back to the U.S. for cutting and polishing. PRDW sells the diamonds to various jewelry manufacturers around the world. The Company had $50,000,000 in gross revenues the previous year, based exclusively on Internet sales, primarily to foreign buyers. PRDW is hoping to raise $10,000,000 to increase its inventory and open a retail facility in NYC. It wants to keep registration costs to a minimum and would like to raise all the money from investors living in New York State. Does PRDW meet the requirements to issue its securities under the intrastate exemption found in SEC Rule 147? 1. It does not, due to its business with overseas vendors.2. It does not, due to its purchasing offices located outside New York State. 3. It does, provided the company invests the proceeds from the offering entirely in its U.S. operations. 4. It does, provided the company invests at least 80% of the proceeds from the offering in New York State. |
Answer: 4
Rule 147 is an intrastate exemption from federal registration. In order to qualify for the exemption, the issue must meet a residency test for purchasers (coming to rest test) and various requirements based on the issue's business (doing business within test). This issue meets both of these requirements. Securities will have come to rest within a state if no sales are made to nonresidents during the time the securities are being issued, or within nine months following the last sale by the issuer. In order to meet the doing-business test, the company's principal office must not only be located within the state, but 80% of its gross revenues, assets, and proceeds from the offering must be generated, held, or invested within the state. [60743] |
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Gargantuan Properties (GP) has been the general partner in a series of real estate limited partnerships. Gargantuan is now seeking to consolidate the assets of all the partnerships into one master limited partnership (MLP), which it plans to list on the NYSE. The limited partners will receive shares in the publicly traded MLP in exchange for their illiquid partnership units. GP has hired your firm to locate the investors of these partnerships and obtain their approval for the transaction. According to industry regulations: 1. Your firm will receive compensation based on the number of investors that it persuades to agree to the roll-up2. Since the resulting entity will be publicly traded, the transaction is exempt from SROs' rules regarding limited partnership roll-ups 3. Your firm's compensation must be limited to no more than 3% of the value of the shares in the resulting MLP 4. Gargantuan, rather than the limited partners, must pay all the solicitation costs associated with the roll-up |
Answer: 4
According to industry regulations concerning limited partnerships (under the broader description of Direct Participation Programs), the sponsor or general partner must agree to pay all the expenses associated with the solicitation of the investors in a roll-up transaction. In addition, a broker-dealer soliciting the approvals from limited partners in connection with a roll-up is limited to compensation of 2% of the value of the newly created securities [not 3% as stated in choice (c)]. The amount of compensation paid to the firm, or its employees, may not be dependent on the number of investors who agree to the transaction. [60633]According to industry regulations concerning limited partnerships (under the broader description of Direct Participation Programs), the sponsor or general partner must agree to pay all the expenses associated with the solicitation of the investors in a roll-up transaction. In addition, a broker-dealer soliciting the approvals from limited partners in connection with a roll-up is limited to compensation of 2% of the value of the newly created securities [not 3% as stated in choice (c)]. The amount of compensation paid to the firm, or its employees, may not be dependent on the number of investors who agree to the transaction. [60633] |
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A company is in the process of an initial public offering. The issuer has asked what action it would need to take in order to register the securities in nine states. It is important for the issuer to make sure the: 1. Issuer has registered the securities in all nine states2. Registered persons offering the securities are registered in all nine states 3. Broker-dealers offering the securities are registered in all nine states 4. Issuer's securities are exempt from state registration requirements in all nine states |
Answer: 1
State securities laws (blue-sky laws) are designed to protect investors from fraudulent securities dealings. In addition to federal filing requirements, issuers may be required to register the securities in any state where they anticipate sales. Often, state regulators simply require that the issuer make payment of a fee and provide copies of its federal filings. The issuer's only requirement is to register the securities in all nine states. Broker-dealers and their representatives are required to register in any state in which they are offering the securities to clients residing in that state. (74350) |
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An offering of securities that are sold into the secondary market, but are not sold at a fixed price is called: 1. An on-demand offering2. An at the market offering 3. A best efforts offering 4. A registered secondary offering |
Answer: 2
An at the market offering of securities is sold (at the prevailing market price) directly into the secondary market through a designated broker-dealer at prevailing market prices, rather than through a traditional offering of a fixed number of shares at a fixed price. Issuers may utilize a shelf registration to initiate an at the market offering, where securities are sold at various prices during the day, reflecting the supply/demand profile for that issuer. Only those issuers registering under Form S-3 or Form F-3 may engage in this type of offering. [60789] |
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One of your clients is seeking an investment in a tax-advantaged investment. Which of the following investments would qualify to pass through both income and losses? 1. A real estate investment trust2. A hedge fund 3. A regulated investment company 4. A company that is subject to SEC Section 12 reporting requirements |
Answer: 2
Most hedge funds are structured as limited partnerships and raise capital by selling units or interests in the partnership to investors. A limited partnership is permitted to pass through both income and losses to investors. A REIT and a regulated investment company (for example, a mutual fund) must pass through a minimum percentage (90%) of their income, but are NOT permitted to pass through losses. A company that is subject to SEC Section 12 reporting requirements is one that, due to the number of its shareholders and value of its outstanding securities, is required to file reports with the SEC. This type of company would distribute cash dividends to shareholders and would not be permitted to pass through losses. [60644] |
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An investment banking representative has been asked by her client about the prospectus delivery requirement for a new issue by the company. If the company is listed on Nasdaq: 1. There is no prospectus delivery requirement2. The requirement is for 25 days from the effective date 3. The requirement is for 40 days from the effective date 4. The requirement is for 90 days from the effective date |
Answer: 1
A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs. There are two exceptions. * If the issuer was not a reporting company prior to filing, but will be listed on an exchange or on Nasdaq as of the effective date, the requirement applies for 25 days.The main purpose of this rule is to provide investors with information concerning an issuer of securities. If the issuer was already a reporting company, existing information is assumed to be readily available to the public through the SEC's EDGAR system. [61019] |
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A Well-Known Seasoned Issuer (WKSI) has filed a shelf registration statement with the SEC. The company will be offering senior debt securities, subordinated debt securities, common stock, preferred stock, and warrants. Which TWO of the following statements are TRUE? I. For each offering of securities, the issuer is required to file an S-3 registration statement. II. For each offering of securities, the issuer is required to file a prospectus supplement. III. The issuer is permitted to use a term sheet for each offering, provided it is filed as a free writing prospectus. IV. The issuer is permitted to use a term sheet for each offering and is not required to file it as a free writing prospectus. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 3
A Well-Known Seasoned Issuer (WKSI) is permitted to use an automatic shelf registration. The issuer must file an S-3 registration form for a specified dollar amount and type(s) of securities that it is planning to offer. Each time the issuer offers securities, it will file both a preliminary and then a final prospectus supplement with the SEC (for the specific securities being issued). According to SEC Rule 433, the issuer is permitted to use a term sheet for each offering, provided it is filed as a free writing prospectus. [61069] |
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The sale of restricted securities by an officer of the issuer would be in compliance with SEC Rule 144 if, among other things, the: I. Securities are listed on an exchange II. Officer has owned the securities for at least 6 months III. Broker-dealer distributing the securities acts in an agency capacity IV. Broker-dealer has solicited orders to purchase the restricted securities 1. I and III only2. I and IV only 3. II and III only 4. II and IV only |
Answer: 3
Restricted stock may be sold if it has been held for at least 6 months and was paid for in full at least 6 months prior to sale. The broker-dealer handling the sale under Rule 144 may do so through a broker's transaction that does not involve a solicitation. The securities do not need to be listed on an exchange. [60361] |
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A venture capital fund acquires 100,000 shares of restricted stock of an issuer quoted on the OTC Bulletin Board. In order to resell this stock under SEC Rule 144, all of the following steps would need to be taken EXCEPT the fund: 1. Must hold the stock for at least 6 months2. May sell the stock through a broker's transaction only 3. Might be limited in the amount of stock it can sell during any 90-day period 4. Must file a notice with the SEC |
Answer: 2
Sales of securities under Rule 144 may be done through a broker's transactions or in transactions made directly with market makers. [60363] |
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The Cyclops Corporation is raising capital through a private placement to complete an acquisition of Bonnie's Industrials. As an investment banking representative working on the deal, you would be LEAST likely to offer the securities to which of the following investors? 1. Officers and directors of Cyclops2. Employees of Cyclops 3. A registered investment adviser 4. Officers and directors of Bonnie's Industrials |
Answer: 2
Cyclops would least likely appeal to its employees to raise capital. Under Regulation D, a private placement may be offered to an unlimited number of accredited investors but only 35 nonaccredited investors. Both officers and directors of an issuer, choice (a), and institutional investors (e.g., a registered investment adviser) are considered accredited investors. Officers and directors of Bonnie's Industrials are more likely to be accredited investors than employees of the issuer due to the income and net worth requirements of Regulation D. [61347] |
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According to SARBOX, how many of the members of an audit committee must be independent? |
According to SARBOX, in general, each member of the audit committee must be a member of the BOD of the issuer and be independent.
