Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 18, Problem 3Q
Summary Introduction
To determine: Whether SEC should, as a part of every new stock or bond offering, render an option to investors on the proper value of the securities being offered.
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The SEC attempts to protect investors who are purchasing newly issued securities by making sure that the information put out by a company and its investment banks is correct and is not misleading. However, the SEC does not providean opinion about the real value of the securities; hence, an investor might paytoo much for some new stock and consequently lose heavily. Do you think theSEC should, as a part of every new stock or bond offering, render an opinion toinvestors on the proper value of the securities being offered? Explain.
1) What would happen to the standard of living in the United States if people lost faith in our financial markets? Why?
2) How does a profitable capital market help reduce the prices of goods and services?
3) The SEC attempts to protect investors who purchase newly issued securities by requiring issuers to provide relevant financial information to potential investors. The SEC does not provide an opinion on the actual value of the securities.Therefore, a reckless investor could pay too much for some shares and consequently lose a lot. Do you think the SEC should, as part of each new offering of stocks or bonds, give investors an opinion on the appropriate value of the securities being offered? Explain
Before entering a formal agreement, investment banks carefully investigatethe companies whose securities they underwrite; this is especially true of theissues of firms going public for the first time. Because the banks do not themselves plan to hold the securities but intend to sell them to others as soon aspossible, why are they so concerned about making careful investigations?
Chapter 18 Solutions
Intermediate Financial Management (MindTap Course List)
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- Disagree. The Securities Act of 1933 ensures investors only that the issuer has complied with all regulations, particularly those involving disclosure of information. The company may still be a weak company without good prospects for success.arrow_forwardWhich is correct about financial securities? a. Financial securities guarantees return to investors. b. Financial securities eliminate risk that most financial managers are facing. c. Diversification spreads risk and improves expected total return. d. Financial securities protect investors against risk shocks brought by social, economic, and political events. e. All of the above f. None of the above Which is correct about debt securities? a. Debt securities make the holders owners and give them the right to vote in all matters of the firm. b. Debt securities give the holders the right to receive interest and dividends. c. Debt securities give the holders the right to be elected as board of directors or to vote them. d. Debt securities give the holders the right to convert them into stocks if the indenture states. e. All of the above f. None of the above.arrow_forwardWhich of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? a. Compensating managers with stock options. b. Abolishing the Security and Exchange Commission. c. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. d. Financing risky projects with additional debt. e. The threat of hostile takeovers.arrow_forward
- Which of the following statements is FALSE? When a buyer seeks to buy a stock, the willingness of other parties to sell the same stock suggests that they value the stock differently. O When private information is relegated to the hands of a relatively small number of investors, these investors may be able to profit by trading on their information. Since stock markets aggregate the information and views of many different investors, we expect the stock price to react quickly to new publicly available information as the investors continue to trade until a consensus is reached as to the new value of the stock. If the profit opportunities from having private expertise are large, other individuals will attempt to gain the expertise and devote at least as large amount of resources needed to acquire it.arrow_forwardWhat are the inherent risks related to the valuation assertion for options/warrants related to equity. Please use the illustration below to help you answer this question.arrow_forwardWhich of the following statements is NOT true of PIPE transactions? In a PIPE transaction, investors purchase securities (equity or debt) directly from a publicly traded company in a private placement. PIPE transaction gives issuers faster access to capital. The securities are virtually always sold to the investors at a discount to the price at which they would sell in the public markets. PIPE transactions are registered with the SEC.arrow_forward
- Why is it important that in an underwriting the investment banker does not overvalue (overprice) or undervalued (underprice) the securities? If the securities are overpriced or underpriced, who suffers the loss? Discuss with illustrations.arrow_forwardWhat is a credit default swap (CDS)? A form of insurance against governments and corporations going bust. A type of stock investment used to hedge short positions. A form of government regulation promoting ESG compliance.arrow_forwardMC Qu. 41-19 Underwrites are investment banking... Underwrites are investment banking firms that do which of the following? Multiple Choice Underwriters resell securities before the prospectus has been filed with and approved by the SEC. Underwriters determine whether the stock is valid and may be offered for sale to the general public. Underwriters purchase securities from an issuing corporation with the intent to sell them to brokerage houses, which them sell them to the public. Underwriters buy bonds from the issuing corporation before the issuing corporation sells its securities to the general public. 27 m A 2 Second create at least three different recoarch que ravearrow_forward
- Discuss the arguments for each position. Some individuals maintain that the only proper accounting treatment for all marketable securities is current value, while others maintain that this treatment might allow companies to manage earnings.arrow_forward1arrow_forwardYou are concerned about one of the assets in your diversified portfolio. You just have an uneasy feeling about the CFO of that particular firm. You do believe however that the firm makes a good product and that it is appropriately priced by the market. Should you be concerned about the effect on your portfolio if the CFO embezzles a portion of the firm's cash? Discuss based on diversification of assets in a portfolio. Further assume your friend is trying to decide to purchase stock from that same company. She does not hold a diversified portfolio like you do. Based on the relationship between risk and return, will you be willing to pay a higher price for the stock than her? Explainarrow_forward
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