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Homework answers / question archive / Copenhagen Business School FINANCE Corporate Quiz 4 1)Why is the reputation of an underwriter important for the company doing an IPO: Underwriters with the best reputation eliminates underpricing

Copenhagen Business School FINANCE Corporate Quiz 4 1)Why is the reputation of an underwriter important for the company doing an IPO: Underwriters with the best reputation eliminates underpricing

Management

Copenhagen Business School

FINANCE Corporate

Quiz 4

1)Why is the reputation of an underwriter important for the company doing an IPO:

    • Underwriters with the best reputation eliminates underpricing.
    • Underwriters with the best reputation can attract enough large investors.
    • Underwriters with the best reputation charge the lowest fee.
    • None of the above.
  2. What are the typical reasons for a company to do a stock IPO?
    • The company wants to hire a new CEO.
    • Venture capital investors would like to cash out.
    • Regulation forces the company to have publicly traded shares.
    • None of the above.
  3. When is the final price of the stock determined in an equity IPO?
    • Already before offers have been written up by the bookrunner.
    • After the offers have been written up by the bookrunner.
    • It is the highest price quoted to the bookrunner and which has been written down in the book.
    • None of the above.
  4. Bond investors can hedge (eliminate losses from) default risk in their portfolio by:
    • Only buying senior debt.
    • Only buying bonds in companies with a low leverage ratio.
    • Shorting stocks in the company that issued the bonds.
    • None of the above.
  5. According to the Modigliani-Miller theorem (without taxes and bankruptcy cost) on capital structure then capital structure choice is irrelevant for rm value. Does this imply the following statements:
    • A high leverage ratio will not result in a higher asset value compared to all equity financing.
    • A company with debt cannot default because then debt would not be irrelevant.
    • Expected equity and debt returns cannot be changed if you change the capital structure.
    • None of the above.

 

  1. A new type of corporate security is called a contingent convertible bond (a CoCo-bond). The CoCo-bond is a regular bond which will be converted into an equity share in the company if the asset value of the company falls below a certain threshold. What is the benefit for the company of substituting part of the existing debt with CoCo-bonds in the capital structure?
    • It allows investors to better diversify their investments because it creates an additional type of security to invest in.
    • It decreases the probability of bankruptcy.
    • It is a cheaper way to raise external capital than ordinary bonds.
    • None of the above.

 

  1. You invested in company stocks when the company was all equity financed. Since then the company has obtained debt financing. How can you reverse the effect of the debt and unlever your position?
    • Maintain your current position as the debt of the company does not affect your personal leverage.
    • Sell some shares and loan it out such that you create a personal debt-to-equity ratio equal to that of the firm.
    • Borrow some money and buy additional shares in the company.
    • None of the above.

 

  1. Increasing leverage in a rm will increase the cost of equity capital:
    • Only if the default risk increases.
    • Not true. The cost of equity will not be affected.
    • Increasing leverage will always increase the cost of equity capital.
    • None of the above.
  2. According to the trade-off theory of capital structure an industrial company with a high ratio of real assets should:
    • Expect to use a higher ratio of equity financing than other companies.
    • Expect to issue debt at a low required rate of returns.
    • Expect to sell out of the current portfolio if they want to finance new projects.
    • None of the above.
  3. According to the pecking order theory of capital structure choice a company with many real assets should have a:
    • High debt to equity ratio.
    • Low debt to equity ratio.
    • Debt to equity ratio which is independent of the tax rate.
    • None of the above.

 

 

 

 

 

 

 

 

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