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How long does an automatic shelf or other shelf registration stay active? |
3 years |
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What is a purchaser representative under Reg D? |
purchaser representative is defined under Regulation D as a person "knowledgeable and experienced in business and financial matters." There are no specific qualifications needed to act in this capacity. A purchaser representative would advise a nonaccredited investor regarding the purchase of a private placement. A purchaser representative may not be given blanket authority by a client to represent that client in all future private placements |
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Which TWO of the following statements are TRUE concerning the organizational structure of a REIT? I. It must have at least 50 different shareholders. II. It must have at least 100 different shareholders. III. Five or fewer individuals may not own more than 75% of the value of its stock. IV. Five or fewer individuals may not own more than 50% of the value of its stock. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 4
As a general rule, a Real Estate Investment Trust (REIT) in its second taxable year must meet two ownership tests. There must be at least 100 different shareholders and 5 or fewer individuals may not own more than 50% of its common stock during the last half of its taxable year. [60640] |
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Which of the following features would NOT normally be included in a private placement memorandum? 1. A historical pricing of the company's common stock2. How the issuer will use the proceeds from the offering 3. Investor suitability standards 4. The company's financial statements |
Answer: 1
In a private placement, the issuer agrees to provide all material information concerning the company that is relevant as to whether an investor should purchase the security. Although it may not be a regulatory requirement, the issuer will usually provide a disclosure document (a private placement memorandum) to avoid violations of the antifraud provisions (as found in numerous securities laws). In many cases, the company is private (rather than a public company) and would not have publicly traded common stock. [60464] |
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When would a financial statement filed by an IPO issuer become stale? 1. Three months from the date of the filing of the registration statement2. 135 days from the date of the filing of the registration statement 3. Six months from the date of the filing of the registration statement 4. One year from the date of the filing of the registration statemen |
Answer: 2
According to Regulation S-X, financial statements in a registration statement become stale and may not be used based on the number of days between the date of the statements in the filing and the effective date of the registration statement. For an IPO issuer, this period may not exceed 135 days. (74358) |
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A communication that contains information that is limited to: * Factual information about the legal identity and business location of the issuer* The title of the security and the amount offered * A brief indication of the general type of business of the issuer * The type of underwriting Which of the following choices would describe this type of communication? 1. It is information found only within an S-4 registration statement.2. It is not a prospectus. 3. The communication is a subscription agreement. 4. It is a term sheet. |
Answer: 2
This type of communication is generally referred to as a tombstone advertisement. If the registration statement has not yet become effective, the following information must be included: * A statement indicating that the securities registration is not yet effective and the orders for the securities may not be accepted until registration is effective.* The contact information of a person from whom a written prospectus may be obtained. |
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Abram and Lincoln Securities, an investment banking firm, has a controlling interest in Iron and Steele Savings. A customer of Abram and Lincoln has placed an order to purchase 5,000 shares of Iron and Steele Savings. Which of the following statements is TRUE? 1. It is necessary to obtain the approval of a principal of Abram and Lincoln before the customer's order is executed.2. Abram and Lincoln must disclose its controlling interest in Iron and Steele Savings on the customer confirmation. 3. Abram and Lincoln may accept and execute the order without the need to disclose its ownership in Iron and Steele Savings. 4. Due to its inherent conflict of interest, Abram and Lincoln must refuse the order. |
Answer: 2
A broker-dealer that owns a controlling interest in a company has a control relationship. Abram and Lincoln must disclose this relationship if it solicits orders for the shares of Iron and Steele Savings. This written disclosure would be documented on the customer's confirmation. [61012] |
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The agreement and plan of merger between Bruce's First Aid Products (BFAP) and the Walk Electric Saw Company calls for a maximum of .75 shares of BFAP to be exchanged for each share of Walk. The combined entity will have assets valued at $1.2 billion. The shares to be issued pursuant to this acquisition are: 1. Restricted stock2. 144A eligible stock 3. Described in the proxy statement/prospectus and S-4 registration statement 4. Not required to be reviewed under the provisions of Hart-Scott-Rodino |
Answer: 3
Rule 145 of the Securities Act of 1933 addresses reclassifications of securities, mergers, consolidations, and acquisitions of assets. The SEC believes that investors should be afforded the protection of securities laws when securities are offered in this manner. When securities are issued under these plans, registration requirements apply. The S-4 registration statement was created for this purpose. Shareholders receive a joint proxy statement prospectus describing the details of the transaction. Hart-Scott-Rodino requires filing with the Federal Trade Commission and the Justice Department if the size of the combined entity (among other things) reaches $283.6 million. This transaction will require filing and approval, due to the size of company test. [61297] |
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I. An initial public offering II. A private placement of nonconvertible debt III. A private placement of equity securities IV. An investment by a venture capital firm 1. IV, III, I, II2. IV, I, III, II 3. I, III, IV, II 4. II, III, IV, I |
Answer: 1
A private company in need of raising capital may have numerous financing options available. Some of the major factors that affect the company's choices are its financial stability, profitability, name recognition, management team, and industry sector. A venture capital firm would usually demand a large equity percentage, or even majority ownership in the company, in exchange for agreeing to invest its capital. The venture capital (VC) firm would negotiate for a large equity percentage and possible involvement in the management of the business. A private placement of equity securities would require the company to offer a fixed-dollar price per share (as opposed to a percentage of ownership in the company). The providers of capital (private placement purchasers) have a stronger negotiating position regarding the price of the shares than the issuer. Since a private placement is sold to sophisticated investors, they would normally demand a higher price per share for the same amount of capital than would be expected if a public offering to retail investors took place. An IPO would be offered to a large number of investors. The company would be able to raise capital while often maintaining majority ownership of the company in the hands of its original owners. The price would be nonnegotiable (as a public offering price), and investors would not be able to insist on the same demands as institutional investors in a private placement. In an offering of nonconvertible debt, the company is not giving up any equity in the firm. [60472] |
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True or False
As long as there is a written procedure for personal loans to officers and directors and approval by the majority of independent directors, a company may issue personal loans.
