[1] True or False? (30 points)

(1) Snap Initial Public Offering (IPO) was a huge success. The market price of the stock closed more than 40% above the $17/share offering price. This means that the underwriter of the IPO bought an additional 15% of stock from the company at the offering price minus the underwriting spread. Is this last statement true or false?

(2) When an investment bank buys stock from a company ahead of its Initial Public Offering, it acts in the primary market.

(3) When calculating the PE ratio (price-to-earnings ratio) of a company, the stock price per share is divided by the earnings per share, or the market capitalization is divided by net income.

(4) As a consequence of the Bernard Madoff scandal, the US government encourages asset managers to hire third-party custodians of the funds they manage.

(5) As a consequence of the Bernard Madoff scandal, the US government facilitates the activity of whistleblowers within financial services companies.

(6) As a consequence of the Bernard Madoff scandal, the US government wants active asset managers to become passive asset managers.

[2] High-Frequency Trading and Spoofing (25 points)

Spoofing can be defined as (more than one answer is possible):

(a) Placing flash orders to force buyers to reveal their price limits, while having previously taken a short position in financial markets.

(b) Placing flash sell orders to create a false sensation of pessimism and lower stock prices, while having previously taken a long position in financial markets.

(c) Placing flash buy orders to create a false sensation of optimism and higher stock prices, while having previously taken a long position in financial markets.

(d) Placing flash orders to force sellers to reveal their price limits, while having previously taken a long position in financial markets.

(e) Placing flash buy orders to create a false sensation of optimism and higher stock prices, while having previously taken a short position in financial markets.

(f) Placing flash sell orders to create a false sensation of pessimism and lower stock prices, while having previously taken a short position in financial markets.

[3] Equity Markets (20 points)

Use the corresponding sectors average price-to-earnings ratio (PE) to estimate the stock price of KaufMack (a European retailer) and BankUSA (a US bank), knowing that KaufMack has an EPS (earnings-per-share) of 2.69 and BankUSA has an EPS of $1.99.

Retail companies	Current P/E		Current P/E
Pop Shop		Morgan Charley
Disco Ventures		JP Stone
		Stockman Sachs
Geneva Passage		Dutch Bank

In the equity market, the stock price of KaufMack trades at 51.20/share, and the stock price of BankUSA trades at $27.70 /share. QUESTIONS. (a) Calculate the stock price of KaufMack and BankUSA based on valuations with average price-to-earnings ratios; (b) What are your recommendations as an analyst as you compare your calculations with the market prices?

[4] Initial Public Offering (25 points)

AirToNbe had an Initial Public Offering. The company sold an initial 2.5 million shares to Morgan Charley, the investment bank in charge of the IPO. The offering price was 85 per share. Morgan Charley charged a 4% underwriting fee. Trading was slow at the beginning of the session, but at the end of the day the shares closed at 107. (Note: the investment bank has a greenshoe option that allows it under certain circumstances to buy an additional 15% of stock from the company at the offering price minus the underwriting fee).

Questions:

a. What is the price received by the company?

b. What is the investment banks fee in ?

c. What is net proceeds to the company in ?