The Most Likely Reason That Underpricing of New Issues Occurs

question 99

Multiple Choice

The most likely reason that underpricing of new issues occurs more frequently than overpricing is the:

• A)underwriters' desire to reduce the risk of a firm commitment.
• B)demand for a new issue is typically too high.
• C)underwriters earn low rates of return.
• D)issuing firms demand that equity be underpriced.

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Definitions:

Controlling

The process of monitoring, comparing, and correcting activities to meet organizational goals and objectives, often part of managerial accounting.

Work in Process Inventory

Inventory that includes all the materials, labor, and overhead costs for products that are in the process of being manufactured but are not yet complete.

Direct Materials

Raw materials that directly become a part of a finished product and can be easily traced to the product.

Manufacturing Overhead

All indirect costs associated with the production process, including utilities, rent, and salaries of support staff.