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False
The Sarbanes-Oxley Act of 2002 enhanced corporate governance standards by making senior executives personally accountable for a corporation's actions. One of the features of this Act is to ban personal loans from corporations to their executive officers and directors. (Note that there are certain limited exceptions to this prohibition: directors and officers of companies that grant credit in the ordinary course of business [lending institutions such as banks] may still obtain credit cards or other types of loans from the company, provided they are obtained on the same terms as those available to the public.) Additionally, officers or directors of brokerage firms may still maintain margin accounts with their firms. [60667] |
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An investor purchasing securities under Section 4(6) of the Securities Act is required to receive: 1. A private placement memorandum2. A prospectus 3. An offering circular 4. No disclosure document |
Answer: 4
According to Section 4(6) of the Securities Act, an offering by an issuer may be considered an exempt transaction if certain conditions are met. The amount of the offering may not exceed $5,000,000. No advertising or public solicitation may be used to offer the securities, and the offering may be sold only to accredited investors. There are no document delivery requirements, but the transaction is subject to the antifraud provision of the Act. This exemption is different from Regulation D where a limited number (35) of nonaccredited investors may participate. [60332] |
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The Biomechanics Fitness Center has filed a registration statement for its initial public offering. If the SEC has NOT issued a stop order, this would indicate: 1. All the necessary factual disclosures have been included in the filing2. An announcement by the SEC regarding the effectiveness of the registration statement is imminent 3. There is no assurance that the information contained in the registration statement is complete or accurate 4. The effectiveness of the registration statement is viewed as an indication that the content is free from misstatement |
Answer: 3
According to the Securities Act of 1933, it is unlawful to represent that a filing of a registration statement, its effectiveness, or the fact that no stop order is in effect should be interpreted as an indication that the disclosure document is complete and accurate. The SEC does not approve any issue of securities. It does not guarantee the accuracy or adequacy of any of the statements contained in the registration statement or the prospectus. [61015] |
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Veronica has acquired securities of the NJF Corporation, a nonreporting issuer, directly from the issuer. The transaction did not involve a public offering. Under Rule 144, Veronica may sell the securities: 1. Immediately2. After 3 months 3. After 6 months 4. After 1 year |
Answer: 4
A person who acquires securities directly from an issuer, in a transaction that did not involve a public offering, has received restricted securities. The holding period for restricted securities in most circumstances is 6 months, unless the issuer is a nonreporting company, in which case the holding period is 1 year. [60355] |
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A media company based in Asia has hired your investment banking firm to raise capital in the U.S. Since many wealthy people in the U.S. have heard of this company, the issuer would like to target these investors as well as institutional investors. If the issuer does not want to file a registration statement with the SEC, you would recommend a: 1. Rule 144 exemption2. Rule 144A Offering 3. Regulation D Offering 4. Regulation S Offering |
Answer: 3
All of these choices do not require filing with the SEC. However, a private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as an institutional investor or a person with either a net worth of $1,000,000, or annual income of $200,000 ($300,000 for a married couple). This would allow the issuer to raise capital from institutional investors and wealthy individuals. Rule 144 is an exemption that allows for the resale of restricted or control stock, and no proceeds would be raised by an issuer. Rule 144A permits the sale by selling stockholders of an unlimited dollar amount of restricted securities to qualified institutional buyers (QIBs). A QIB may not be a natural person and, therefore, would not allow the issuer to offer securities to high-net-worth investors in the U.S. Regulation S allows U.S., not foreign, issuers to raise capital outside the U.S. without filing a registration statement with the SEC. (74360) |
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Octagon Chemical plans to publish shipment information consistent with its usual disclosures. Octagon regularly files reports with the SEC., such as quarterly and annual reports. If Octagon has already filed an S-3 registration statement as a well-known seasoned issuer, the publication of information regarding its shipments would be viewed as: I. An offer to sell II. Factual business information III. Pro forma information IV. A research report 1. I and III only2. I and IV only 3. II and III only 4. II and IV only |
Answer: 3
The information in a business release by a reporting company is considered to be factual business information and may contain forward-looking (pro forma) statements. It is not an offer to sell provided the issuer is an S-3 or F-3 reporting company. Factual information may include information contained in SEC filings, information about the issuer's products or services and forward-looking statements (provided the information is contained in statements filed with the SEC). Information related to forward-looking statements may include projections of revenue, earnings, losses, capital expenditures, dividends, capital structure, management plans and objectives for future operations. [60801] |
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An investment banking representative would require an authorized person of an institutional investor to sign which of the following documents to attest to, or determine, whether the institution has the status of an accredited investor? 1. The private placement memorandum2. The subscription agreement 3. The confidentiality agreement 4. The engagement agreement |
Answer: 2
The subscription agreement is a sales contract for the sale of securities in a private placement. It sets forth the terms and conditions of the securities. The client, or an authorized person of an institutional investor, will sign the agreement attesting to the status of an accredited investor. [60469] |
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All of the following choices are qualified institutional buyers under Rule 144A EXCEPT: 1. An investment company that manages a $15 million portfolio but is part of a family of funds holding $400 million of qualifying securities2. A bank that has a net worth of $50 million and which owns and invests $150 million of qualifying securities 3. A broker-dealer that owns and invests $5 million of securities of unaffiliated issuers and which is acting on a riskless principal basis for customers who are QIBs 4. An accredited individual investor who owns and invests $250 million of qualifying securities |
Answer: 4
Investors, generally, must pass a 3-part test in order to be considered a QIB. (1) Only certain types of institutions are eligible, including insurance companies, registered investment companies, pension plans, corporations, and registered investment advisers. (2) The buyer must be purchasing for its own account or the account of other QIBs. (3) The buyer must own and invest at least $100 million of securities of issuers not affiliated with the buyer. Certain buyers are subject to special tests as alternatives to this 3-part test. For example, a broker-dealer is a QIB if it owns and invests $10 million of securities of issuers not affiliated with the dealer, or if it acts as a riskless principal for other QIBs. Banks and S&Ls, in addition to meeting the $100 million portfolio test, must also have a net worth of $25 million. An investment company can be a QIB by being part of a family that, in aggregate, meets the $100 million portfolio test. Finally, any entity where all of its owners are QIBs is also a QIB. [60346] |
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An executive summary of a private placement memorandum is also referred to as a(n): 1. Red herring2. Term sheet 3. Teaser 4. Offering circular |
Answer: 3
The executive summary of a private placement memorandum (PPM) is usually a short document, referred to as a teaser. An investor would receive this document to determine whether he might be interested in the offering. If he is, the investor would then receive the complete PPM. The term sheet provides information regarding the specific securities being offered. A preliminary prospectus is also known as a red herring. It is used in a public offering, prior to the effective date of the new issue. An offering circular is a disclosure document provided to an investor who is purchasing exempt securities under Regulation A (a public offering not exceeding $5,000,000). [60467] |
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Under Regulation D, which of the following private placements may require a purchaser representative for individuals? 1. An offering of $4,000,000 sold only to accredited investors2. An offering of $4,000,000 sold to both accredited and nonaccredited investors 3. An offering of $9,000,000 sold to both accredited and nonaccredited investors 4. An offering of $20,000,000 sold only to accredited investors |
Answer: 3
The term purchaser representative designates a person who represents potential nonaccredited purchasers who are solicited to buy securities under Regulation D. Only offerings exceeding $5,000,000 specify the need for investor sophistication, or the use of a purchaser representative. [60340] |
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Certain offerings of securities may be registered on a continuous or delayed basis. All of the following instruments may qualify for continuous or delayed offerings, EXCEPT: 1. Securities issued in connection with an exercise of a convertible instrument2. Securities issued in connection with business combination transactions 3. U.S. Treasury instruments 4. Securities sold on behalf of a subsidiary of the registrant |
Answer: 3
Rule 415 of the 1933 Securities Act offers issuers the flexibility to offer securities on a continuous or delayed basis by filing a shelf registration. Securities that are guaranteed by the U.S. government are exempt securities. No registration of U.S. Treasury instruments is required. [60788] |
