Smith in Evaluating Issuance Costs from Underwritten Issues, Rights Issues

question 34

Multiple Choice

Smith in evaluating issuance costs from underwritten issues, rights issues with standby underwriting and a pure rights issues found that 90 percent of the issues are underwritten which was the most expensive method. This is done because:

• A) investment bankers know more than CFOs and they may buy the issue at an agreed price and disburse the funds sooner.
• B) investment bankers can increase the price received by increasing confidence in the issue, they will buy the issue at an agreed upon price and disburse the cash sooner.
• C) investment bankers provide other services including price counsel, increase public confidence and provide funds to the issuer sooner.
• D) investment bankers know how to price the issue, would not need to set as low as a price as the subscription price and provide price counsel.

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Definitions:

Error Variance

The variance of the error terms in a statistical model, indicating the degree to which the data points deviate from the predicted values.

Multiple Regression

A statistical technique that uses several explanatory variables to predict the outcome of a response variable.

Sales

The exchange of goods or services for money; it is a critical measure of the performance and health of a business.

Promotional Expenditures

Costs associated with marketing and advertising efforts to promote a product or service.