All of the Following About a Firm-Commitment Underwriting Is True

question 44

Multiple Choice

All of the following about a firm-commitment underwriting is true EXCEPT

• A) the investment banker guarantees the issuer a fixed amount of money from the stock sale.
• B) the investment banker actually buys the stock from the firm.
• C) the issuer bears the risk that the resale price might be lower than the price the underwriter pays.
• D) the underwriter bears the risk that the resale price might be lower than the price the underwriter pays.

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Definitions:

WACC

Weighted Average Cost of Capital, a measure of a company's cost of capital where each category is proportionally weighted.

MM Proposition

Refers to the Modigliani-Miller theorem, which posits that under certain market conditions the value of a company is unaffected by how it is financed, whether through debt or equity.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, representing how a firm finances its overall operations and growth.

Miller's Theory

Miller's Theory, part of the Modigliani-Miller theorem, posits that in perfect markets, the value of a company is unaffected by how it is financed, regardless of whether it's through debt or equity.