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Which of the following documentation would be defined as a free writing prospectus? 1. A research report issued by a broker-dealer2. A term sheet summarizing the securities being offered and prepared by an underwriter 3. The dissemination of factual information by an issuer 4. An advertisement by a firm indicating it makes a market or takes proprietary positions in the security |
Answer: 2
A free writing prospectus is any communication that does not meet the standards of a statutory prospectus. It is considered a solicitation of an offer to buy a security. Examples include term sheets, marketing materials, and press releases whether prepared by the issuer (which is usually the case) or an underwriter. The SEC requires that a legend be included within the free writing prospectus. The legend would indicate whether the issuer will file a registration statement and how a prospectus may be obtained. Research reports and advertisements are defined and subject to FINRA requirements, and are not considered free writing prospectuses. [61349] |
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Which of the following types of offerings would permit a U.S. public company to quickly raise an unlimited amount of capital in the U.S. from an unlimited number of institutional investors and a small number of retail investors, without filing a disclosure document with the SEC? 1. A Regulation S offering2. A Regulation A offering 3. A Regulation D offering 4. An offering of securities under Rule 144A |
Answer: 3
Regulation D (Rule 506) allows an unlimited amount of capital to be raised by selling securities to an unlimited number of accredited investors. Regulation D, however, limits the number of nonaccredited or retail investors to 35. Regulation A limits the dollar amount of securities that may be raised by the issuer to $5,000,000. According to Regulation S, a U.S. company may (quickly) issue an unlimited amount of securities outside the country without filing any documentation with the SEC. There are no restrictions as to the type of non-U.S. investors who may purchase the security. To qualify for a Regulation S exemption, the transaction must be offshore, which means no U.S. person may purchase the offering. An offering under Rule 144A may be offered only to qualified institutional buyers. [61327] |
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ABC Corporation currently has an equity issue in registration. Broker-Dealer X which has not previously followed ABC, would like to publish comments about the company. Under which TWO of the following circumstances may Broker-Dealer X publish comments about ABC Corporation? I. Broker-Dealer X is not participating in the distribution of the new issue. II. Broker-Dealer X, although an underwriter, limits its comments to a recommendation of the new issue. III. Broker-Dealer X, although an underwriter, limits its comments to ABC's nonconvertible debt. IV. Broker-Dealer X, although an underwriter, limits its comments to a projection of ABC's earnings in a table containing projections for all of the major companies in the same industry. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 1
SEC rules permit broker-dealers who are not participating in a distribution to publish information, opinions, or recommendations about an issue in registration, if the issuer is a reporting company. Additionally, a broker-dealer that is participating in the distribution of common stock or convertible debt may comment on the nonconvertible debt or preferred stock of the issuer. In order to make comments as found in choices II or IV, the broker-dealer's research report would have to be of a continuing nature. Coverage not may be initiated during the registration period. [61212] |
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Volume and holding period restrictions do not apply to the resale of private placements (Regulation D offerings) when: 1. Purchasers' representatives assist investors2. Both parties are accredited investors 3. The transaction is initiated by a registered principal 4. The purchaser is a qualified institutional buyer |
Answer: 4
Under Rule 144A of the Securities Act, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer without the volume and holding period restrictions of Rule 144. [60342] |
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Rule 144A permits: 1. Insiders to sell a certain amount of their holdings within a 3-month period2. Private resales of securities to qualified institutional buyers 3. Offerings of up to $25,000,000 to be exempt from registration 4. Underwriters to incorporate a market out clause in their underwriting agreement |
Answer: 2
Rule 144A allows the resale of restricted securities to qualified institutional buyers without the complications of registration or the burdens associated with using Rule 144. [60345] |
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Marlboro Securities would like to issue a research report on Winston Corporation, a U.S.-based company filing an S-3 registration statement. Marlboro has not issued research reports on Winston with reasonable regularity. Which of the following statements is TRUE if Marlboro is acting as an underwriter for the Winston Corporation? 1. Since the issuer is an S-3 filer, research reports may be prepared and distributed.2. Research reports may be prepared, but only distributed to institutional investors. 3. The report may be distributed outside the United States. 4. Underwriters that have not previously published research regarding an issue are prohibited from publishing a report during the registration period. |
Answer: 4
Pursuant to Rule 139 of the 1933 Act, since Marlboro has not issued reports with reasonable regularity, it may not issue a report on Winston, either in the U.S. or outside the U.S. The SEC considers that reports distributed outside the U.S. could be used to facilitate a distribution in the U.S. This rule allows an underwriter to publish a research report if the issuer meets certain conditions (e.g., is an S-3 or F-3 filer), and the report is published in the normal course of business. The research report may not be an initiation report. [61024] |
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An equity security that is distributed under Regulation S may be resold by: 1. Immediate sale into the U.S. market2. Immediate sale in a designated offshore market 3. Regulatory approval from SROs 4. Waiting two years, then selling into the U.S. market |
Answer: 2
An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas immediately through a designated offshore securities market. There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year period before an equity security sold pursuant to Regulation S may be resold in the U.S. [60349] |
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On September 1, an underwriter offers stock that has been registered with the SEC. This is the first offering of stock made by the issuing company. The issue will be listed on the New York Stock Exchange. A dealer that subsequently sells the stock in the secondary market will be required to furnish a prospectus: 1. Only if the dealer was a member of the underwriting syndicate or selling group2. For a period of 25 days following the initial offering 3. For a period of 40 days following the initial offering 4. For a period of 90 days following the initial offering |
Answer: 2
When a new issue is sold to the public, a prospectus must be given to all potential purchasers. In addition, dealers who sell the security in the aftermarket, even if they were not involved in the original distribution, are required to provide a copy of the prospectus. This lasts for a period of 25 days following the initial offering for issues to be listed on an exchange (including Nasdaq). If the offer is an IPO and the securities are not listed on an exchange, the prospectus must be provided for 90 days. If the issue is not an IPO, and the securities will not be listed on an exchange, dealers must deliver prospectuses for 40 days after the offering date. [61018] |
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All of the following statements are TRUE of a Regulation A offering EXCEPT: 1. Two years of financial statements must be filed with the SEC2. All financial statements filed with the SEC must be audited 3. The offering circular may be in a question-and-answer format 4. The maximum aggregate value of the issue is $5,000,000 over a 12-month period |
Answer: 2
Regulation A requires that only two years of financial statements need to be filed. These statements may be unaudited, if audited information is not readily available. The maximum aggregate dollar amount of the offering is limited to $5,000,000 over 12 months, with no more that $1,500,000 to be sold on behalf of selling shareholders. The issuing company may choose among three different formats for the offering circular, one of which may be a question-and-answer format. [60749 |
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The Seventh Seal Gasket Corporation has already filed a registration statement for a primary offering with the SEC. If 6 days later, the company files an amendment, which of the following statements is TRUE? 1. The amendment will be treated as part of the registration statement.2. The SEC will issue a stop order. 3. The SEC will issue a cease and desist order. 4. The deal will be postponed indefinitely. |
Answer: 1
With the consent of the SEC, an amendment that is filed prior to the effective date is treated as part of the registration statement. [61227] |
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Based on the size of the issue, which of the following issuers could seek a registration exemption under Regulation A? 1. A $6,000,000 aggregate offering of common stock, that includes $1,500,000 sold on behalf of existing shareholders2. A $10,000,000 offering of newly issued common stock 3. A $5,000,000 offering of newly issued common stock and a $1,500,000 sale on behalf of existing shareholders 4. A $4,500,000 aggregate offering of common stock, that includes $1,250,000 sold on behalf of existing shareholders |
Answer: 4
The maximum size of an offering under a Regulation A exemption is $5,000,000 as an aggregate offering, with no more than $1,500,000 of the $5,000,000 being sold on behalf of existing shareholders. In choice (c), the $1,500,000 is in addition to the $5,000,000. [60752] |
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An individual owns restricted stock. He would not be required to file a Form 144 for a sale of less than: I. 5,000 shares II. 10,000 shares III. $50,000 IV. $100,000 1. I and III only2. I and IV only 3. II and III only 4. II and IV only |
Answer: 1
An individual is allowed to sell restricted stock without filing under Rule 144 or reporting the sale if the sale is for less than 5,000 shares and $50,000. [60360] |
