Chapter 18, Problem 1Q

a.

Summary Introduction

To define: The term going public, IPO and new issue market.

Explanation of Solution

When the company allows the outside investors to own their shares through initial public offering then it is known as going public. This is different from the stocks that are traded in the public market.

Initial public offerings are the offer given by the organization to the institutional investors and other investors to directly own company stocks. This is done through underwriting the stocks by one or more investment banks.

The assets which are offered for the first to the investors are called new issues and the market in which these new issues are offered is regarded as new issue market.

b.

Summary Introduction

To define: The term public offerings and private placements.

Explanation of Solution

The term ‘public offerings’ refers to the offer that the company give to the investors by selling company’s shares for raising capital.

The private placement is another source of raising funds in which company extend their offerings to limited number of investors. In other words, in private placement, the company calls limited investors to sell their company’s shares in order to raise funds.

c.

Summary Introduction

To define: The term venture capitalist, road show; spread.

Explanation of Solution

The person who manages the venture capital fund is known as venture capitalist. The venture capital is the fund that has been raised by the manager to start their set up. The venture capitalist is considered as one of the member of the board of directors in the company.

The difference between stock price that an underwriter set for an IPO and the proceeds that is passed to the issuing firm by an underwriter is known as spread. In simple words, it is the fee charged by an underwriter.

d.

Summary Introduction

To define: The term Securities Exchange Commission (SEC), insiders, margin requirement, registration statement, shelf registration.

Explanation of Solution

The regulatory body which regulates the sale of new securities along with security exchange operations is regarded as Securities Exchange Commission (SEC). This government agency is helpful for ensuring market stability, sound brokerage firms and elimination of stock manipulation. The company who desires to trade in security market is liable to get registered in the SEC. The statement which includes financial and legal information of a company who wants to get registered under SEC is known as registration statement.

The companies prepare a master registration statement and update the statement whenever required. This process is regarded as shelf-registration because the company places their stock in the shelf for selling them when the market is favorable.

Insiders are the person who is employed in the stock broking firms such as officers, directors, major stockholders.

The percentage of stock price that has been borrowed by an investor to purchase the stock is known as margin requirement.

e.

Summary Introduction

To define: The term prospectus, red herring prospectus.

Explanation of Solution

The prospectus is the document which is prepared to provide information about the new security issued along with the company details to shareholders.

The red herring is the preliminary prospectus which is issued to all the potential buyers to provide information about the stock and company but the final price is not revealed in this document.

f.

Summary Introduction

To define: The term National association of security dealers.

Explanation of Solution

The National Association of the security dealers refers to the industry group that are majorly concerned with the over-the-counter market operations.

g.

Summary Introduction

To define: The term best efforts arrangement and underwritten arrangement.

Explanation of Solution

There are two methods used by the companies to sale their stocks i.e. best effort arrangement and underwritten arrangement. When the investment banker is only liable to make all the possible efforts to sell the stocks at offer price then it is known as best efforts arrangement. Whereas, in the underwriting arrangement, the entire stocks are bought by the investment banker at set offer price and resell them in the market at their own risk.

h.

Summary Introduction

To define: The terms refunding, project financing and securitization.

Explanation of Solution

Refunding takes place when the debt are issued by the firms at a current lower prices and utilizes the proceeds for purchasing again the highest coupon rate debt issues.

When the arrangements are made to raise funds for the large capital projects such as dam construction, oil refineries and so on. Some of the amount is financed by one or more sponsors and rest is financed by the lenders or lesser in these large capital projects.

The process by which conversion of financial instruments that are thinly traded into the form that creates greater liquidity takes place is known as securitization.