Exam 20: Initial Public Offerings, Investment Banking, and Financial Restructuring

A) Facilitates stockholder diversification.
B) Increases the liquidity of the firm's stock.
C) Makes it easier to obtain new equity capital.
D) Establishes a market value for the firm.
E) Makes it easier for owner-managers to engage in profitable self-dealings.

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A) When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."
B) "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
C) Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC.
D) When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
E) It is possible for a firm to go public and yet not raise any additional new capital.

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A) In a private placement, securities are sold to private (individual) investors rather than to institutions.
B) Private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
C) Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
D) The SEC requires that all private placements be handled by a registered investment banker.
E) Private placements can generally bring in funds faster than is the case with public offerings.

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