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If the SEC has entered an order temporarily suspending a Regulation A exemption, the underwriter, issuer, or the selling security holder may request a hearing within how many days? 1. 102. 20 3. 30 4. 45 |
Answer: 3
The underwriter, selling security holder, or issuer may request a hearing within 30 days. If a hearing is not requested, the temporary order suspending the Regulation A exemption becomes permanent on the 30th day. If a hearing is requested, it will be held within 20 calendar days of the SEC's receipt of the request. [60750] |
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Which TWO of the following choices have liability for untrue statements and material omissions contained in a registration statement that is filed with the SEC? I. All underwriters II. Any registered representative who sold the security III. A professional who certified or prepared any part of the registration statement IV. The SEC 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 1
The parties that may be sued for untrue statements and material omissions from a registration statement according to the Securities Act of 1933 include: * Every person who signed the registration statement* Every director or partner of the issuer at the time of the filing * Every accountant, engineer, or appraiser named as having prepared or certified any part of the registration statement * Every underwriter of the security |
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2. An investment company registered under the Investment Company Act of 1940 3. A U.S.-based investor who has a residence in Bermuda 4. A non-U.S. person who has a residence in the U.S. |
Answer: 4
Only a non-U.S. person may buy an overseas offering sold under Regulation S. The investor must not be defined as a U.S. person. A U.S. investor who is traveling, or resides outside the U.S. for a significant part of the year, would still be classified as a U.S. investor. A U.S. person is defined as any individual who is a resident of the U.S. as well as any partnership, estate, or account held for the benefit of a U.S. resident. [60347] |
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What is the difference between convertible debt and debt issued with a warrant? |
A convertible bond is a hybrid security consisting of a bond with an imbedded call option permitting the purchase of a share of common stock at a fixed price. A convertible bond trades as one unit. A bond issued with warrants attached will trade as two separate units. When the bond is issued, the warrants are detached from the bond and will trade as a separate unit. |
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Which of the following statements is TRUE regarding a private placement of securities under Regulation D? 1. If the offering does not exceed $1,000,000, the issuer is not required to file a Form D.2. If the offering exceeds $1,000,000, the issuer is required to provide a disclosure document only to nonaccredited investors. 3. If the initial offering does not exceed $1,000,000, and the issuer sells additional securities within 12 months, the additional offering of securities would not be exempt from registration. 4. If the offering does not exceed $1,000,000 and the issuer meets certain conditions, the holding period on the securities is three months. |
Answer: 2
Rule 504 of Regulation D allows an issuer to offer securities of up to $1,000,000 in a 12-month period. Provided the issuer complies with all the provisions of Regulation D, this private placement is exempt from SEC registration. The issuer is still required to file Form D with the SEC no later than 15 days after the first sale of securities. Under Regulation D, if the issuer offers securities exceeding $1,000,000, any nonaccredited investor must receive a disclosure document. The SEC does, however, recommend that an issuer provide the same information to accredited investors to avoid the antifraud provisions of federal securities regulations. If the initial offering does not exceed $1,000,000 and the issuer sells additional securities within 12 months, these securities may be exempt from registration. For example, an issuer offers $1,000,000 and 5 months later offers another $3,000,000. The first offering could be sold under Rule 504 and the second offering could be sold under Rule 505 (private exempt offerings not exceeding $5,000,000). If the offering does not exceed $1,000,000 and the issuer meets certain conditions, investors may resell the securities immediately. The conditions are generally based on registration and exemption requirements of the states in which the issuer is offering the securities. [60339] |
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When would gun-jumping take place in the process of raising capital? 1. When the issuer is raising capital in the private placement market2. After the effective date of the registration statement 3. Between the filing of a registration statement and the effective date 4. Between the effective date and the time in which a research analyst may publish research on the issuer |
Answer: 3
Gun-jumping violations of the 1933 Act would occur if prohibited oral or written communications were used by an issuer of securities. The period between the filing date and the effective date is referred to as the waiting (cooling-off) period. An example of gun-jumping would be a situation where some type of written communication used by an issuer between the filing of a registration statement and the effective date was not filed with the SEC as a free writing prospectus. Gun-jumping could also occur prior to the period immediately preceding the filing of a registration statement (the quiet period). A safe harbor permits communications carried out more than 30 days before filing a registration statement that does not reference a securities offering. Also permitted is the regular release of "factual business information" and "forward-looking statements" during both the quiet period and waiting period. Choice (c) is referred to as the quiet period. (74359) |
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You are an investment banking representative. One of your firm's clients is a foreign private issuer that has inquired about Rule 415 (shelf registration). If securities are registered under Rule 415 using Form F-3, an issuer would be permitted to offer the securities for: 1. 6 months2. 1 year 3. 3 years 4. 5 years |
Answer: 3
Shelf registration will permit an issuer to file a Form S-3 or F-3 registration statement with the SEC and offer securities over a 3-year period. Form F-3 may only be used by foreign private issuers that have reported under the '34 Act for a minimum of twelve months and that have a (worldwide) public market float of more than $75 million. [60787] |
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Put the following in order from first to last, of the following actions performed during the underwriting of securities by a Well-Known Seasoned Issuer (WKSI)? 1. The issuer files an S-3 registration statement.2. The issuer files a preliminary prospectus supplement. 3. The managing underwriter distributes a pricing term sheet. 4. The managing underwriter distributes the concession to the other members of the syndicate. |
1, 2, 3 and 4
A Well-Known Seasoned Issuer (WKSI) is permitted to use an automatic shelf registration. The first step is for the issuer to file an S-3 registration form for a specified dollar amount and type(s) of securities that it is planning to offer. Each time the issuer offers securities it will file both a preliminary and then a final prospectus supplement with the SEC for the specific securities being issued. The managing underwriter will distribute a pricing term sheet to be used by syndicate members. This sheet provides a summary of the details of the securities that being offered. The issuer is permitted to use a term sheet for each offering, provided it is filed as a free writing prospectus. The managing underwriter is required to distribute underwriting compensation (the concession) to the other members of the syndicate, within 90 days of the syndicate closing. [61070] |
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Six months after purchasing stock in Holiday Travel Co, a U.S. company, Julia Smythe, who lives in Birmingham, UK, attempted to sell her stock to an investor who lives in California. Julia was notified that she could not sell the stock to the California investor for another 6 months. Which of the following types of offerings would carry such a restriction? 1. Rule 1442. Regulation D 3. Rule 415 4. Regulation S |
Answer: 4
Under Regulation S, if a U.S. company issues stock outside the country, that stock is not required to be registered under the Securities Act. To qualify for a Regulation S exemption, the transaction must be offshore. An offshore transaction is one in which no offer is made to a person in the United States and, either (i) at the time the buy order is originated, the buyer is outside the United States or (ii) the transaction is executed through the facilities of a designated offshore securities market. Securities sold under Regulation S may not be resold to U.S. investors for a specific period, called the distribution compliance period, which is usually 40 days for debt securities and one year for equities. [60350] |
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LamoNate is a plastics company. It issued a communication 45 days before filing a new issue registration statement. Its communication failed to mention the future securities offering. Which of the following statements is TRUE regarding the LamoNate communication? 1. The communication is in conflict with the SEC registration requirements.2. The communication is defined as a free writing prospectus. 3. It is not defined as an offer to sell. 4. It is defined as an omitting prospectus. |
Answer: 3
Any communication made by an issuer more than 30 days before the filing date of a registration statement does not constitute an offer to sell, if it does not mention the securities offering. This is an example of one of the safe harbors that would not violate the SEC gun-jumping restrictions. The term gun-jumping refers to a communication made by an issuer during a period in which it is planning to make a public offering of securities. This would be in violation of the Securities Act of 1933. During this period the issuer should not be engaged in any communication that would be seen as preconditioning the market for offering. This situation may occur if an issuer is planning an IPO and relies on this safe harbor when management makes a public comment concerning the company, at least 30 days prior to the filing of the registration statement. [60800] |
