4. IPO trading

QUESTION : Based on your understanding of the involvement of investment banks in an IPO, complete the following sentences.

If the investment bank does not guarantee the sale of the securities, the investment bank is working on ? deal.

A. BEST EFFORTS

B. AN UNDERWRITTEN

QUESTION: If the IPO involves a large amount, investment banks form?to distribute and sell the securities.

A. AN UNSYNDICATED GROUP

B. A SELLING GROUP

QUESTION:

Which of the following statements aretrueabout the activities involved in the IPO process?Check all that apply.

A. Issuing firms mostly allow underpricing of their IPO because the company wants to create excitement and have a successful IPO, which would help the company in future offerings.

B. During the roadshow, the IPO team can divulge additional information to institutional investors that is not given in the registration statement to lure the institutional investors.

C. If the investment bankers in the book-building process realize that the demand for the securities is low, they can either reduce the offering price or consider withdrawing the IPO.

D. The underwriter selects institutional clients and takes the IPO team on a roadshow to make presentations to these clients across different cities.

QUESTION:

Suppose ReapingTheBenefits Co. (RTB Co.) is one of the largest investment banking firms on Wall Street. VisionStone Corp. hired RTB Co. as the underwriter for its IPO. RTB Co. has set the offering price of the share to $30 per share. The underwriters will charge a 6.4% spread. How many shares must the company sell to net $73 million, ignoring any other expenses?

A. 2.43 million shares

B. 3.12 million shares

C. 2.60 million shares

D. 3.64 million shares

Consider the case of LinkedIn Corp.:

In May 2011, LinkedIn issued its IPO, which was priced at $45 a share. On the first day of trading, it hit a high of $122.70. After six months of its IPO, the company's stock was trading at double the price of its IPO.

QUESTION:

There are several theories that explain IPO underpricing. One of them is that underpricing INCREASES OR DECREASES the likelihood of oversubscription, which REDUCES OR MAGNIFIES the risk to the underwriter.