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Your client is President of XYZ Corporation and is selling XYZ shares pursuant to Rule 144. According to the Rule, a filing must be made with the SEC: 1. 15 days before the sale2. At the time of the sale 3. 30 days after the sale 4. 90 days after the sale |
Answer: 2
The filing must be made at the time of the sale and is effective for 90 days. [60359] |
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In which of the following transactions are no new funds raised for the issuer? 1. A Regulation A offering2. A Rule 144 sale 3. A Rule 147 distribution 4. A private placement sold only to accredited investors |
Answer: 2
Rule 144 permits the resale of restricted (unregistered stock) and control stock under certain conditions. The seller is not the issuer, but an investor who has either acquired the stock through a private placement, or by being an affiliated person and purchasing the stock in the open market. In a Regulation A offering, a Rule 147 distribution, or a private placement, funds may be raised for the issuer. [60354] |
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What is the effective date of a registration statement? |
20th day after the filing date
Any amendment filed to a registration statement prior to the effective date will initiate the 20-day period. An exception is made if the issuer requests and receives approval for an accelerated effective date. The request may be oral or written, but if the request is made orally, it must be followed by a letter that accompanies an amended filing. The request is made by the issuer and the managing underwriter. The issuer may request a specific hour in the day when it wants the date to be effective, but the SEC must be notified no later than the second business day before the day they want the registration to become effective. [61364]
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Which TWO of the following statements are TRUE concerning the minimum criteria that a company must meet in order to be considered a well-known seasoned issuer (WKSI)? I. It must have been a reporting company for the previous12 months. II. It must have been a reporting company for the previous 36 months. III. The company must have a certain public float of debt or equity. IV. The company must have a certain amount of annual revenue. 1. I and III2. I and IV 3. II and III 4. II and IV |
Answer: 1
A well-known seasoned issuer (WKSI) is an issuer that is defined as a company that meets the following requirements. * It must be eligible to register on Form S-3 (short form for the registration statement) or Form F-3 (registration statement for certain foreign private issuers). In order to file these forms, an issuer must have been a reporting company for the previous 12 months.* It may not be an ineligible issuer. |
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If an investment banking representative would like to become familiar with the required content of nonfinancial disclosures in registration statements filed under the Securities Act of 1933, which of the following regulations/rules should the representative peruse? 1. Regulation A2. Regulation D 3. Regulation S-K 4. Rule 415 |
Answer: 3
Regulation S-K is a crucial component of the SEC disclosure system. It sets forth many of the disclosure requirements for registration statements filed under the '33 Act and other reports filed under the Securities Exchange Act of 1934. Some of the reports include going-private statements, tender offer statements, and proxy statements. Some of the issues addressed include material contracts, executive compensation and management reports on internal controls. [61211] |
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Which of the following choices would NOT be subject to the holding period restriction under Rule 144? 1. Restricted stock acquired under an investment letter2. Restricted stock acquired under a stock option plan 3. Control stock acquired under a private placement 4. Control stock acquired through an open-market purchase |
Answer: 4
There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period. [60357] |
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Under rule 144, how long will an investor have to wait to sell restricted shares and how many shares can they sell? |
6 months and they can sell 1% of the outstanding shares or the 4-week average weekly trading volume, whichever is greater. |
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2. Is prohibited because broker-dealers may not purchase securities under Rule 147 under any circumstances 3. May endanger the registration exemption for the entire issue 4. Is permitted with no restrictions |
Answer: 3
Rule 147 deals with exemptions from registration for intrastate offerings. One of the requirements needed to obtain the exemption is that the entire offering must be sold only to residents of the state. The sale of the securities to any out-of-state entity, including broker-dealers, would endanger the exemption. [60745] |
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Which of the following types of offerings would permit a U.S. public company to raise an unlimited amount of capital quickly from an unlimited number of retail and institutional investors, without filing any documentation with the SEC? 1. A Regulation S offering2. A Regulation A offering 3. A Regulation D offering 4. An offering of securities under Rule 144A |
Answer: 1
According to Regulation S, a U.S. company may (quickly) issue an unlimited amount of securities outside the country without filing any documentation with the SEC. There are no restrictions as to the type of non-U.S. investors who may purchase the security. To qualify for a Regulation S exemption, the transaction must be offshore, which means no U.S. person may purchase the offering. Regulation A limits the dollar amount of securities that may be raised by the issuer to $5,000,000. Regulation D limits the number of nonaccredited investors to 35. An offering under Rule 144A may be offered only to qualified institutional buyers. [60348] |
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CF Eye Care is filing an S-1 shelf registration statement with the SEC. The securities are to be issued in connection with a business combination. The shelf registration will be valid for: 1. 6 months2. 1 year 3. 2 years 4. 3 years |
Answer: 3
Many shelf registrations remain in effect for three years, however, if securities are not registered using Form S-3 or Form F-3 (foreign private issuer), the registration statement remains in effect for two years. [60791] |
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Lear, Kaplan and Simon, a small boutique investment banking firm, is discussing the possibility of a Regulation A offering for Big Apple Sound Studios. Some of the officers of Big Apple would like to sell a portion of their equity interest in the company. Under Regulation A, the maximum amount that may be sold on behalf of selling shareholders is: 1. $1,000,0002. $1,500,000 3. $5,000,000 4. $10,000,000 |
Answer: 2
A Regulation A offering is a small-dollar offering of no more than $5,000,000 over a 12-month period. However, the maximum amount that may be sold on behalf of existing shareholders is $1,500,000. [60746] |
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Which of the following registration activities require the use of Form S-8? 1. A real estate transaction2. Investment by a venture capital firm 3. Securities registered for employee benefit plans 4. Security transactions of $50 MM to $100 MM |
Answer: 3
Form S-8 is filed with the SEC to register securities that are made available through employee benefit plans. [60779] |
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A prospectus would include all of the following communications EXCEPT 2. Advertisement that contains a summary of information that is contained in the registration statement 3. Communication that contains information relating to the offer of a security 4. Television advertisement that offers a security for sale |
Answer: 1
According to the Securities Act of 1933, a prospectus is defined as any notice, circular, prospectus, advertisement, letter, or communication, whether written or on television or radio, that offers a security for sale. This is a very broad definition, but it includes an exemption if the information only identifies the security, the price, the name of the underwriters, and from whom a prospectus may be obtained. This type of advertisement is called a tombstone. This rule defines a prospectus, but it is not the same as SEC Rule 134, which defines a communication not deemed to be a prospectus. Rule 134 pertains to communications published after a registration statement has been filed. [61016] |
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Bear Brokerage is acting as the lead underwriter for the IPO of Global Transport Ltd. The new issue is expected to be priced at $22.00. Which of the following statements is TRUE regarding the shares sold to the public? 1. All underwriters must sell the shares at the public offering price.2. Underwriters may sell shares at any price, provided it does not exceed the public offering price. 3. An underwriter may accept reduced compensation and sell the shares below the public offering price, provided the client agrees to a six-month lock-up period. 4. The underwriter may sell shares below the public offering price only to its employees. |
Answer: 1
Under industry rules, syndicate and selling group agreements set the price at which the securities are to be sold to the public, or the formula to determine the price. The agreements must also state to whom and under what circumstances concessions are permitted. An underwriter's sale of a new issue below the public offering price is not permitted. [60730] |
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Which of the following statements is TRUE concerning Regulation M and the distribution of a Nasdaq issue? 1. The managing underwriter must file a notice with FINRA indicating whether the participants in the distribution will be excused from trading, or will be passive market makers during the restricted period.2. FINRA automatically applies the status of passive market maker to all distribution participants unless the managing underwriter files a notice requesting excused withdrawal status. 3. FINRA requires that all distribution participants withdraw from market making and may execute transactions only as agent on an unsolicited basis. 4. Each distribution participant that is a market maker must file a separate notice with FINRA requesting excused withdrawal or passive market-making status. |
Answer: 1
For any Nasdaq security that is part of a distribution subject to Regulation M, the managing underwriter must request an Underwriting Activity Report from FINRA's Corporate Financing Department. The report will identify if the security's restricted period begins one day or five days prior to pricing, or whether it is exempt as an actively traded security. For those securities that are not exempt, the manager must submit to FINRA's Market Regulations Department, no later than the day prior to the commencement of the restricted period, a Restricted Period Notification Form, indicating whether distribution participants will be excused, or designated as passive market makers. [61258] |
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Which of the following statements is TRUE regarding sales of a new issue by a syndicate? 1. Generally, the selling concession is larger than the underwriting spread.2. The underwriting spread is normally larger than the selling concession. 3. Generally, the reallowance is larger than the underwriting spread. 4. The reallowance is normally larger than the selling concession. |
Answer: 2
In the underwriting of a new issue, the underwriting spread is larger than the selling concession. The underwriting spread is larger because members of the underwriting syndicate assume the risks of underwriting. A selling group earns the selling concessions and acts in a best-efforts capacity. It does not assume the risks associated with unsold shares in a firm-commitment underwriting. A reallowance is compensation given to broker-dealers that are not members of the syndicate or selling group, but would like to participate in the new issue offering. The reallowance is less than the amount that members of the syndicate or selling group receive. [60814] |
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If 4.8% of a outstanding shares are tendered, what does the entity tendering the shares have to file? |
Neither a TO or 13D
This type of offering is referred to as a mini-tender offer. The disclosure and investor protection rules would not apply to this type of tender offer. The only applicable rules would be the antifraud regulations, the minimum open tender offer period (20 business days), and the mandate that investors must be paid promptly. [61253] |
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After failing to negotiate a merger with Company B, Company A has launched a public tender offer for all of Company B's outstanding common stock. How many days must the tender offer be kept open? 1. 20 business days2. 20 calendar days 3. 10 business days 4. 10 calendar days |
Answer: 1
Tender offers generally must be held open for at least 20 business days from the time they are announced to security holders. [61046] |
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GMM Inc. is offering to repurchase up to 10,000,000 shares of common stock from its shareholders. The purchase price will range from a low of $16.25 per share to a high of $18.00 per share. The 10,000,000 shares represents 14% of the publicly traded shares of common stock. GMM is required to file Schedule: 1. TO as soon as practical on the commencement date2. TO within 10 days of the commencement date 3. 13D as soon as practical on the commencement date 4. 13D within 10 days of the commencement date |
answer: 1
GMM is required to file a Schedule TO (tender offer) as soon as practical on the commencement date of the tender offer. A 13D filing is made within 10 days when a person, or group of persons, acquires ownership of more than 5% of a company's equity. An issuer would not file a 13D if it is repurchasing its own securities. [61216] |
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If an offer is made in connection with a business combination, any communications prior to the filing of a registration statement are: 1. Not permitted2. Permitted if the communication is filed with the SEC 3. Permitted if the communication is filed with the SEC and a disclosure is made that urges investors to read all relevant information related to the transaction, once it becomes available 4. Permitted if the communication is filed with the SEC and all communications are forwarded to shareholders with a disclosure that urges investors to read all relevant information, once it becomes available |
answer 3:
Under SEC Rule 165, written communications are permitted once there is a public announcement of a business combination (a merger, acquisition, exchange, or reclassification). If the securities to be issued are required to be registered with the SEC, usually Form S-4 is used. Any written communication made in connection with, or relating to, the transaction must be filed with the SEC according to SEC Rule 425. If both companies are publicly traded, each must file with the SEC. Each document must contain a prominent legend that urges investors to read all relevant information concerning the offering on the SEC's Web site. There is no requirement to send these communications to shareholders. [61039] |
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Company A's tender offer for Company B is not going well. Company A therefore has increased the price it is willing to pay to the shareholders who tender shares of Company B's stock. Company A must hold the tender offer open for: 1. An additional 20 business days2. An additional 20 calendar days 3. An additional 10 business days 4. The remainder of the initial offer period |
Answer: 3
If a person making a tender offer increases, or decreases the percentage of the class of securities being sought, the consideration being offered, or the dealer's soliciting fee, the offer must remain open for at least 10 business days from the date that notice of the change is given to security holders. However, the minimum period that the offer must remain open is 20 business days from when it is announced to security holders. [61047] |
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A third party is making a tender offer for the shares of BAZ Inc. The tender offer announcement appeared in the newspaper on October 15. Two weeks later, the third party wants to extend the length of the tender offer. This is permitted provided: 1. All shareholders are provided with written notification2. Shareholders who have not already agreed to tender their shares are given written notification 3. A press release is issued within 10 business days of the extension 4. A press release is issued no later than the morning of the day following the scheduled expiration date of the offering |
Answer: 4
According to SEC Rule 14e-1 (Unlawful Tender Offer Practices), if a person extends the length of a tender offer, they are required to issue a notice of the extension through a press release or other public announcement. This is required no later than 9:00 a.m. Eastern Time, on the next business day following the scheduled expiration date of the offer. The notice must include the approximate number of securities deposited to date. [61059] |
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A company is subject to a tender offer by a third party. How long does the company have to notify the shareholders? |
10 business days from the date the tender offer is made
Along with a notice of the tender offer, the subject company must also either (a) recommend that shareholders accept or decline the tender offer, (b) express that it has no opinion and remains neutral, or (c) state that it is unable to take a position on the tender offer. If any material change occurs in these disclosures, the subject company is required to publish promptly or give notice to shareholders. [61060] |
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A notice has been published concerning the transfer of assets of a company. The notice contains the name of the company, a brief description of the transaction, and the parties to the transaction. This notice is: 1. Not required to be filed with the SEC2. Required to be filed with the SEC with no additional disclosures 3. Required to be filed with the SEC with additional disclosures 4. Required to be filed with the SEC and sent to shareholders with additional disclosures |
Answer: 1
According to SEC Rule 135, an issuer is permitted to publish a notice that contains only limited information. Such notices are not required to be filed with the SEC. The notice must have a legend explaining that it does not contain an offer to sell securities. If the notice concerns a business, SEC Rule 145 applies to situations in which securities are offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets. The only information permitted is: * The name of the person whose assets are to be sold in exchange for the securities to be offered* The names of any other parties to the transaction * A brief description of the business of the parties to the transaction * The date, time and place of the meeting of the security holders to vote on, or consent to the transaction * A brief description of the transaction and the basic terms of the transaction |
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SEC Rule 145 applies to which of the following companies? 1. A company that effects a reverse stock split, due to a price decline2. A company that has declared a stock dividend of less than 5% 3. A private equity company that is filing for an IPO to become a public company 4. A public company that is in the process of acquiring a firm that is in the same business sector |
Answer: 4
SEC Rule 145 of the Securities Act of 1933 applies to situations where securities are offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets. Stock splits, stock dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145. A private equity company, or any company that is filing for an IPO to become publicly traded, would most likely file an S-1 registration statement. This is not covered under SEC Rule 145. [61031] |
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A merger transaction between two public companies is about to take place. The acquiring company will issue common stock to the shareholders of the target company. The following actions performed during the merger process in order from first to last would be: I. The registration statement Form S-4 is filed II. The boards of directors vote to approve the proposed merger III. Form 425 concerning communication in connection with the proposed merger is filed IV. The shareholders vote on the proposed merger 1. I, II, III and IV2. II, III, I and IV 3. III, I, II and IV 4. IV, II, III and I |
Answer 2: A friendly merger transaction between two public companies typically begins with a vote by the respective boards of directors to approve the proposed merger. This occurs prior to a public announcement. Since this is a material event, Form 8-K must be filed at the time of the announcement of the merger. A press release will be issued. According to SEC Rule 165, any written communication after the public announcement, and until the filing of a registration statement, must be filed with the SEC. These communications are referred to as Form 425 filings. For example, a joint press release by the boards of directors of both companies announcing a merger, or an e-mail message from the CEO of the acquiring firm sent to the employees of the target company, would be filed with the SEC. Each document must contain a prominent legend that urges investors to read all relevant information concerning the offering on the SEC's Web site. Since securities will be issued in connection with this merger, the acquiring company is required to file a registration statement with the SEC, usually on Form S-4. The shareholders will then vote on the proposed merger. [61037] |
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What is Rule 13e3 for? |
applies to going private transactions by certain issuers or affiliates. It involves transactions where an issuer (or an affiliate of the issuer) is purchasing its own common stock and this will likely cause the company to become delisted from an exchange, or to be no longer considered a reporting issuer. The issuer is required to file a Schedule 13E-3 with the SEC, and make certain disclosures to shareholders. In addition, the issuer is required to file certain information with the SEC, such as reports and opinions by a financial adviser. In some situations this may occur when a company has a stock repurchase plan (tender offer). [61051] |
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Which of the following statements is NOT TRUE concerning a stalking horse bidder in a Section 363 sale? 1. They will take the lead role and negotiate a purchase agreement2. The process will lead to one bidder since no auction is allowed under this section of the bankruptcy code 3. The bidder will usually receive special incentives such as expense reimbursement 4. The process may entitle the stalking horse bidder to a break-up fee |
Answer: 2
The sale of assets outside the normal course of business can be accomplished through a Section 363 sale. The trustee, or debtor, must file a motion with the bankruptcy court seeking the court's approval of an asset sale. The initial or stalking horse bidder normally conducts the initial due diligence, provides a lead bid, and will negotiate a purchase agreement with the seller. This bid sets a minimum price for the sale. In return for doing the due diligence and providing a minimum bid, the stalking horse often receives incentives such as reasonable expense reimbursement, overbid protection, and break-up fees. Without these incentives, it would be very difficult for the distressed seller to find a lead or stalking horse bidder. Choice (b) is incorrect since there may be a bidding process if there are other qualified bidders for the assets after the stalking horse bidder has provided the lead bid. Overbid protection may provide the stalking horse with protection by requiring a subsequent bidder to top the bid by a required minimum increment, or may require the stalking horse only to match the competing high bid to win. A break-up fee may be payable to the stalking horse if another bidder acquires the assets. (74375) |
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A customer has securities that were received as part of a merger. The customer discloses that the securities are subject to SEC Rule 145. Which of the following statements is TRUE? 1. In order to sell the securities immediately, several conditions of Rule 144 may need to be satisfied.2. The securities must be registered with the SEC before they can be sold. 3. The resale of the security is not subject to any conditions, provided the amount sold is 5,000 or fewer shares, worth $50,000 or less. 4. The securities are subject to a minimum six-month holding period. |
Answer: 1
Securities that are subject to Rule 145 may not always be resold freely. If the shares that were held prior to the business combination were restricted, then the shares received as a result of the business combination would be restricted and subject to resale under Rule 144. These securities are usually received by affiliates of one of the companies involved in a merger, reclassification, consolidation, or transfer of assets. The securities can be resold according to any one of the following three conditions. 1. The person has not been an affiliate of the issuer for at least three months and has held the securities for at least one year |
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Rule 14D-9 relates to what? |
SEC Rule 14d-9 concerns recommendations or solicitations by the subject company and other parties related to a tender offer. The rule requires Schedule 14D-9 or Schedule TO be filed by certain persons such as: * The subject company, any officer or director, employee, or affiliate of the subject company* Any owner of any security of the subject company, the bidder, or any affiliate of the bidder * Any other person who makes a solicitation or recommendation to shareholders on behalf of any of the previously mentioned persons * Attorneys, banks, broker-dealers, and investment advisers who are not participating in the tender offer and who are furnishing information only on an unsolicited basis to their customers * The subject company, if it is providing a "stop-look-and-listen communication," which only identifies the tender offer by the bidder, states that the tender offer is under consideration by the subject company's board of directors, and states that, on or before a specified date (no later than 10 business days from the commencement of the offer), the subject company will advise its shareholders. |
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What is rule 14e-5? |
a covered person in a tender offer may not purchase the common stock or convertible securities of the same issuer during the period that the tender is open. A covered person is an issuer or individual that is making the tender offer, with the investment bank acting as the dealer-manager in the transaction. The dealer-manager is usually a broker-dealer. The SEC has created a number of exemptions to permit firms to transact their regular business during the tender offer period. Some of the exempt activities include: * Purchases by the dealer-manager or its affiliates on an agency basis* Purchases on a principal basis, provided the dealer-manager and its affiliates are not market makers * Purchases by an affiliate of the dealer-manager, if the affiliate maintains and enforces written policies and procedures that are designed to prevent the flow of information (i.e., information barriers), and the purchases are not made to facilitate the tender offer Buying shares in the capacity of a market maker and buying convertible debt for the proprietary trading desk are not permitted. [61068] |
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Super Entertainment Inc., a NYSE-listed company, has spun-off its domestic syndication division and created 23,000,000 new shares at $12.50 per share. To receive the new shares, investors must exchange 25% of their old shares. Investors who receive shares of the new company would: 1. Be required to receive a prospectus under the Securities Act of 19332. Not receive a prospectus because the shares were sold by way of a private placement 3. Receive a prospectus only if they received 500 shares or more 4. Receive a prospectus only if the company is raising additional capital |
Answer: 1
This scenario is an example of an offering regulated by Rule 145 of the 1933 Act. Rule 145 defines certain types of reclassifications of securities as sales, subject to the registration and prospectus requirements of the Act. Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the Rule. It requires holders of securities to receive information concerning a new investment decision. The amount of shares offered is irrelevant. [61032] |
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JTM, an oil and gas company, has announced that it wants to purchase all the outstanding shares of common stock of the Bigbit Company, one of its competitors. The offer is .65 shares of JTM common stock for every outstanding share of Bigbit stock. If JTM has not yet filed a registration statement with the SEC, which of the following statements is TRUE? 1. No written communication is permitted until a registration statement has been filed.2. Written communication is permitted and is not required to be filed with the SEC. 3. Written communication is permitted but must be filed with the SEC. 4. Written communication is permitted but must be filed with both the SEC and FINRA. |
Answer: 3
Under SEC Rule 165, written communications are permitted once there is a public announcement of a business combination (a merger, acquisition, exchange, or reclassification). If securities will be issued in connection with this transaction, the acquiring company will be required to register the offering with the SEC, usually on Form S-4. Any written communication made in connection with, or relating to, the transaction must be filed with the SEC according to SEC Rule 425. If both companies are publicly traded, each must file with the SEC. [61036] |
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Which of the following statements is NOT TRUE concerning the tender offer process? 1. A Schedule TO is filed by the acquirer in order to provide the terms of the transaction to shareholders.2. A Schedule TO is filed by the issuer to repurchase any of its fixed-income securities. 3. A definitive proxy statement is filed by the issuer to provide information to shareholders. 4. Any communication in which comments on the merger are being made by executives of either company is filed with the SEC. |
Answer 3:
The proxy statement would be provided if shareholders would be voting on the M&A transaction. A Schedule TO is filed by the acquirer to provide both the terms of the transaction as well as other required information to shareholders of the target company. Any communication in which comments on the merger are being made by executives of either company is filed with the SEC. (These are referred to as 425 filings.) If the target has fixed-income securities outstanding, it may want to repurchase these securities from its holders. In this case, the target will file a Schedule TO in order to provide information to the holders of these securities. [61316] |
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Which of the following entities typically provides the funds in a stapled financing transaction? 1. The seller2. The seller's banker 3. The buyer's banker 4. A leveraged buyout (LBO) firm or private equity concern |
Answer: 2
Stapled financing is a prearranged financing package offered by an investment bank to potential bidders in an acquisition. The investment bank (advising the selling company) includes all details of the lending package, including the principal amount of the offer, loan covenants, and applicable fees. The financing offer is attached, or stapled, to the acquisition term sheet. [61296] |
